PotlatchDeltic Corporation (NASDAQ:PCH) Q1 2024 Earnings Call Transcript

PotlatchDeltic Corporation (NASDAQ:PCH) Q1 2024 Earnings Call Transcript April 30, 2024

PotlatchDeltic Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic First Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Wayne Wasechek, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Wayne Wasechek: Good morning, and welcome to PotlatchDeltic first quarter 2024 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic’s President and Chief Executive Officer. This call will contain forward looking statements. Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC regarding the risks associated with these forward statements. Also, please note that a reconciliation of non-GAAP measures can be found in the appendix to the presentation slides and on our website at www.potlatchdeltic.com. I’ll turn the call over to Eric for some comments and then I will review our first quarter results and our outlook.

Eric Cremers: Well, thank you Wayne and good morning, everyone. Looking at our first quarter results we reported total adjusted EBITDA of $30 million after the market close yesterday I’m pleased with the solid operational performance delivered by our team despite market and weather-related challenges during the quarter. Our Timberland segment generated adjusted EBITDA of $35 million in the first quarter. We harvested $1.9 million tons achieving the upper range of our Q1 harvest plan. Our Wood Products segment’s adjusted EBITDA was breakeven in the first quarter compared to a loss of $6 million in the fourth quarter. The year kicked off to a challenging start for lumber markets as severe weather across the country restricted construction activity in January.

Despite this difficult start to the typical inventory building season, lumber prices modestly trended upward throughout the first quarter driving the improvement in our Wood Products results. As for our elevated 2024 capital plan, we are approaching the final phases of our $131 million Waldo, Arkansas sawmill modernization and expansion project. Vertical construction and equipment installation is well underway with project completion continuing to remain on track and within budget for startup early in the third quarter. Following completion of the project, we anticipate a ramp up in production through Q4 and into next year. Based on other brownfield additions in the industry, we have seen we expect it will take 6 months to 12 months to reach the mill’s new capacity of 275 million board feet per year.

As a reminder, the project will increase the mill’s annual capacity by 85 million board feet. It will improve recovery by 6% and reduce cash processing costs by about 30%. Once the ramp phase is completed, we expect the mill to generate approximately 25 million of incremental EBITDA annually. Our Real Estate segment generated six million of adjusted EBITDA in the first quarter. On the development side of the business we sold 24 residential lots at an average price of about $120,000 per lot in our Chenal Valley master-planned community in the Rock Arkansas. On the rural side of our real estate business, we completed the sale of 800 acres at nearly $3,100. An acre is important to note that the volume of transactions in rural real estate can fluctuate significantly from quarter to quarter.

Although, we experienced a subdued level of rural real estate transactions in this period, we expect the sales pace to accelerate as we move through the second quarter. The interest in our rural land remains quite high. The highlight of our anticipated rural real estate activity in the upcoming second quarter includes the previously announced deal to sell 34,000 acres of Southern plantation timberlands which have now have an average age of just under four years for a total of $58 million or $1,700 per acre. Now let me transition to our emerging natural climate solutions business. Our collaboration with solar developers continues to grow as evidenced by the optioning of an additional solar deal in the first quarter. Currently, our option contracts for solar land sales and leases are valued at nearly $200 million on a net present value basis, representing roughly 1% of our total timberland ownership.

Additionally, we are in the process of finalizing negotiations on several more lease options. At the end of 2024, we expect to have approximately 30,000 acres of solar land sale and lease options under contract valued at over 300 million on a net present value basis. Our Southern timberland carbon credit initiative continues to move forward. We’re anticipating generating in excess of 500,000 carbon credits in the first year with an estimated 100,000 credits each year, for at least a decade thereafter. The extensive scope and high-quality nature of these credits, necessitates a thorough verification process which is lengthy and complex. We have initiated preliminary marketing activities and are targeting placement and sale of credits in the market towards the end of the year.

Nonetheless, the completion of this project timeline is heavily dependent on various third-parties involved in the accreditation process. We’ve also identified potentially valuable prospects in Carbon Capture and Storage as well as bioenergy. These opportunities, along with other Natural Climate Solutions are currently under discussion with various other parties. Although they are not imminent, we are optimistic as to their potential value. Furthermore, we continue to believe that all of these Natural Climate Solutions opportunities will boost the demand for our rural land, likely driving timberland values higher. Moving to capital allocation, we continue to be committed to our disciplined and opportunistic approach. And we constantly evaluate all, our capital allocation opportunities to grow shareholder value overtime.

Timberland M&A was our main priority during the quarter. As we previously announced, in Q1, we acquired 16,000 acres of high-quality mature timberlands in Arkansas, through a privately negotiated one-on-one transactions for 31 million or about $900 per acre. Also the acquired timberland has strong real estate potential, including solar opportunities. We employ stringent criteria when evaluating timberland M&A, and for this particular transaction we expect to achieve an approximate 8% real IRR which is well above our cost of capital. We did not purchase any shares in the first quarter. However share repurchases remain an important component of our capital allocation strategy, especially when we are trading well below our estimated NAV. We consistently assess and prioritize our capital allocation options, taking into consideration the economic backdrop.

We have $125 million remaining on our 200 million share repurchase authorization. Turning our attention to the US Housing Market, existing home inventories for sale continue to persistently hover at historically low-levels. The scarcity in this segment of the market poses challenges in meeting housing demand. However, new housing has emerged with an affordability advantage, over existing housing. Large homebuilders are enticing buyers with rate buy-down incentives, making new home construction more financially attractive especially given today’s mortgage rate environment. Consequently, new single-family residential construction demonstrated resilience, by maintaining over one million starts for the fifth consecutive month, providing some level of stability to the market.

In addition homebuilder confidence has been steady and in positive territory, in spite of the recent up-tick in mortgage rates. Nonetheless, new residential construction continues to underperform, as challenges in the economy persist, driven by the uncertainty of inflation and the direction of interest rates. In particular the multi-family segment of new residential housing has been under pressure, in large part due to excessive financing costs, the timing and pace of potential rate cuts by the Federal Reserve add to the level of uncertainty. However, we anticipate that once rate cuts begin to decline — once rates begin to decline, possibly later this year it will likely spur pent-up housing demand, ultimately benefiting lumber markets. Longer-term we retain a positive outlook on housing fundamentals and underlying shortage of housing stock — stock which some pundits estimate of four million units and favorable demographic trends will provide tailwinds to the housing market.

We continue to expect that U.S. housing starts will return to levels above the long-term average of 1.5 million units per year, once mortgage rates decline in homes become more affordable. Turning to the repair and remodel segment, demand in this market appears to have moderated somewhat with some weakness in the DIY segment. That said, our home center business remains solid. The overall resilience in the repair and remodel market is underpinned by several factors, including strong consumer balance sheets, record home equity levels across the US, steady labor markets and existing homeowners staying in their homes due to the prevailing higher interest rate environment. Looking ahead, long-term trends indicate that the fundamentals of the repair and remodel market will be favorable.

This optimism is bolstered by an aging housing stock leading to increased repair activity as well as elevated home equity levels and the ongoing prevalence towards remote work. In closing, we remain committed to enhancing operational and financial performance across all of our business segments. As part of this commitment, we are diligently focused on completing our strategic modernization expansion project at the Waldo sawmill on schedule and within budget. Also, returning capital to our shareholders remains a core tenet of this strategy. With our investment grade balance sheet and ample liquidity, we possess the flexibility and the solid foundation to continue creating long-term shareholder value. I will now turn it over to Wayne to discuss our first quarter results and our outlook.

Wayne Wasechek: Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $30 million in the first quarter compared to $41 million in the fourth quarter. A sequential quarter-over-quarter decline in EBITDA resulted from fewer rural real estate sales, partially offset by improved wood products segment results, stemming from higher average lumber prices. I will now review each of our operating segments and provide more color on our first quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment’s adjusted EBITDA increased from $33 million in the fourth quarter to $35 million in the first quarter. EBITDA benefited from improved per unit log and haul costs and seasonally lower forest management costs which more than offset a decline in Idaho sawlog prices.

Our sawlog harvest volume in Idaho was 327,000 tons in the first quarter which is consistent with our fourth quarter harvest volume. Harvest volumes in the first quarter were adversely impacted by mild winter weather limiting available holidays. Our Idaho sawlog prices were 5% lower on a per ton basis in the first quarter compared to the fourth quarter, price decline is primarily a result of the effect of seasonally heavier logs. Turning to the south, we harvested 1.6 million tons in the first quarter. This level of activity slightly exceeded our Q1 planned harvest volumes, as we benefited from favorable logging conditions. Additionally, demand for sawlogs and pulpwood in the south generally remained stable throughout the quarter. Our Southern sawlog prices were 3% lower in the first quarter compared to the fourth quarter.

The decline was primarily driven by a seasonally lower mix of hardwood sawlogs and higher mix of smaller diameter softwood sawlog. Moving to wood products on Slides 8 and 9. Adjusted EBITDA increased from a loss of $6 million in the fourth quarter to breakeven in the first quarter. Higher average lumber prices and lower per unit cash processing costs drove the improvement. Our average lumber price realizations increased $15 per thousand board feet or approximately 4% in the quarter. This price increase is comparable to the Random Lengths framer framing lumber composite on a percentage basis. Our lumber prices increased each month during the quarter, specifically our average lumber price realizations per thousand board feet were $405 in January $427 in February and $443 in March.

Lumber shipments in Q1 totaled 271 million board feet compared to 285 million board feet in Q4 of last year. Sequentially. Lower shipment volume in Q1 was influenced by seasonal factors, but nonetheless, marks the Company’s second highest Q1 shipment volume on record. Shifting to real estate on Slides 10 and 11. The segment’s adjusted EBITDA was $6 million in the first quarter compared to $22 million in the fourth quarter. EBITDA generated by our rural real estate business decreased due to the sale of fewer acres. EBITDA generated by our Chenal Valley master-planned community declined primarily due to the lack of commercial land sales this quarter. Commercial sales tend to be lumpy but our pipeline of potential future land sale opportunities continues to remain attractive.

We closed on the sale of 24 residential lots in the first quarter at a 12% higher average price than in the fourth quarter due to a different mix of what price points. Turning to capital structure, which is summarized on slide 12, our total liquidity was $479 million. This amount includes 180 million of cash on our balance sheet as well as availability on our undrawn revolver. This level of liquidity is after utilizing cash on hand to acquire 16,000 acres of bolt-on timberlands in Arkansas for 31 million, as Eric previously discussed. We have $176 million of debt that is scheduled to mature in October and November this year. Our decision to pay off a portion or refinance all this debt will occur later this year. We still have 200 million of notional forward swaps valued at 36 million on our balance sheet, which we can deploy to issued debt at below market rates.

Capital expenditures were 14 million in the first quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statements. For the full year, we continue to expect CapEx spend of $100 million to $110 million excluding potential Timberland acquisitions. That estimate includes approximately $44 million for the final installments on the Waldo, Arkansas sawmill modernization expansion project. I will now provide some high-level outlook comments. The details are presented on slide 13. Harvest volumes in the north are planned to be seasonally lower in the second quarter compared to the first quarter due to spring breakup. We expect Northern sawlog prices to increase approximately 6% in the second quarter due to resetting the prices index volume to reflect improved Q1 lumber prices and seasonally lighter logs.

In the South, we plan to harvest approximately 1.4 million tons in the second quarter. We expect our Southern sawlog prices to decrease modestly, primarily due to seasonally smaller sawlogs in the mix. We plan to ship 275 to 285 million board feet of lumber in the second quarter. Our average lumber price thus far in the second quarter is flat compared to our first quarter average lumber price. This is based on approximately 115 million board feet of lumber. As a reminder, a $10 per thousand board foot change in lumber price equals approximately 12 million of consolidated EBITDA for us on an annual basis. Shifting to real estate. We expect to sell approximately 43,000 acres of rural land, which includes the sale of 34,000 Southern acres for 58 million as Eric previously mentioned.

Additionally, we expect to sell approximately 24 additional value residential lots in the second quarter. Additional real estate details are provided on the slide. Overall, we expect our total adjusted EBITDA will be higher in the second quarter, primarily attributable to more rural land sales, driven by the Southern land sale to FIA. That concludes our prepared remarks. Dee, I would now like to open the call to Q&A.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Anthony Pettinari from Citi. Please ask your question.

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Q&A Session

Anthony Pettinari: Good morning.

Eric Cremers: Good morning, Anthony.

Anthony Pettinari: Hey. Obviously, lumber prices are pretty dynamic and it’s early in the year. But I’m just wondering as you think about the kind of cash flow that you could generate this year and with just spending on Waldo. Can you just talk a little bit more around kind of capital allocation and supporting the dividend potential opportunities to delever? You know at a time when the stock does seem like it’s trading at but maybe near record discount to NAB. Just wondering if you talk a little bit more about that given it seems like there’s a few options here.

Eric Cremers: Yes. Thanks for the question, Anthony. So regarding capital allocation, I mean I think first and foremost, we’re going to we’re going to protect our balance sheet. We’re going to we’re going to maintain investment grade status. But moving beyond that from a rate, we view our dividend is sacrosanct or nearly sacrosanct. So that’s always going to be the highest priority for us. I will say that as our stock drops lower in a tough lumber market environment, share repurchases look more attractive to us than otherwise. But I would also say that, we’re constantly thinking about M&A. And in the first quarter, we completed what we call Project Ritch Wood, our $31 million acquisition in Arkansas and I think that kind of pushed share repurchases to the back burner a little bit.

We also like investing in our mills quite a bit. We like wood products CapEx. Obviously, it might not feel good doing it right now and worse in such a tough lumber price environment. But lumber prices are historically very volatile. And this too shall pass, the industry cannot continue to run at breakeven or for a lot of mills below breakeven levels. So, continuing to keep our fleet of mills from first or second quartile mills is always going to be our objective, assuming we can find private projects to generate the needed returns. So, I think that’s CapEx is always a given strong consideration amongst our capital allocation levers. Regarding debt paydown, I think it all comes down to what our refinance costs are going to be and how do those refinance cost compared to other options that we have.

We’re just now really getting into those discussions with our banking partners. And so it’s a little premature to speak to delevering at this point. And we also have those. As Wayne mentioned, we still have 200 million of swaps sitting on our balance sheet that we can deploy to bring down our borrowing costs. So, it’s a little bit premature to talk about delevering at this point, but certainly that’ll be that will be in the mix of our capital allocation decisions.

Anthony Pettinari: Got it. Got it. That’s very helpful. And then just picking up on one thing. You mentioned I mean, if you’re running EBITDA breakeven in lumber, presumably there’s a lot of other producers who are burning cash here and yes, I’m not asking you to speak for other competitors here, but I’m just wondering, if you are you surprised that we haven’t seen more capacity curtailments in lumber year to date? Are you starting to see them? And just any kind of industry dynamics that would keep some of this capacity on maybe for longer? Is there an import dynamic? I’m just wondering, if you could talk generally about the supply side of supply demand in lumber?

Eric Cremers: Yes, that’s a great question, Anthony. So capacity utilization across the industry, I think it’s running in the high 70% kind of range which is frankly quite low. It hasn’t been this low since I don’t know 2012, 2013, something like that relative to demand. There is a lot of excess supply in the industry, particularly in southern yellow pine, where we’ve seen a lot of new capacity come online. So far this year, we have seen nine mills close up and several were in BC which had some in the Pacific Northwest. And then you had some in the South. But given where we sit today with pricing, where it’s at today and I’ve seen cost curves for the industry. There’s no doubt that there are a lot of mills that are hemorrhaging cash right now.

And so, I would not be surprised if we see more curtailments in the coming months, especially when you take into consideration the fact that duties are going up on Canadian lumber from 8% to 14% here in just a couple of months. So there’s still more pain yet to be felt. So yes to answer your question there, I’m almost certain, there will be more curtailments. Everybody’s got to make their own decision, but nobody likes hemorrhaging cash. That’s for sure.

Anthony Pettinari: Got it. Got it. That’s very helpful. I’ll turn it over.

Operator: Our next question comes from the line is Ketan Mamtora from BMO Capital Markets. Please ask your question.

Ketan Mamtora: Thank you and good morning everyone. Can you talk a little bit about sort of your operating rate in lumber in the first quarter and perhaps talk about sort of we know how your order books are trending thus far, given that we are in all pretty close if not already in the busiest time of the year?

Eric Cremers: Yes. So Ketan, so we’ve been running our mills as hard as we possibly can, producing as much volume as we can. And it’s because we’ve got good efficient mills. Now you might look at it and say why you had breakeven EBITDA, why would you bother running so hard. But you have to take it one step further, because our administration costs to running your mills, if you look at each mill individually, each mill individually can make money, but then you add up the earnings from those individual mills and that offset administration costs. And after you offset those administration costs, we ran at a breakeven level in the first quarter. So the point is that, the mills themselves or individually are doing just fine, barely doing just fine.

But in this environment, it still makes sense for us to run as hard as we can. Now I will say, our mills are better than a lot of mills. And I generally know where they sit, on the cost curve as it relates to know industry-wide competition, and I know that there are a lot of mills that are not covering their cash variable costs and those are the mills, I’m sure, the owners are having tough discussions about what to do. So for us, we’re continuing to run as hard as we can, but I’m sure it’s a different discussion at other mills.

Ketan Mamtora: Got it That’s helpful. And how are your order books for this time of the year Eric, in lumber