PotlatchDeltic Corporation

Good morning. My name is Celine, and I will be your conference operator today. At this time, I would like to welcome everyone to the POTLATCH DELTEC first quarter 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. you would like to withdraw your question press the pound key i would now like to turn the call over to mr jerry richards vice president and chief financial officer for opening remarks sir you may proceed thank you good morning and welcome to potlatch delta's first quarter 2021 earnings conference call joining me on the call is eric creamers potlatch delta'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 concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com. I'll now turn the call over to Eric for some comments, and then I will cover our first quarter results and our outlook. Well, thank you, and good morning, everyone. The year is off to an extraordinary start, which is saying a lot given our incredible financial performance last year. Consolidated EBITDA was $195 million in the first quarter of 2021, which is our third consecutive quarter of record financial performance. All three of our business units performed well in the quarter. Our wood product segment generated a record $126 million of EBITDA in the first quarter. To put that amount in perspective, Wood Products earned nearly as much in the first quarter as it did in all of last year. Our employees did an excellent job and remain focused on meeting our customers' needs safely, despite challenges presented by extreme winter weather in the south and lingering effects of the COVID pandemic. Our timberland segment's EBITDA of $68 million saw log sales contracts which are unique in the industry. Our Idaho team took advantage of favorable logging conditions to capture prices that remain near record levels and our southern team did a good job mitigating the effects of extreme winter weather on harvest volumes. Our real estate segment also had a strong quarter as demand for rural and development land remains robust. In our Chenal Valley master plan community in Little Rock, Arkansas, we raised residential lot prices approximately 10% and still sold 51 residential lots in Q1, along with completing a $3 million commercial sale. In Idaho, our real estate team has done a magnificent job capitalizing on the surge in demand for rural acreage. Our team is creating small rural lots for sale, about 10 to 20 acres in size, and we expect to sell about 40 of these lots this year for about $5 million, at a price that is multiples of the underlying timber value. Looking ahead, we expect housing fundamentals will remain very strong. U.S. housing starts increased to just over 1.7 million units on a seasonally adjusted annual basis in March, which is the highest level since June of 2006. Total permits remained above 1.7 million units, which is well above consensus expectations of about 1.5 million units for the year. On a macro level, the stage for robust housing demand was set by massive underbuildings since the great financial crisis, record low inventories of homes for sale, historically low mortgage rates, and millennials entering their prime home-buying years. On the first point, Freddie Mac recently stated that the shortage of U.S. single-family homes has grown to 3.8 million units. These factors all suggest that housing construction will remain very active for the foreseeable future. The repair and remodel market, which represents about 40% of lumber demand, is also expected to continue to grow. Key drivers include the age of U.S. housing stock, which is now around 42 years on average, high and increasing levels of home equity, and the work from home trend. Positive demand signals include recent commentary from the big box home supply stores like Home Depot and Lowe's, the Harvard Joint Center for Housing Studies, and the National Association of Home Builders Remodeling Market Index, which hit a new high in the first quarter. It has been challenging for the industry to catch up to stronger than expected lumber demand. This is evidenced by lumber inventories that remain at historically low levels despite lumber production remaining at its highest levels since the great financial crisis. Truck and rail transportation bottlenecks may also play a role, particularly as we head into produce season in the south. Absent a significant increase in mortgage rates or a COVID resurgence, it is hard to imagine what could cause lumber demand to drop and prices to moderate in the foreseeable future. Our leverage to lumber strategy is perfectly situated to continue to drive strong financial performance for the remainder of 2021 and beyond. Turning to capital allocation, returning cash to shareholders remains a top priority. We are positioned well for our board to consider distributions beyond our current annual dividend of $1.64 per share per year. This discussion typically occurs at our December board meeting each year. Our strong balance sheet and $761 of liquidity provide a solid platform as we consider additional investments in our existing mills or accretive acquisitions. We are interested in acquiring timberlands, mills, or a combination of the two near our current operating areas. We are excited to publish our second Environmental, Social, and Governance Report in the coming weeks, which will add disclosures of Scope 2 greenhouse gases, expanded information about our carbon sequestration, and storage and climate-related analysis. Potlatch Delta is a leader in sustainable forest management and we are committed to environmental and social responsibility and to responsible governance. To wrap up my comments, Potlatch Delta is very well positioned to take advantage of favorable industry fundamentals and our strong liquidity and prudent capital allocation strategy positions us to continue increasing shareholder value. We'll turn it over to Jerry to discuss first quarter results and our outlook. Jerry? Thank you, Eric. Starting with page four of the slides, adjusted EBITDA increased from $164 million in the fourth quarter to $195 million in the first quarter. This is the third quarter in a row that we have set a new quarterly EBITDA record, and we have generated $530 million of EBITDA over the last 12 months. The effect of higher lumber prices more than offset the 72,000-acre Minnesota land sale completed in the fourth quarter seasonally lower harvest volumes, and lower lumber shipments. I will now review each of our operating segments and provide more color on the first quarter results. Information for our Timberland segment is displayed on slides five through seven. The segment's adjusted EBITDA increased from $63 million in the fourth quarter to $68 million in the first quarter. Our team leveraged good logging conditions and strong markets to harvest 427,000 tons of saw logs in the north in the first quarter. This volume is higher than the 378,000 tons that we harvested in the fourth quarter. Northern saw log prices were 1% lower on a per ton basis in the first quarter compared to the record fourth quarter price. Higher cedar saw log prices mostly offset the negative effects of seasonally heavier saw logs and the timing of price resets on indexed volume. For example, index prices were at their lowest recent point in January, and saw log shipments seized mid-March with the onset of spring breakup, right as lumber prices were surging. In the south, we harvested 893,000 tons in the first quarter. As Eric mentioned, our southern timberlands team did a really good job making up most of the shortfall caused by extreme winter weather in February. Our southern saw log prices were 1% lower in the first quarter compared to the fourth quarter, primarily due to seasonally lower hardwood volumes in the mix. Turning to wood products on slides eight and nine, adjusted EBITDA increased from $70 million in the fourth quarter to $126 million in the first quarter. This is a new quarterly EBITDA record for the segment. Our average lumber price realization increased 41% from $629 per thousand board feet in the fourth quarter to $890 per thousand board feet in the first quarter. To provide context, it's helpful to look at our lumber prices by month. Our average lumber price realizations per thousand board feet increased from $817 in January to $880 in February and to $961 in March. Lumber shipments decreased from 274 million board feet in the fourth quarter to 258 million board feet in the first quarter. We lost a week of production at our three Arkansas sawmills due to the winter storm that hit Texas and Arkansas in February. We also had planned maintenance downtime during the quarter. The lower production hours negatively affected fixed cost absorption. Higher index log costs in our Idaho mills also affected margins. Moving to real estate on slides 10 and 11, the segments adjusted EBITDA was $17 million in the first quarter compared to $57 million in the fourth quarter. As a reminder, fourth quarter included a 72,000-acre Minnesota transaction for nearly $48 million. shifting to financial items which are summarized on slide 12 our total liquidity increased to 761 million dollars this amount includes 382 million dollars of cash as well as availability on our undrawn revolver we did not repurchase any shares during the first quarter as a reminder we have a 10b51 plan in place This reflects our ability and commitment to repurchase our shares at attractive prices as part of a broader capital allocation strategy focused on increasing shareholder value over the long term. Capital expenditures were $14 million in the first quarter. Note that the amount I just mentioned includes real estate development expenditures, which are included in cash from operations in our cash flow statement and excludes Timberland acquisitions. We continue to expect that our total capital expenditures will be in the range of $55 to $60 million, excluding acquisitions in 2021. I will now provide some high-level outlook comments. The details are presented on slide 13. We expect to harvest 1.1 to 1.3 million tons in our timberland segments in the second quarter. Harvest volumes in the north are planned to be seasonally lower due to spring breakup. We expect northern saw log prices to increase in the second quarter due primarily to higher index saw log prices. Harvest volumes and saw log prices in the south are expected to be comparable to the first quarter. Our lumber order file is currently three to four weeks, depending on mill. Our average lumber price thus far in the second quarter, including orders booked but not yet shipped, is approximately 18% higher than our first quarter lumber price. 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. We plan to ship 275 to 285 million board feet of lumber in the second quarter. Shifting to real estate, we expect to sell approximately 2,500 acres of rural land and approximately 15 Chenal Valley lots in the second quarter. Lot demand remains strong, but there will be a pause in the second quarter as builders digest recent lot purchases. We continue to expect to sell approximately 145 lots for the year. Additional real estate details are provided on the slide. Corporate expense is expected to be higher than the typical level in the second quarter, primarily due to bonus accruals related to our strong results. For the year, we expect corporate expense to be $45 to $50 million. We also expect our consolidated tax rate will be approximately 20% in the second quarter and for the full year. Overall, we anticipate second quarter total adjusted EBITDA will be higher than the first quarter, which would establish a fourth consecutive new quarterly record for the company. We remain very bullish on industry fundamentals, and we believe that our integrated operating model and leverage to lumber prices are aligned with those fundamentals. we are well positioned to continue growing shareholder value over the long term. That concludes our prepared remarks. Zulene, we would now like to open the call to Q&A.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, that is star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Keetan Ramtora with BMO Capital Markets. Your line is open.