PotlatchDeltic Corporation

Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Deltic fourth 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'd like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. 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, Emma. Good morning, everyone, and welcome to Potlatch Deltics' fourth quarter 2021 earnings conference call. Joining me on the call is Eric Cramer, Potlatch Deltics' 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 reconciliation and 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 fourth quarter results and our outlook. Thank you, Jerry. Starting with our results, a full-year adjusted EBITDA of $653 million shattered the record we set just last year. That performance is a tribute to and would not be possible without the performance, resilience, flexibility, and continued focus of our employees in year two of the pandemic. Our wood product segment generated a record $394 million of adjusted EBITDA in 2021, To put that in context, Wood Products earned more in 2021 than the entire company did in 2020, and consolidated 2020 EBITDA was the company record at the time. On the operational front, we shipped just over 1 billion board feet of lumber. We completed virtually all of our capital projects on time and under budget. and our employees' safety performance was outstanding. Key safety milestones achieved during the year included two-year anniversaries without recordable injuries at our Bemidji and our Waldo sawmills, three months during the year where all of our mills were incident-free, and also a record low injury severity rate for the year. Still, we were disappointed about the fire at our Ola, Arkansas sawmill in 2021. Thankfully, nobody was injured and property damage and lost profits are covered by insurance. Restarting the large log line at Ola in the third quarter of 2022 is a top company priority. Furthermore, once the mill restarts, it will have significantly lower cash processing costs and higher production volume than before. Our timberland segment generated record-adjusted EBITDA of $263 million in 2021, despite our harvest volume falling short of our 6-million-ton plan. Indexed Idaho saw log prices hit record levels during the year, which more than offset the effect of OLA-related harvest deferrals in the South and a decline in low-margin polkwood shipments in Idaho. Our real estate segment generated adjusted EBITDA of $48 million in 2021. On the rural side of the business, we sold approximately 18,000 acres at just over $2,100 per acre. Our rural sales team continues to do an excellent job identifying opportunities that create value. On the development side of our real estate business, we sold 159 residential lots in our Chennault Valley Master Plan community in Little Rock, and we completed a commercial sale during the year. Lot sales are off to a strong start in 2022, which is a tribute to our team's focus on creating inventory to meet strong residential lot demand. Turning to capital allocation, We distributed $388 million of cash to shareholders in 2021, equal to 90% of our cash available for distribution for the year. We paid a $4 per share special dividend in December. We also increased the regular dividend 7.3% in the fourth quarter to $1.76 per share on an annual basis. we remain committed to growing the regular dividend sustainably. The large fourth quarter dividend increase reflects both bullishness in our business and the successful completion of accretive Timberland acquisitions. Speaking of Timberland acquisitions, we closed four bolt-on deals in the South in the fourth quarter for an aggregate consideration of $131 million. The largest transaction was a tax-free merger with Luter Land and Timber Company, whereby we acquired just over 51,000 acres of high-quality, well-stocked timberlands in southern Arkansas and northern Louisiana for 1.96 million shares and the assumption of $6.6 million of debt. The Luter timberlands are a highly attractive addition to our portfolio. Average stocking levels of approximately 90 tons per acre and an average timber age greater than 40 years are both well above the norm. Typical metrics for southern timberlands are roughly 45 tons per acre and an average age of timber of 14 to 15 years, assuming a 30-year growing cycle and even age management. We expect to realize average annual EBITDA of $8.5 million over the first 10 years of ownership, providing an appealing cash yield. We had a liquidity of nearly $600 million at the end of 2021 after paying the special dividend. Our leverage also remains the lowest of the timber REITs despite our large special dividend. Our financial strength provides a solid platform for continued growth as we consider additional accretive acquisitions and investments in our existing mills. I will now provide some thoughts on our expectations for 2022. BC transportation challenges and COVID absenteeism stressed a supply chain that has had difficulty consistently meeting lumber demand over the last two years. As a result, lumber prices increased back above $1,000 per 1,000 board feet as reported by Random Links. We do not believe prices at this level are sustainable, and we expect lumber prices to moderate as we move through 2022. Having said that, we continue to believe average lumber prices for the full year will be structurally higher than long-term averages due to exceptional lumber demand and tight supply. Housing fundamentals remain robust. U.S. housing starts increased to 1.7 million units on a seasonally adjusted basis, and building permits were nearly 1.9 million units in December. Both statistics were notable milestones and represent a strong finish to a strong year. A shortage of homes in the large millennial demographic cohort continue to underpin our view that housing should be set up for a multi-year boom. We are monitoring rising mortgage rates given their effect on housing affordability. Homebuyers and builders have levers to offset affordability issues caused by higher rates. Migration to less costly housing markets given the durability of remote work, builder concessions, and smaller houses are examples of factors that may mitigate the effect of higher mortgage rates. Interestingly, Freddie Mac released a forecast just last week predicting that the single-family housing market will remain stable in 2022. They expect that higher mortgage rates will moderate the pace of home price increases and that the entry-level home segment will remain tight due to a shortage of homes for sale. We expect continued growth in the repair and remodel segment in 2022. In the last week, RISI published an expectation that R&R spend will increase 3% in 2022, and the Harvard Joint Center for Housing study is predicting 17% growth. Factors supporting growth in the repair and remodel segment include high levels of home equity, the work-from-home trend, and the age of U.S. housing stock, which is now 42 years on average. Regarding environmental, social, and governance reporting, we plan to publish our third annual ESG report in May. We are also developing a full ESG section of our website, and we plan to publish a carbon and climate report in September. Potlatch Delta has a strong ESG story, and we are committed to do our part to mitigate climate change and continue our legacy of responsibility across the ESG spectrum. To wrap up my comments, Potlatch Delta is very well positioned to take advantage of favorable industry fundamentals, and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value. We'll now turn it over to Jerry to discuss fourth quarter results and our outlook. Thank you, Eric. Starting with page four of the slides, adjusted EBITDA decreased from $107 million in the third quarter to $76 million in the fourth quarter. The decline largely reflects the effect of lower indexed Idaho saw log prices and seasonally lower harvest volumes in the fourth quarter. I'll now review each of our operating segments and provide more color on the fourth quarter results. Information for our timberland segment is displayed on slides five through seven. The segment's adjusted EBITDA was $42 million in the fourth quarter compared to $76 million in the third quarter. We harvested 349,000 tons of saw logs in the north in the fourth quarter. This is down seasonally from the 462,000 tons that we harvested in the third quarter. Northern saw log prices were 28% lower on a per ton basis in the fourth quarter compared to the third quarter. The decrease in saw log prices reflects lower prices for indexed and cedar saw logs, as well as seasonally heavier logs. Because of our index prices reset on a one month lag, the higher lumber prices that occurred in December won't be reflected in our saw log prices until the first quarter. In the south, we harvested just under 1.1 million tons in the fourth quarter. This volume was 4% higher than the third quarter as our southern timberlands team worked hard to minimize the amount of our harvest shortfall for the year. Our southern saw log prices were 2% lower in the fourth quarter compared to the third quarter. As discussed on last quarter's call, we expected pine saw log prices to moderate once conditions dried out and saw log mill – or saw log mill – saw mill log inventories returned to more normal levels. Sorry. Turning to wood products on Slides 8 and 9, adjusted EBITDA was $37 million in the fourth quarter compared to $27 million in the third quarter. Our average lumber price realization increased 6% from $533 per thousand board feet in the third quarter to $563 per thousand board feet in the fourth quarter. Our price increase is comparable to the Random Links framing lumber composite on a percentage basis when the composite is shifted to account for the length of our order files. Our lumber prices increased each month during the fourth quarter. Our average lumber price realizations per 1,000 board feet were $487 in October, $570 in November, and $639 in December. Lumber shipments decreased from 265 million board feet in the third quarter to 243 million board feet in the fourth quarter. COVID absenteeism was a drag on production. Our plywood business performed exceptionally well in 2021 and delivered record profitability. The negative residuals and panels variance on page 8 of the slides primarily reflects a decline in plywood prices after peaking at an all-time high in the third quarter. Moving to real estate on slides 10 and 11, the segments adjusted EBITDA was $10 million in the fourth quarter, up slightly from $9 million in the third quarter. Higher rural land sales closings slightly exceeded fewer residential lot sales in our Chenal Valley Master Plan Community in Little Rock, Arkansas. Shifting to financial items, which are summarized on slide 12, our total liquidity remains strong at nearly $600 million. This amount includes $296 million of cash, as well as availability on our undrawn revolver. Speaking of our revolver, in December, we extended its maturity to February 14, 2027. We also reduced the size of the facility to $300 million, given our strong balance sheet and plentiful available capital. We refinanced $40 million of debt scheduled to mature in December 2021, reducing our annual interest expense to approximately $700,000. We also repaid the $6.6 million of debt we assumed in the Luder merger in December and $3 million of medium-term notes of maturity in January. We did not repurchase any shares during the fourth quarter. As a reminder, we have a 10b-5-1 plan in place. This reflects our ability and commitment to repurchase our shares at attractive prices. Capital expenditures were $19.6 million in the fourth 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 the Timberland acquisitions that Eric discussed. We also recorded a favorable income tax adjustment of approximately $5 million in the fourth quarter, mostly to reflect lower state income taxes. I will now provide some high-level outlook comments. The details are presented on slide 13. We expect to harvest about 6.1 million tons in our timberland segment in 2022, with approximately 70% of the volume in the south. We expect our annual harvest volume run rate will increase to 6.2 to 6.4 million tons after our Ola Arkansas sawmill startup curve is behind us sometime in 2023. Harvest volumes in the north are planned to be comparable in the first quarter relative to the fourth quarter. We expect northern solid prices to increase significantly in the first quarter, reflecting higher lumber index prices. Harvest volumes and saw log prices in the South are expected to decrease seasonally in the first quarter. The saw log price decline is due primarily to seasonally fewer hardwood saw logs in the mix. We plan to ship just over 1 billion board feet of lumber in 2022. In the first quarter, we plan to ship 230 to 240 million board feet of lumber. Our estimates reflect uncertainty associated with pandemic-related absenteeism. Our average lumber price thus far in the first quarter, including orders booked but not yet shipped, is approximately 70% higher than our average fourth quarter lumber price. Our current lumber prices are approximately 90% higher than our average fourth quarter 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. Shifting to real estate, we expect to sell approximately 13,500 acres of rural land and approximately 165 Chenal Valley residential lots in 2022. Additional real estate details are provided on the slide. We estimate that interest expense will be $3 million in the first quarter and just over $8 million per quarter for the second, third, and fourth quarters of 2022. Interest expense is lower in the first quarter because that is when we receive our annual patronage payment from the farm credit banks. Our total capital expenditures are planned to be in the range of $70 to $75 million in 2022, excluding acquisitions. That estimate includes approximately $15 million to rebuild OLA, which we expect will be reimbursed by insurance. Overall, we expect to start 2022 with a very strong first quarter. We anticipate total adjusted EBITDA for the first quarter will be a bit more than double fourth quarter's level, due primarily to higher lumber and index saw log prices. We remain bullish on industry fundamentals despite rising interest rates. Our integrated operating model and leverage to lumber prices are aligned with those fundamentals, and we are well positioned to continue growing shareholder value. That concludes our prepared remarks. Emma, I'd now like to open the call to Q&A.

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. Your first question today comes from Kurt Yinger with D.A. Davidson. Your line is now open.