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 first quarter 2022 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. If you would like to withdraw your question, press the star one. 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' first quarter 2022 earnings conference call. Joining me on the call is Eric Kramers, 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 regarding 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.

Thank you, Jerry. 2022 is off to a phenomenal start, as all three of our businesses delivered exceptional financial results in the first quarter. Total adjusted EBITDA of $246 million is the highest Potlatch Deltic has ever reported in a first quarter, and it is the second highest quarterly EBITDA in the company's history. Continuing with that theme, Wood Products' $150 million of adjusted EBITDA in the first quarter is the segment's second highest quarterly level ever. It is also the second time our lumber prices have averaged over $1,000 per 1,000 board feet for a quarter. We shipped 233 million board feet of lumber in the quarter, which was 10 million feet less than we shipped in Q4. As we discussed on last quarter's earnings call, production was negatively affected early in the quarter by COVID absenteeism. In addition, transportation, both rail and trucks, became more and more of a challenge as the quarter progressed. More broadly, these supply constraints made tight lumber markets even tighter, particularly given we are in a peak seasonal demand window. Our wood products team went above and beyond to minimize the effect of the operational challenges, and I am particularly pleased that they maintained their focus on working safely. Restarting the large log line at our OLA Arkansas sawmill in the third quarter remains the top company priority and the project is on track. The foundation for the new saw line is complete, structural steel and equipment installation has begun and delivery of the new saw line is on schedule. We expect to wrap up the project on schedule in the third quarter and our target is to complete the startup phase by the end of the year. As a reminder, OLA's rebuild will significantly lower cash processing costs, improve recovery, and increase production volume after it completes the startup phase. Our Timberlands segment generated adjusted EBITDA of $76 million in the first quarter. This nearly beat the quarterly record the segment set just last year. Our Timberlands team took advantage of favorable logging conditions to generate harvest volumes that exceeded our expectations in both the north and the south. Log prices were strong in both regions. In fact, our southern pine saw log prices increased 5% quarter over quarter, which is notable because weather was favorable and there was decent log availability. Our real estate segment is firing on all cylinders and had a strong quarter with the justity bedav $30 million. On the rural side of the business, we closed our first solar-related transaction in the first quarter. The sales price was $7,500 per acre, and the transaction generated EBITDA of $13 million. Our team has identified other solar opportunities that could reach $50 to $100 million of value in the aggregate over the next few years. We also continue to see strong demand in the development side of our real estate business. Residential lot inventory in our Chennault Valley Master Plan community is at rock bottom levels, and we continue to sell residential lots as fast as our team can create them. In fact, we have sold or put under contract all 261 lots we have developed in the last two years. In the first quarter, we sold 64 residential lots for over $100,000 per lot. We also completed two commercial real estate sales during the quarter for $3 million, or over $900,000 per acre in each transaction. Turning to factors that drive our business results, it appears that lumber prices have started to firm after declining for six weeks. Prices are currently at very attractive levels, as the last framing lumber composite price of $933 per thousand board feet is well above historical averages. Lumber market dynamics were different over the last six weeks than what occurred last summer. Last year, prices peaked in May after the key spring selling season was over. This year, lumber prices declined during the peak seasonal demand window when buyers needed lumber for projects. As a result, takeaway remained decent even as prices declined. That point was reinforced by strong March U.S. housing starts of 1.79 million units on a seasonally adjusted basis. Furthermore, U.S. lumber imports from the EU may also be under pressure this year due to the Ukraine war, and that was not the case last year. We believe that demand for new homes will remain strong despite higher mortgage rates. As a reminder, multifamily competes with single family for shelter, And multifamily rents have been going up some 15% to 20% year over year in much of the country. So it is not just single family homes that have gotten more expensive. The high level of home price appreciation, along with significant home builder sales backlogs, point to housing demand exceeding supply by a wide margin. In other words, there appears to be ample room for mortgage rates to increase, housing demand to decline, and for the housing market to remain healthy. This view is shared by industry pundits such as Forest Economic Advisors, and it was echoed by Freddie Mac in the most recent quarterly forecast report. In addition, homebuyers and builders have levers to offset affordability issues caused by higher mortgage rates. Migration to less costly housing markets given the durability of remote work, builder concessions, Smaller houses are examples of factors that may mitigate the effect of higher mortgage rates. Shifting to R&R, we think lumber demand will continue to be healthy in the repair and remodel segment as well. The underlying fundamentals remain favorable, and higher interest rates usually have less of an effect on repair and remodel demand than other factors. Importantly, home equity is at record levels across the U.S. The job market is very healthy. Consumer balance sheets are in great shape. And if you cannot afford to trade up to a new or existing house, remodeling becomes a very attractive option for homeowners. The last point is particularly true given the average age of homes is over 42 years. Further bolstering our views on the R&R markets is the fact that on average, equity analysts covering the home center stocks still expect positive same store sales growth each quarter throughout 2022. Our home center takeaway remains solid. 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. This has a meaningful effect on our bottom line given our leverage to lumber strategy. Now turning to capital allocation, we remain committed to growing the regular dividend sustainably. We typically review the regular dividend with our board in the fourth quarter and we just increased the dividend 7.3% last December. We may pay another special dividend this year given the amount of cash we generated in the first quarter and our outlook for the remainder of the year. We will provide updates as the year progresses and we have a better line of sight. Growing the company through high return investments in our existing mills, and M&A remain high capital allocation priorities. We see attractive opportunities to deploy capital to grow and create additional shareholder value through M&A. At the end of Q1, we had $471 million of cash on the balance sheet and liquidity of $770 million. Our leverage remains the lowest of the timber REITs. Our financial strength provides a solid platform for continued growth as we consider additional accretive acquisitions and investments in our existing mills. Regarding environmental, social and governance reporting, our team is putting the final touches on our third annual ESG report and we are on track to publish the 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 the fall. Potlatch Deltic 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 Deltic 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. I will turn it over to Jerry to discuss first quarter results and our outlook.