PotlatchDeltic Corporation

Good morning. My name is David and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Potlatch Delta's second quarter 2022 conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one once again. I'd 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, David. Good morning, everyone, and welcome to Potlatch Deltics' second 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'll review our second quarter results and our outlook.

Thank you, Jerry. We reported second quarter total adjusted EBITDA of $175 million after the market closed yesterday. This is the second highest EBITDA Potlatch Delta has ever reported in a second quarter. Additionally, our quarterly EBITDA has exceeded $100 million in seven out of the last eight quarters. We have generated nearly $1.4 billion of EBITDA over those eight quarters. Those financial results reflect the strength of our leverage to lumber strategy. Speaking of lumber, wood products generated $107 million of adjusted EBITDA in the second quarter. As expected, lumber prices moderated during the quarter from the extraordinarily high levels we saw in Q1, when the random lengths framing lumber composite price exceeded $1,300 per thousand board feet. The composite price has increased every week since reaching a low of $578 per thousand board feet in the middle of June, and lumber prices are at very attractive levels. we expect lumber prices to remain well above long-term averages for the rest of the year. We shipped 254 million board feet of lumber in the second quarter, which was 21 million feet more than we shipped in Q1. Transportation continues to be a significant challenge. For example, our Warren, Arkansas mill, which typically ships about 50% of its lumber by rail, only received five rail cars out of 260 requested in Q2. Our wood products team worked miraculously to shift virtually all of Warren's shipments to truck, and they continue to go above and beyond to solve these types of issues while maintaining their focus on working safely. Transportation challenges continue to present risk to our business. Restarting the large log line at our Ola, Arkansas sawmill remains a top company priority. The new sawmill equipment has been installed, which is an important milestone. We expect to wrap up the project during 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 log recovery, and increase production volume after it completes the startup phase. Our timberland segment generated adjusted EBITDA of $58 million in the second quarter. Our southern timberlands team took advantage of favorable logging conditions to generate harvest volumes that exceeded our expectations. Idaho harvest volumes were lower this quarter due to unseasonably wet weather in June after the typical pause for spring breakup. On a positive note, the wet spring should reduce forest fire risk in Idaho this year. Saw log prices remained strong in both regions, which is notable for the south because weather was favorable and there was decent log availability. Our real estate segment had another strong quarter with adjusted EBITDA of $22 million. On the rural side of the business, we closed a Minnesota conservation sale comprised of more than 10,000 acres. This is notable because this sale effectively completes our long-term strategy to sell our Minnesota land holdings for prices well above timberland value. Over the course of the last 16 years, we estimate that the Minnesota land sales have created approximately $300 million of value for our shareholders. We also continue to see strong demand in the development side of our real estate business. Residential lot inventory in our Chenault Valley master plan community remains at rock bottom levels, and we continue to sell residential lots as fast as our team can create them. We also completed two more commercial real estate sales during the quarter for $2 million in the aggregate, or nearly $700,000 per acre. Turning to housing fundamentals, we believe that the long-term backdrop still remains favorable. Specifically, the housing shortage estimated to be approximately 4 million units in the United States still exists. Millennials, who are the largest demographic cohort in history and who have entered their prime home buying years, still have a strong desire to own a single family residence. Existing U.S. housing stock remains the oldest at 42 years on average in the history of the statistic. Those three examples support our belief that housing-related investments new residential construction as well as repair and remodel will remain strong over the next several years. While we remain optimistic about the future, we must acknowledge some negative factors that have moderated housing starts in recent months. We believe that the combination of more expensive homes, higher mortgage rates, and a decline in consumer confidence have pushed many potential buyers to the sidelines. Until expectations about the U.S. economy improve, We believe housing starts will settle at modestly lower levels, perhaps around a 1.5 million annual run rate. We also expect a mixed shift away from single family towards multifamily. In the meantime, the number of housing units under construction was a record 1.7 million units in June. The elevated level of housing units under construction bodes well for lumber demand in the near term. In addition, homebuyers and builders have levers to offset affordability issues. 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. Shifting to repair and remodel markets, we think lumber demand will continue to be healthy in this market segment. 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 remains at record levels across the U.S. The job market is very strong, consumer balance sheets are in great shape, and if you cannot afford to trade up to a new or existing home, remodeling is a very attractive option for homeowners. Our home center takeaway remains solid at pre-COVID levels. Turning to the topic of growth, we have been very active recently. Last month, we announced a $131 million project to modernize and expand our Waldo, Arkansas sawmill. The project will increase the mill's annual capacity by 85 million board feet and significantly reduce cash processing costs, which we expect will result in incremental EBITDA of $25 to $30 million per year and a 22% IRR in our base case. The existing mill will continue to operate during the project with just three weeks of downtime expected in 2024 to tie in the new equipment. Project completion is expected by the end of 2024. Shifting to the Catchmark merger, there has been a lot of progress since we announced the transaction at the end of May. The registration statement on Form S-4 was filed July 11th. The next steps are to finalize the S-4 and for Catchmark to conduct its shareholder vote. We expect the merger will close late in Q3, and we continue to be excited about the strategic and financial benefits of the transaction. We have also been a successful bidder on three bolt-on Timberland transactions this year, aggregating $100 million in total. The first transaction closed in May, the second closed earlier this month, and we anticipate closing the third transaction later this quarter. The three bolt-on transactions add approximately 46,000 acres to our ownership in Mississippi and Arkansas. Combined, this year's bolt-on acquisitions and catch mark represent an increase of nearly 400,000 acres or 22% in our fee timberlands. We remain committed to growing our regular dividend sustainably, increasing our stable cash flows with the catch mark merger and the bolt-on timberland transactions provides the opportunity to continue doing so. We typically review the regular dividend with our board in the fourth quarter. Given our strong results in the first half of the year, we expect to pay another special dividend this year. While the amount depends on our performance for the remainder of the year, we expect the amount will be much lower than the $4 special dividend we paid last year. We will provide updates as the year progresses and we have better line of sight. Finally, on the theme of returning cash to shareholders, we repurchased $5 million of our shares recently at approximately $44 per share under our 10B51 plan. We plan to discuss our share repurchase strategy with our board at our next regular meeting. At the end of Q2, we had $511 million of cash on the balance sheet and liquidity of $810 million. Our leverage remains the lowest of the timber REITs, and our financial strength provides a solid platform for continued growth. Regarding environmental, social, and governance reporting, we published our third annual ESG report in May. Our team is currently working on developing a full ESG section of our website, and we plan to publish a carbon and climate report in the fall. 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 remains 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'll now turn it over to Jerry to discuss our second quarter results and our outlook.