PotlatchDeltic Corporation

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Celtic third 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 pound key. Press star 1 again. Thank you. I would 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, Lisa. Good morning and welcome to Potlatch Deltic's third quarter 2022 earnings conference call. Joining me on the call is Eric Kramers, Potlatch Deltic'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-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then I will review our third quarter results and our outlook.

Thank you, Jerry. We reported third quarter total adjusted EBITDA of $101 million after the market closed yesterday. That makes eight out of the last nine quarters that our quarterly EBITDA has exceeded $100 million. We are having another really strong year with EBITDA of $522 million through the first three quarters. Our financial results reflect the strength of our leverage to lumber strategy. Our wood product segment's adjusted EBITDA was $31 million in the third quarter. Lumber prices were lower than last quarter as expected, but they are still at attractive levels. The composite price has stabilized over the last couple of weeks and has increased modestly to $494 per thousand board feet after declining 12 weeks in a row. Lumber futures are also back above $500 per thousand board feet. We continue to expect that lumber prices will remain above long-term averages. We shipped 265 million board feet of lumber in the third quarter, which was 11 million feet more than we shipped in Q2. Transportation was a significant risk when we entered the third quarter, but availability of rail cars and trucks has improved considerably. We successfully completed the rebuild of our OLA Arkansas sawmill and restarted the large log line on schedule in the third quarter. The startup phase is underway and the mill is expected to reach its 150 million board feet annual capacity on a run rate basis by the end of 2022 as planned. As a reminder, OLA's rebuild also significantly lowers the mill's cash processing costs and improves its log recovery. Our timberland segment generated adjusted EBITDA of $65 million in the third quarter. Our southern timberlands team continued to take advantage of favorable logging conditions and strong log demand, resulting in harvest volumes that exceeded our expectations. Notably, our team set a quarterly harvest record for our southern timberlands business. The addition of Keshmark's timberlands will provide another boost in the fourth quarter. Idaho harvest volumes were seasonally higher this quarter but fell short of our plan primarily due to contractor availability issues. Our Idaho team is working hard to address the issues and they have a plan in place to reduce the harvest shortfall in the fourth quarter. Our real estate segment had another solid quarter with adjusted EBITDA of $14 million. On the rural side of the business, we sold 1,600 acres at nearly $4,000 an acre. The development side of our real estate business remains strong. Residential lot inventory in our Chenal Valley Master Plan community remains at low levels, and we continue to have good take-up on our lot offerings. We also completed over $6 million of commercial land sales in the quarter, which averaged $183,000 per acre. That is three quarters in a row that we have closed commercial sales in Chennault, resulting in total revenue $11 million thus far this year. Turning to housing, we continue to believe that the backdrop is favorable over the long term. There is a fundamental shortage of housing stock due largely to the combination of underbuilding after the great financial crisis and favorable demographics in the form of millennials, who are the largest demographic cohort in U.S. history. While the rapid increase in mortgage rates has played a key role in slowing housing demand, the Fed's aggressive pace could turn into an easing cycle beginning as soon as mid 2023. Lower demand should also result in home prices declining. Acknowledging that it will take time, we expect demand to increase and U.S. housing starts to return to levels above the long-term average of 1.5 million units per year once homes become more affordable. In the meantime, the number of housing units under construction in the U.S. remains elevated at 1.7 million units in September. The elevated level of housing units under construction supports lumber demand in the near term. In addition, home buyers and builders have ways to respond to affordability issues. For example, remote work opened the possibility to move to less costly parts of the country for a lot of people. Builder concessions or a shift in product mix to smaller homes or fewer amenities are other examples. Shifting to repair and remodel, the largest market segment for lumber demand, the underlying fundamentals continue to be favorable for a variety of reasons. Existing U.S. housing stock remains the oldest in the history of the statistic at 42 years on average. This is important because older homes are significantly smaller than new homes on average and the older homes typically need more repairs. Higher mortgage rates mean that people are much more likely to stay in their existing homes. Remodeling is a very attractive option for homeowners given record levels of home equity across the U.S., a strong job market, and the fact that consumer balance sheets remain in great shape. In addition, higher interest rates usually have less of an effect on repair and remodel demand than other factors. Pundits expect repair and remodel spending to continue to grow. The National Association of Home Builders is forecasting a 7% increase in R&R spending in 2022, a 6% increase in 2023, and a 4% increase in 2024. Harvard's leading indicator of remodeling activity report forecasts R&R spending will be 6.5% higher year over year in Q4 of next year. Both forecasts imply healthy lumber volume growth in the R&R segment given much lower, but still attractive, lumber prices. Our home center customer takeaway remains strong, and we remain optimistic about lumber demand in the repair and remodel market segment. Turning to Catchmark, the merger closed on the 14th of September. We continue to be excited about the strategic and financial benefits provided by the transaction. While we only operated the Timberlands for two weeks in the quarter, we were very pleased with log price realizations and harvest volumes. Integration of the two companies is going faster than anticipated as we have already achieved CAD synergies of $15 million. Also, we now expect to achieve CAD synergies of $21 million versus the $16 million target that we communicated when we announced the transaction at the end of May due to higher interest savings than planned. The sharp rise in interest rates led to a significant increase in the value of our interest rate swaps, which allowed us to reduce the combined company's interest run rate by $8.5 million annually. Jerry will provide more color on the interest savings. As discussed on last quarter's earnings call, we were the successful bidder on three Bolton Timberland transactions earlier this year, aggregating $101 million in totals. In total, these transactions add approximately 46,000 acres to our ownership in Mississippi and Arkansas in the last of the three transactions closed earlier this month. 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 review the special dividend with our board in December. On the theme of returning cash to shareholders, our board approved a new $200 million share repurchase program in August. We believe repurchasing stock at the current price level is very attractive, and we look forward to our trading window opening in early November, one week from today. Finally, 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. Now that said, the relative attractiveness of deploying capital to repurchase shares given the current steep discount to our estimated NAV will factor into our analysis. We typically review the regular dividend in the fourth quarter. At the end of Q3, we have $484 million of cash on the balance sheet and liquidity of nearly $800 million. Our leverage remains low 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 and our first carbon and climate report in September. Our team is currently working on developing a full ESG section of our website. 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 and our strong balance sheet and liquidity provide a high degree of flexibility as we seek to maximize shareholder value. While there is no doubt that new residential construction is weakening given affordability issues, Our view is that R&R spending will remain relatively strong over the next couple of years. In addition, the housing construction downturn may prove to be relatively short-lived. We'll now turn it over to Jerry to discuss our third quarter results and our outlook.