PotlatchDeltic Corporation

Good morning, and welcome to Potlatch Deltics first quarter 2025 earnings conference call. Joining me on the call is Eric Cremers, Potlatch Deltics president and chief executive officer. This call will contain forward-looking statements. Please review the cautionary 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 in the appendix to the presentation slides and on our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments and then we'll review our first quarter results and our outlook. Well, thank you, Wayne, and good morning, everyone. Thanks for joining us. Following a market close yesterday, we reported total adjusted EBITDA of $63 million for the first quarter. I'm pleased with our solid operational performance across all businesses despite the prevailing economic and trade policy uncertainties affecting the market. Our financial performance improved compared to the fourth quarter in all three of our business units, demonstrating strong execution by our teams, the resilience of our operations, and the positive effects of our strategic investment in the Waldo, Arkansas sawmill. Starting with timberlands, our teams in Idaho in the south did a great job of producing higher than planned harvest volumes during what is typically a seasonally slower period. This incremental volume was particularly advantageous in Idaho as we benefited from an increase in saw log prices due to our index saw log agreements, coupled with higher cedar prices driven by strong regional demand. In our wood products business, lumber markets were dominated by tariff discussions throughout most of the first quarter. The Random Links Western SPF composite price rose by $60 during the quarter in anticipation of Canadian tariffs. As the tariff deadlines loomed, buyers refrained from building inventory to hedge their positions, preferring instead to continue to purchase for near-term needs. With Canadian lumber tariffs currently on hold, it remains to be seen how much of this run-up of SPF prices in Q1 will unwind. Conversely, southern yellow pine markets did not experience near the pricing benefit as SPF. Nonetheless, southern pine lumber markets were more active and prices remained relatively firm during the quarter. Lumber markets continue to face relatively tepid demand from end markets. That said, the capacity curtailments announced last year continued to impact the market, providing greater balance to supply and demand dynamics and helping support lumber prices. Additionally, pending regulatory actions related to Canadian duties and potential tariffs have provided support to pricing thus far this year, and that should continue as we move to the second half of the year. Canadian producers who supply approximately 25% of U.S. demand were recently spared from reciprocal tariffs. However, there are already well-established softwood lumber duties on imported Canadian lumber, which are adjusted annually. Preliminary Canadian softwood lumber duty rates that will take effect later this year were announced, and they are higher than current levels. The preliminary quote all others rate is set to increase from 14% to over 34%, more than double the current rates once finalized. Furthermore, on March 1st, the Secretary of Commerce initiated a Section 232 investigation to determine the effects of imports of lumber and derivative products on national security. Commerce will evaluate the extent to which U.S. production can meet domestic demand and the feasibility of increasing domestic timber and lumber capacity. The findings of this investigation could lead to the implementation of tariffs on all lumber imports into the U.S. and would be incremental to the already established Canadian softwood lumber duties. During Q1, we shipped 290 million board feet of lumber, which was 10 million board feet over the upper range of our Q1 guidance. This overperformance to plan was mainly driven by our Waldo, Arkansas sawmill. The ramp up in performance of this mill has gone extremely well. In fact, by March, we were consistently achieving a run rate that matches its new targeted annual nameplate capacity of 275 million board feet per year. By hitting the mill's targeted key production metrics, including improvement in recovery rates and a 30% reduction in cash processing costs, we have now completed the ramp-up phase of the project three months ahead of schedule. This modernization and expansion project at Waldo has significantly enhanced the competitiveness of the mill and is expected to generate approximately $25 million in incremental EBITDA annually assuming a mid-cycle sales environment. Moving on to our real estate segment, this business continues to benefit from demand for rural real estate, particularly for conservation and recreational purposes. We sold over 7,000 acres in the first quarter, including several larger transactions which contributed to achieving notable premiums to Timberland value. Steady demand is expected to persist, as buyers seek hard assets like rural land against an environment of significant volatility and many other asset classes. Now turning to our natural climate solution initiatives, solar continues to be very active. Since the end of 2024, we have expanded our acres under solar option contract by an additional 3,000 acres. This increases our total acreage under option to 38,000 with an estimated net present value of around $475 million. In recent conversations with solar developers, they continue to view their solar projects as viable and are therefore proceeding with their plans. Another promising NCS opportunity for us is in lithium, as a portion of our property in southwestern Arkansas has potential for lithium development. We began our first step in potentially monetizing our land for lithium development this year by granting exclusive rights to a lithium developer to conduct brine exploration and production on approximately 900 service acres in Lafayette County, Arkansas. The lease anticipates an initial five-year term for planning, engineering, and construction before potential production begins. Additionally, we are actively engaged in discussions on executing another large mineral rights lease in southwestern Arkansas. Regarding forest carbon offsets, we are in the process of developing an improved forest management carbon offset project aimed at storing carbon in our forest, which we believe will generate cash flows that exceed our business as usual baseline. At this stage, we are currently conducting feasibility studies with reputable project developers that focus on potential projects in our southern timberlands. Due to the complexity and care required to develop a high quality carbon project, We would target to bring a meaningful project to market sometime in the next 18 to 24 months. In addition, we continue to pursue a range of other longer-term natural climate solution opportunities, including carbon capture and storage and new markets for biomass, such as bioenergy and sustainable aviation fuel. For CCS, we are exploring projects for development in a block of our timberlands in northern Louisiana that would support CO2 storage for potentially new emitting facilities in the region. We believe initiatives like these will ultimately increase demand for our rural land, likely driving timberland values significantly higher. Shifting to our capital allocation strategy, we maintain a balanced and disciplined approach, especially given current lumber markets and the uncertainty surrounding the broader economy. Our stock continues to trade at a significant discount to our estimated net asset value in addition to yielding over 4.5%. As a result, share repurchases remain more attractive than acquiring timberlands or other capital allocation options. In the first quarter, we purchased $4 million of our common stock through our 10B51 program at an average price of $45 per share. And we have bought another $4 million at $40 per share so far this quarter. Our solid financial position, coupled with our liquidity profile, allows us to continue being opportunistic with capital deployment as we move through the year. Turning our attention to the U.S. housing market, overall macroeconomic conditions continue to constrain consumer confidence and challenge affordability, leading to low buyer urgency in both new and existing home sale markets. While large U.S. home builders have pointed to a slower start to the spring selling season, annualized U.S. housing starts are stable, averaging nearly 1.4 million units. Single-family home building starts remained resilient near the 1 million unit level as the larger public home builders continue to offer rate buy-down incentives to drive home sales. The multifamily home building segment remains challenging due to the restrictive construction financing and an oversupply of units which continue to be digested in the market. For existing homes, inventory has risen, but sales remain on pace with last year's low-level As interest rates continue to be elevated and existing homeowners wanting to move are continuing to choose to stay in their current homes due to the lock-in effect of their low mortgage rates. Despite the current state of the housing market, the key drivers of inherent housing demand remain positive. These longer-term structural tailwinds include the massive undersupply of homes, a substantial demographic shift as millennials transition to homeownership, and strong household formations. We believe that once the constraints on housing affordability ease, this will serve as a catalyst for upward momentum in lumber demand. Shifting to the repair to model sector, the level of activity so far this year has remained relatively stable. On the one hand, underlying demand continues to be held back by several near-term challenges, including falling consumer confidence and elevated financing costs for discretionary home improvement projects. However, leading R&R pundits predict modest gains in repair and remodel as we move through the year, and big box retail centers are forecasting slight growth in comparable store sales. For our own home center business, we have strong takeaway, and we expect this trend to continue. Additionally, the factors influencing demand for R&R remain intact, including an aging housing stock with a median age over 40 years, historically high home equity levels, and the enduring trend of people working from home. To close out my comments, while the near term may be volatile and uncertain, we have a favorable view of long-term fundamentals in our industry. Lumber prices have made a strong run since last summer in what has been a flat demand environment. And our view is that once markets settle down, demand will return, and as demand returns, pricing should improve as well. Combined with our strong balance sheet, an excellent capital allocation track record, We are well-positioned to deliver long-term value to our shareholders. We'll now turn it over to Wayne to discuss our first quarter results as well as our outlook. Thank you, Eric. Starting from page four of the slides, total adjusted EBITDA increased $10 million, rising from $53 million in the fourth quarter to $63 million in the first quarter. This sequential quarter-over-quarter increase attributed to improved performance across all our business segments, particularly Timberlands, which benefited from higher saw log prices in Idaho and increased harvest volumes in both Idaho and the South. I will now review each of our operating segments and provide more details on our first quarter results. Information regarding our Timberland segment is presented on slides 5 through 7. The segment suggested EBITDA increased from $34 million in the fourth quarter to $42 million in the first quarter, driven by higher harvest volumes, increased Idaho saw live prices, and seasonally lower forest management costs. The first quarter's overall harvest volume exceeded our plan for Q1, marking a good head start to 2025. In Idaho, We delivered 368,000 tons in the first quarter, taking advantage of favorable logging and hauling conditions and adequate contractor availability. Saw log prices increased by 9% per ton compared to the fourth quarter due to higher index and cedar saw log prices combined with a slightly higher mix of cedar. Lower seasonal spending on forest management and roads also favorably impacted results. In the south, we harvested 1.6 million tons in the first quarter, slightly above our fourth quarter harvest volume and exceeding our Q1 plan by almost 170,000 tons. Favorable weather and better than anticipated demand for stumpage sales let us start the year ahead of schedule. In the first quarter, our southern saw log prices decreased by just over 2.5% compared to the fourth quarter. This decline in price was mainly attributed to a shift in product mix, including a higher mix of smaller diameter saw logs and a lower volume of hardwood saw logs. Now, I will return to wood products, which is shown on Slides 8 and 9. Adjusted EBITDA increased from $9 million in the fourth quarter to $12 million in the first quarter. The increase was driven by slightly higher average lumber prices, somewhat offset by higher log costs in Idaho. Our average lumber price realization increased $9, or 2%, from $445 per thousand board feet in the fourth quarter to $454 per thousand board feet in the first quarter. Comparatively, The random lengths framing lumber composite average price was about 6% higher in the first quarter compared to the fourth quarter. Note that a regional mix and product mix differs from the composite, and there's also a timing difference between our sales and the composite. Lumber shipments increased by 7 million board feet, rising from 283 million board feet in the fourth quarter to 290 million board feet in the first quarter. This increase in shipment volume was primarily a result of the Waldo sawmill reaching its targeted production levels following the completion of our modernization and expansion project. Shifting to real estate on slides 10 and 11. The segment generated adjusted EBITDA of $23 million in the first quarter compared to $19 million in the fourth quarter. In our rural real estate business, We sold over 7,000 acres at an average of $3,300 per acre during the first quarter. Our first quarter results include three significant rural real estate sales, including a conservation land sale in Georgia for over $7 million at approximately $3,300 an acre. We continue to leverage strong demand for rural real estate across all buyer segments, but particularly for conservation outcomes and recreational purposes. In the Chenal Valley development side of a real estate business, 11 residential lots were sold at an average price of $113,000 per lot in the first quarter. These sales were in line with our expectations due to the level of inventory available. Turning to our capital structure, summarized on slide 12, At the end of Q1, we had $447 million in liquidity, including $147 million of cash on our balance sheet, as well as availability on our undrawn revolver. Net interest expense was approximately $2 million in the first quarter, which is the lowest level for the year since we received the vast majority of our annual patronage payments from the farm credit banks during this quarter. We have $100 million of debt maturing in August, which we plan to refinance. We also have available $75 million of notional forward starting interest rate swaps, the lower borrowing cost for this debt refinancing. As Eric mentioned, we have been actively repurchasing our shares as our stock continues to trade at a significant discount to net asset value. Thus far this year, we have spent $8 million on share repurchases, having bought back 188,000 shares for an average of $42 per share under our 10 plan. We have $82 million remaining on our $200 million repurchase authorization. Capital expenditures totaled $23 million in the first quarter. This amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement. For the full year, we continue to anticipate capex spend of $60 to $65 million, which excludes the final closeout payment of $6 million for the Waldorf sawmill project that we made in Q1 and any potential Timberland acquisitions. I will now provide some high-level outlook comments. The details are presented on slide 13. In our Timberland segment, we plan to harvest between 1.6 and 1.7 million tons in the second quarter with approximately 82% of the volume coming from the south. Harvest volumes in the north are expected to be seasonally lower in the second quarter compared to the first quarter due to the anticipated spring breakup. Also, northern sawlock prices are expected to remain mostly flat. In the south, We plan to harvest 1.4 million tons in the second quarter, and we expect our southern saw log pricing to remain relatively stable as well. We plan to ship 300 to 310 million board feet of lumber in the second quarter. With Waldo now operating at full capacity, achieving this shipment level will set a new quarterly record. Our average lumber price thus far in the second quarter is $475 per thousand board feet, which is roughly 5% higher compared to our average lumber price in the first quarter. This is based on approximately 100 million board feet of lumber. Shifting to real estate, we expect to sell approximately 8,000 acres of rural land and roughly 20 Chenal Valley residential lots in the second quarter. Further details regarding real estate can be found on the slide. Overall, we estimate our second quarter total adjusted EBITDA be lower compared to our first quarter results due to seasonally lower harvest volume and higher forest management costs that concludes our prayer remarks rob i would now like to open the call to questions thank you we will now begin the question and answer session if you would like to ask a question please press star 1 in your telephone keypad to raise your hand and join the queue if you would like to withdraw your question simply press star 1 again

Your first question comes from the line of Keetan Memtora from BMO. Your line is open.

Good morning, and thanks for taking my question. Great. Maybe start with, can you talk a little bit about, you know, the demand trends that you are seeing both in the new SE channel and the R&R channel as we move through April? You know, as you pointed out, you know, it seems like things have gotten off to a slow start, but I'm curious.