PotlatchDeltic Corporation

ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Mr. Wayne Wastechek, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.

Good morning and welcome to Potlatch Deltics second quarter 2025 earnings conference call. Joining me on the call is Eric Creamers, Hotlatch 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 then our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then I will review our second quarter results and our outlook. Well, thank you, Wayne. Good morning, everyone. Thanks for joining us. Yesterday, we announced second quarter total adjusted EBITDA of $52 million. Despite ongoing macroeconomic and trade policy uncertainty, Our overall performance remains solid, primarily driven by our timberlands and our real estate segments. The wood products division earned $2 million in adjusted EBITDA during Q2, as its results were hampered by lower lumber prices and several non-recurring items, which I will touch on in a bit more detail later. Turning to our business operations, let's start with a review of our timberlands division. During the quarter, weather conditions for logging and hauling were favorable, enabling our teams, particularly those in Idaho, to surpass planned harvest volumes. Although we have managed to exceed our projected harvest volumes for the first half of the year, our overall annual harvest plan remains unchanged. Log prices across the South remained stable in Q2, while our average Idaho saw log price was higher due to the seasonal impact of lighter logs as well as cedar pricing, which was driven by strong regional demand. In our wood products business, overall lumber market conditions remain soft, primarily due to tepid demand in both repair and remodel, as well as new residential construction segments. Also, the market anticipated tariffs on imported lumber going into the quarter and when they failed to materialize, it contributed to a decline in lumber prices, especially for western SPF. Further, adverse weather conditions in the southern region negatively impacted construction activity, consequently affecting southern yellow pine pricing. While declining lumber prices added pressure to our second quarter results, several other factors, including certain one-time items totaling approximately $7 million, also negatively impacted wood products' financial performance compared to Q2. First, freight costs surged during the quarter from constrained supply due to seasonal trucking demand for produce, as well as a shortage of commercial truck drivers stemming from a recent executive order and Department of Transportation guidelines mandating English language proficiency in drivers. However, we believe these transportation challenges are temporary as we have begun to see improvement in truck availability in recent weeks. Second, the utility providing electricity to our Waldos sawmill conducted unannounced major maintenance on a substation during the second quarter, resulting in lower quality power, which caused production and maintenance challenges at the mill. While the substation maintenance has been completed, this temporary disruption had a negative impact on the mill's results in the second quarter. Third, a key capital project undertaken this year involved the replacement and upgrade of the saw box at the St. Mary's Sawmill. This $3 million project, which we expect to have a nearly 20% IRR, required a period of downtime and subsequent ramp-up, which temporarily affected production levels at the St. Mary's Sawmill. This project was originally scheduled for installation in the third quarter, but we accelerated this initiative into the second quarter due to the anticipated tariffs on imported machinery from Canada. Lastly, a significant decline in lumber prices at the end of the second quarter resulted in a non-cash inventory impairment charge of $3 million compared to the first quarter. Although these items negatively impacted our second quarter results, We believe that these factors are now largely behind us and expect improved results for wood products in the third quarter. Looking ahead, the administrative review on anti-dumping duties for softwood lumber imported from Canada has been finalized, with the final countervailing duties expected to follow in short order. The average combined duty rate will rise significantly, which will likely result in higher lumber prices across various species. These duties are separate from any potential tariffs that may get announced as the Trump administration completes the Section 232 investigation regarding the impact of imports of lumber and derivative products on national security. If such tariffs are imposed, they are expected to be on top of the duties and could further boost lumber prices. Moving to real estate, the division delivered another strong quarter, selling 7,500 acres at an average price of $3,100 per acre in Q2, which included a large conservation sale to the Nature Conservancy. Nearly one-third of the acres sold in the first half of the year were associated with conservation sales at significant premiums to timberland value. Our transaction pipeline remains strong as buyers continue to pursue hard assets such as rural land, amid considerable volatility across many other asset classes. On the natural climate solutions front, we continue to make steady progress across our various initiatives. Starting with solar, the overall market slowed down as participants digested the adjustments made to green energy incentives as part of the reconciliation bill. Despite these changes to incentives, we continue to see activity and healthy interest from solar developers especially from the larger players in the space. In fact, we are finalizing negotiations on one option that started after the bill was passed, highlighting the fact that developers remain interested in solar even without the investment tax credits. Once this option is executed, our outstanding solar option portfolio will total approximately 43,000 acres at an estimated net present value of nearly $550 million. Additionally, lithium continues to be another promising NCS opportunity for us. We placed 900 acres under option with a lithium developer in the first quarter and expect to add significantly more acres under option by the end of the year. The Smackover Formation in southwest Arkansas continues to attract significant interest from lithium developers, including major energy companies such as ExxonMobil and Chevron. We are also continuing to pursue opportunities related to forest carbon offsets, carbon capture and storage, and emerging markets for biomass, such as bioenergy and sustainable aviation fuel. We are excited about the potential optionality timberland ownership provides and remain focused on growing our natural climate solutions opportunities. Shifting to our capital allocation strategy, our priorities remained centered on activities that we expect to create long-term value for our shareholders. This includes maintaining our dividend, key capital investments, and opportunistic share repurchases, all while preserving flexibility as we navigate challenging market conditions. With our stock trading at a significant discount to our estimated net asset value and now yielding over 4.5%, Share repurchases emerged as the top capital allocation opportunity in the second quarter. Consequently, we purchased $56 million of our common stock through our 10B51 program at an average price of $39 per share during Q2. Notably, this was the company's largest share repurchase volume within a single quarter or year since becoming a REIT back in 2006. After deploying $60 million in cash for share repurchases in the first half of this year, we continue to maintain a solid financial position, have the flexibility to navigate the current macroeconomic environment, and remain opportunistic with capital deployment as we move forward. Now turning to the U.S. housing market, uncertainty surrounding trade policy and other macroeconomic headwinds continue to weigh on affordability and buyer sentiment. Persistently elevated mortgage interest rates and economic uncertainty have kept many potential buyers on the sidelines. In the second quarter, average total housing starts hovered just above 1.3 million units on a seasonally adjusted basis, with average single family starts around 900,000 units. New residential construction retreated slightly, along with a higher proportion of average starts shifting to multifamily during the quarter. However, housing starts remain relatively stable given current market dynamics. To stimulate demand for new home construction, builders continue to adapt by offering smaller homes, price reductions, and mortgage rate buy-downs. Nonetheless, the long-term fundamentals of housing demand remain intact. These include a persistent housing shortage, demographic tailwinds from millennial household formation, and a growing population of renters transitioning toward ownership. As affordability pressures ease, we expect these structural drivers to reassert themselves, supporting future growth in housing activity and, by extension, lumber demand. Moving on to the repair and remodel sector, activity has remained relatively subdued. Ongoing economic uncertainty and elevated borrowing costs continue to weigh on discretionary home improvement spending, particularly for larger-scale remodeling projects. However, the latest readings from both the leading indicator of remodeling activity from the Joint Center for Housing Studies at Harvard University and the National Association of Home Builders still forecast slight gains for expenditures on home improvements and maintenance in 2025, followed by more modest but still positive growth in 2026. For our business, we continue to see steady takeaway from our home center customers. We anticipate this trend will continue through the second half of the year, especially as homeowners complete deferred maintenance and mid-scale renovation projects. Importantly, the long-term fundamentals of the repair and remodel market segment remain unchanged. These include an aging housing stock, now with a median age over 44 years, historically high levels of home equity, and the continued prevalence of hybrid and remote work arrangements, which drive demand for functional and aesthetic home upgrades. To close out my comments, while uncertainty and near-term headwinds remain in the market, we have a favorable view of long-term fundamentals that drive demand in our industry. Looking forward, we believe lumber prices have bottomed out for the year as we are starting to see prices trend higher. We are optimistic that the increase in Canadian softwood lumber duties and any potential Section 232 tariffs will have a positive effect on domestic lumber prices as we work through the back half of the year. Our strong balance sheet and excellent capital allocation track record combined with operational execution and cost discipline positions us to deliver long-term value to our shareholders. I will now turn it over to Wayne to discuss our second quarter results and our outlook. Thank you, Eric. Starting from page four of the slides, total adjusted EBITDA was $52 million in the second quarter compared to $63 million in the first quarter. This sequential quarter-over-quarter decrease in adjusted EBITDA is primarily attributed to seasonally lower harvest volumes and higher forest management costs in our timberland segment, along with an inventory impairment charge and certain one-time costs in wood products. I will now review each of our operating segments to provide more color on our second quarter results. Information regarding our timberland segment is presented on slides five through seven. The segment's adjusted EBITDA decreased from $42 million in the first quarter to $40 million in the second quarter. In Idaho, 360,000 tons were harvested in the second quarter, representing a slight decrease from the 368,000 tons harvested in the first quarter. While a seasonally lower harvest volume in the second quarter was anticipated, We capitalized on favorable logging and hauling conditions, as well as adequate contractor availability to exceed the planned volume. The favorable conditions we experienced during the first half of the year have allowed us to make great progress on our 2025 planned harvest volume. Saw log prices in Idaho rose by 9% per ton compared to the first quarter. This increase was driven by higher cedar saw log prices and seasonally lighter saw logs. Expenditures on forest management and road maintenance also increased seasonally compared to the first quarter. In the south, we harvested 1.5 million tons in the second quarter, down seasonally compared to 1.6 million tons harvested in the first quarter. Our southern saw log prices increased by 2% compared to the first quarter. This rise in price was mainly driven by a higher volume of premium grade pine saw logs in our Gulf South region. Now, I will turn to wood products, which is shown on slides eight and nine. Adjusted EBITDA was $2 million in the second quarter compared to $12 million in the first quarter. The decrease was driven by a combination of factors, including lower average lumber prices Increased processing costs primarily from one-time items and a write-down of lumber inventories to net realizable value. Our average lumber price realization decreased $4, or 1%, from $454 per thousand board feet in the first quarter to $450 per thousand board feet in the second quarter. Comparatively, the random links framing lumber composite average price was also 1% lower in the second quarter compared to the first quarter. Lumber shipments increased by 13 million board feet, rising from 290 million board feet in the first quarter to 303 million board feet in the second quarter, setting a new quarterly record. This increase is attributable to improved seasonal operating conditions and incremental production at the recently upgraded Waldo, Arkansas sawmill. Transitioning to real estate, on slides 10 and 11, the segment produced adjusted EBITDA of $23 million in the second quarter, which matches our first quarter results. During the second quarter, the rural real estate business sold 7,500 acres at an average price of $3,100 per acre, reflecting a significant premium over Timberland values. Sales included a conservation land sale in Arkansas, which generated proceeds over $4 million. Demand for rural real estate remains robust, as evidenced by achieving the highest level of transaction volume this quarter since 2017. In the Chennault Valley development side of a real estate business, 18 residential lots were sold at an average price of $102,000 per lot in the second quarter. Despite prevailing macroeconomic challenges, we continue to experience steady demand from regional builders in Chennault. Turning to our capital structure, summarized on slide 12, we finished the second quarter with $395 million in liquidity, including $95 million of cash on our balance sheet, as well as availability on our undrawn revolver. The reported cash balance reflects the use of $60 million through the end of the second quarter to repurchase 1.5 million shares at an average of $40 per share under our existing repurchase authorization. We have $30 million remaining on our $200 million repurchase authorization. We have $100 million of debt maturing in August, which we expect to refinance. We also anticipate utilizing our remaining forward starting interest rate swaps with the $75 million notion of value to lower borrowing costs for this debt refinancing. Capital expenditures were $10 million in the second quarter. This amount includes real estate development expenditures, which are included in cash from operations in 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 Waldo 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. Within our Timberland segment, we anticipate harvesting between 1.9 and 2 million tons during the third quarter, with approximately 80% of this volume sourced from the south. Harvest volumes in Idaho are projected to be seasonally higher in the third quarter relative to the second quarter. Additionally, saw lock prices in Idaho are expected to decline approximately 9% in the third quarter, primarily due to lower prices on index volume. As a reminder, Our index volume is based on a one-month lag. Consequently, Q3 index pricing is based on June through August lumber prices, with both June and July having seen relatively low lumber prices. In the southern region, we anticipate harvesting approximately 1.5 million tons during the third quarter, and we expect that saw log prices will remain relatively flat. We plan to ship 310 to 320 million board feet of lumber in the third quarter, which would establish another quarterly record. Our average lumber price thus far in the third quarter is $410 per thousand board feet, which is roughly 9% lower compared to our average lumber price in the second quarter. This is based on approximately 100 million board feet of lumber. The lumber prices have been weak thus far in Q3. They have recently been improving, and we expect them to continue to rise as we move through the back half of the year, driven by higher duties and potential tariffs. Also, our wood products division had a couple of challenges in Q2, which we do not expect to repeat, and as such, we anticipate results to improve in Q3. Turning to our real estate segment, we expect to sell approximately 15,000 acres of rural land at an average price of $3,100 per acre in Q3. Given this level of anticipated third quarter activity, we are increasing our full year guidance to an estimated 31,000 acres and increasing our average price per acre to $3,100. For our Chenala Valley development, we expect to close on approximately 50 residential lots at $140,000 per lot and 13 acres of commercial land at $530,000 per acre in the third quarter. Further details regarding real estate can be found on slide 13. We anticipate that our total adjusted EBITDA for the third quarter will be significantly higher than our second quarter results driven by improved performance in both real estate and wood products divisions. That concludes our prepared remarks. John, I would now like to open the call to questions.

Absolutely. Ladies and gentlemen, this now begins the question and answer session for today. Once again, if you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking the question. The first question comes from the line of Keetan Mamtora with BMO. Please go ahead.