PotlatchDeltic Corporation

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, again, press star and the number one. Thank you. I'd 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 Potlight Celtic's third quarter 2025 earnings conference call. Joining me on the call is Eric Cremers, Potlatch-Deltax 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 potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then we'll review our third quarter results and our outlook. Well, thank you, Wayne. Good morning, everyone. Thanks for joining us. Yesterday, we announced third quarter total adjusted EBITDA of $89 million. Our overall results were driven by a strong performance in our real estate business from both the rural and the development part of the business. Additionally, I'm pleased with the strong operational performance delivered across all segments this quarter, especially given the challenging market backdrop we continue to navigate through. Before I discuss each of our business segments, I wanted to briefly comment on our recent joint announcement with Rainier on our proposed merger of equals transaction. As we highlighted on the call a couple of weeks ago announcing the transaction, We believe that the merger between our two companies will result in significant strategic and financial benefits beyond what either of us could achieve independently. Pollack, Steltic, and Rainier share complementary business models, similar cultures, and capital allocation philosophies, and a long-standing commitment to sustainability. This merger will significantly increase the scale of both companies, as the combined company will own nearly 4.2 million acres of timberlands across 11 states. The combined company will also continue to operate our efficient and scalable wood products manufacturing business with 1.2 billion board feet of lumber capacity and 150 million square feet of plywood capacity. In addition, the combination will result in a diverse real estate portfolio, including three active real estate development projects, and robust opportunities to provide land-based and natural climate solutions. From a financial perspective, the combined company will have a strong pro forma balance sheet, as well as an enhanced capital markets presence. Through this combination, there's also a significant opportunity to create value through synergies, operational efficiencies, and the sharing of best practices. We estimate synergies of $40 million which will be primarily driven by corporate and operational cost optimization. We expect to close the transaction in late the first quarter or early the second quarter of 2026, subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and the approval of Potlatch, Deltics, and Rainiers shareholders. Now, shifting to our third quarter operations, starting with Timberlands. The division delivered on its Q3 planned harvest volume of 1.9 million tons, with Idaho producing its highest quarterly volume so far this year, which follows typical seasonal patterns. Indexed saw log prices in Idaho softened in line with broader lumber price declines, while cedar saw log prices remained elevated, supported by strong regional demand. Across the south, underlying saw log and pulpwood prices held relatively stable during the quarter, despite the seasonal increase in log supply and elevated mill log inventories throughout the region. Moving on to our wood products business, the segment reported an EBITDA loss of $2 million in the third quarter. This decline was driven by historically weak lumber prices, as muted demand and persistent oversupply continued to plague lumber markets. From an operational standpoint, however, our performance was quite strong. The division delivered 333 million board feet in shipments and produced its lowest average manufacturing cost per thousand board feet since Q2 of 2021, which was prior to the onset of inflationary cost pressures we have experienced over the last few years. We believe these operational results position us well to capture upside when market conditions eventually improve. The downward lumber pricing trend during Q3 ran counter to our expectations, especially given the significant increase in Canadian anti-dumping and countervailing duties implemented during the quarter. Beyond relatively soft lumber demand, we believe several other factors contributed to the price decline, including Canadian mills accelerating shipments into the US ahead of the higher duties, along with the financial support pledged by the Canadian government to its lumber industry. Despite scattered mill curtailments and production cutbacks across the industry and the recent implementation of 10% Section 232 tariffs for lumber imports from all regions, these measures have yet to generate any meaningful upward momentum in lumber prices. Unfortunately, we are also in a seasonally weak period for lumber demand. All that said, we believe prices have now stabilized as we head through the remainder of the year, supported by a more balanced supply-demand dynamic and a more normalized level of inventories across the industry. Moving to real estate, the division delivered another robust quarter, driven by strong contributions from both rural and development sales activity. For rural real estate, highlights include two larger transactions in Georgia, totaling $39 million in revenue. Each had attractive multiples to Timberland value. We also experienced solid take-up on our residential lot offerings and completed a commercial land sale to a local church in Chenal Valley. Demand for rural real estate remains strong, supported by its appeal as a stable long-term investment. Buyers have been also motivated by additional factors, including conservation, recreation, home sites, and adding property that is adjacent to their land ownership. Looking at our natural climate solutions opportunities, we continue to make progress across our various initiatives. Starting with solar, developers are actively evaluating recent adjustments to green energy incentives within the tax bill and assessing how to navigate under the current regulatory environment. While these factors present some potential headwinds, interest from well-established solar developers remain solid. We currently maintain 34,000 acres under solar option agreements and expect this to grow to 40,000 to 45,000 acres by year-end, reinforcing our confidence in the long-term opportunity. Additionally, the smack-over formation in southwest Arkansas continues to attract significant interest from major lithium developers. Since last quarter, we signed a new mineral lease agreement with Saltworks LLC, a subsidiary of Exxon Mobil Corporation, covering approximately 4,200 surface acres for lithium development in the region. With this agreement, our total surface acres under mineral leases in the Smackover Formation now stands at over 5,000 acres, underscoring the growing strategic value of our holdings in the emerging market for lithium. We remain excited about the unique optionality that Timberland ownership provides and are committed to expanding our natural climate solutions portfolio. This includes opportunities in forest carbon offsets, carbon capture and storage, and other emerging initiatives that position us to create long-term value. Shifting to capital allocation, in the first half of the year, we repurchased $16 million of common stock through our 10B51 program. Due to our pending merger with Rainier, our ability to repurchase shares has been and will be limited prior to closing. That said, we continue to maintain a solid financial position, providing flexibility to navigate the current macroeconomic environment while staying focused on executing on our strategic plan, including our 2025 CapEx program. Now, moving to the U.S. housing market, overall demand remains constrained by weaker consumer confidence and affordability challenges, with many prospective homebuyers waiting for mortgage rates to move lower. Encouragingly, rates, in fact, are trending lower. The 30-year fixed rate mortgage fell to 6.1% in October, and home affordability reached its best level in two and a half years. Combined with anticipated further easing of interest rates by the Fed, These developments could point to a more favorable housing environment ahead. Furthermore, the long-term fundamentals of housing demand remain intact, including a persistent housing shortage and demographic tailwinds from millennial household formation. As affordability improves, these structural drivers should reassert themselves, supporting future growth in housing activity. Shifting to the repair and remodel market, activity has been muted as economic uncertainty and elevated borrowing costs weigh on discretionary spending, particularly for large-scale remodeling projects. However, leading indicators, including the Joint Center for Housing Studies and the National Association of Home Builders, suggest that demand for home improvement will remain stable in the near term, followed by more modest but positive growth in 2026. Looking at our own business, demand from our home center customers started the quarter seasonally slower, but strengthened as the quarter progressed. This momentum has continued as we move toward the end of the year. The long-term fundamentals of this segment remain compelling, driven by an aging housing stock, historically high home equity levels, and the persistence of hybrid and remote work, which continues to fuel demand for functional improvement and aesthetic home upgrades. To wrap up my comments, while near-term headwinds persist, we maintain a positive view of the long-term fundamentals that drive demand in our industry. Looking forward, we believe lumber prices have reached their low point for the year and have generally stabilized. We are optimistic that the combined impact of higher Canadian softwood lumber duties, the 10% Section 232 tariffs, and supply reductions from an increasing number of mill curtailments We'll gain traction to support improved domestic lumber pricing as we move through the remainder of the year. Finally, we remain focused and disciplined in operating our businesses efficiently and effectively while advancing the key work streams necessary to complete our proposed merger with Rainier, a transformative transaction that positions the combined company for growth and delivering long-term shareholder value. I will now turn it over to Wayne to discuss our third quarter results and our outlook. Thank you, Eric. Starting from page four of the slides, total adjusted EBITDA was $89 million in the third quarter compared to $52 million in the second quarter. This sequential quarter-over-quarter increase in adjusted EBITDA is mainly attributed to strong real estate activity in both our rural and development real estate businesses. I will now review each of our operating segments and provide more color on our third quarter results. Starting with our Timberland segment, which is presented on slides five through seven. A segment suggested EBITDA increased from $40 million in the second quarter to $41 million in the third quarter. Our saw log harvest in Idaho increased from 360,000 tons in the second quarter to 411,000 tons in the third quarter. Our quarterly harvest volume is typically the highest of the third quarter as dry weather results and more favorable logging conditions. Saw log prices in Idaho declined by 5% per ton compared to the second quarter. This decrease was driven by lower index saw log prices, partially offset by seasonally lighter saw logs. Logging haul costs were higher compared to the second quarter due to a greater seasonal mix of steep terrain logging operations in Idaho, along with longer haul distances. In the south, we harvested 1.5 million tons in the third quarter, consistent with harvest volumes in the second quarter. Average southern saw log prices were up by just over 1% from the second quarter. This increase in price primarily reflects a higher mix of larger diameter pine saw logs and a seasonal increase in hardwood volumes both within our Gulf South region. Turning to wood products shown on slides eight and nine. Adjusted EBITDA was a loss of $2 million in the third quarter compared to a positive $2 million in the second quarter. This decline was primarily driven by lower lumber prices by strong operational execution demonstrated by lower average cash processing costs and higher shipment volume. Our average lumber price realization decreased $54 per thousand board feet for 12% from $450 per thousand board feet in the second quarter to $396 per thousand board feet in the third quarter. Comparatively, The Random Links Framing Lumber Composite average price was approximately 10% lower in the third quarter compared to the second 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 30 million board feet, rising from 303 million board feet in the second quarter to 333 million board feet in the third quarter. Transitioning to real estate on slides 10 and 11, the segment generated adjusted EBITDA of $63 million in the third quarter compared to $23 million in the second quarter. During the third quarter, our rural real estate business sold approximately 15,600 acres at an average price of nearly $3,300 per acre. Notably, Sales included two large transactions in Georgia, a conservation land sale generating over $21 million in proceeds and a nearly $18 million recreation sale to a landowner with adjacent property. In the Chennault Valley development side of a real estate business, 55 residential lots were sold at an average price of $139,000 per lot in the third quarter. Sales reflected a balanced mix of premium and more affordable lots, supporting diverse buyer demand. The division also completed the nearly $7 million commercial land sale in the quarter for $533,000 per acre. Turning to our capital structures summarized in slide 12, we finished the quarter with $388 million in liquidity, including $89 million of cash in our balance sheet, as well as availability on our undrawn revolver. Additionally, We successfully refinanced $100 million of debt that matured in August and utilized our final forward-starting interest rate swap. This refinancing approach resulted in only a $50,000 annual increase in our cash interest costs and maintains our weighted average cost of debt at approximately 2.3%. Capital expenditures were $16 million in the third quarter. This amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement, and it excludes Timberland acquisitions. 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 Solano project that we made in Q1, and any additional potential Timberland acquisition. I will now provide some high-level outlook comments. The details are presented on slide 13. Within our Timberland segment, we anticipate harvesting between 1.7 and 1.8 million tons in the fourth quarter, with approximately 80% of this volume sourced from the south. In Idaho, harvest volumes are anticipated to be just above Q1 and Q2 levels. Additionally, saw log prices in Idaho are expected to decline approximately 13% in the fourth quarter, driven mainly by lower prices on index volume. As a reminder, our index volume reflects a one-month lag. Consequently, Q4 index pricing is based on September through November lumber prices, with both September and October experiencing relatively low lumber prices. In the southern region, we anticipate harvesting approximately 1.3 to 1.4 million tons during the fourth quarter, and we expect that our average saw log prices will decline slightly based on saw log mix and mills wanting to maintain log inventory levels that are in balance with current lumber market demand. We plan to ship 290 to 300 million board feet of lumber in the fourth quarter. Our average lumber price thus far in the fourth quarter is $397 per thousand board feet, which is near our average lumber price for the third quarter. This is based on shipments of approximately 120 million board feet of lumber. Turning to our real estate segment, we expect to sell approximately 5,000 acres of rural land at an average price of $3,200 per acre in Q4. For our Chenala Valley development, we expect to close on approximately 46 residential lots at an average of $95,000 per lot. Further details regarding real estate can be found on slide 13. We expect total adjusted EBITDA in the fourth quarter to be lower than third quarter results. The anticipated decline is mainly driven by fewer rural real estate acres sold, reduced residential and commercial development activity, and within Timberlands, seasonally lower harvest volumes combined with softer index pricing on Idaho saw logs. That concludes our prepared 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. If you would like to withdraw your question, simply press star 1 again. Your first question today comes from the line of Keetan Mentora from BMO. Your line is open.