PotlatchDeltic Corporation (PCH) Earnings Call Transcript & Summary

Thank you. If any stockholder would like to make a comment regarding any of the proposals, please submit your comment through the web portal. I'll now pause for a minute to see if we have any of those comments. Apparently, there are no comments. Under the company's bylaws, stockholders must have given advanced notice to the Corporate Secretary in order to bring their business before the meeting. As no such notice was received, there is no other business. Now that everyone has had the opportunity to vote, I declare the polls closed today, May 4, 2020, at 9:07 a.m. Pacific Time. Ms. Tyler, do we have preliminary voting results?

Yes, we do. As Inspector of Election, I report the following preliminary results. For Proposal 1, each of the nominees for election as a Director received the affirmative vote of at least 93% of the votes represented in person or by proxy. Proposal 2. The ratification of the appointment of KPMG LLP as the company's independent registered public accounting firm received the affirmative vote of approximately 98% of the votes represented in person or by proxy. Proposal 3. The advisory vote to approve executive compensation received the affirmative vote of approximately 98% of the votes represented in person or by proxy. We will be reporting the final vote results in a Form 8-K to be filed with the Securities and Exchange Commission within 4 business days.

Thank you for your report. I now declare that each of the Director nominees proposed for election has been elected and that proposals 2 and 3 have been approved. I now declare the business part of the meeting concluded at 9:09 a.m. Thanks for attending our virtual meeting today. Now Mr. Cremers, Mr. Richards and I will give a brief presentation followed by a Q&A session. And I also believe that Trisa Clemons from KPMG is available for questions as well when I'm done with my remarks. At this point, I'd like to remind you that some of the statements made at this meeting may be considered forward-looking. The company cautions investors that results of future operations may differ from those anticipated. We urge you to review the company's cautionary statements and other information contained in the company's filings with the SEC, including our annual report on Form 10-K and our most recent quarterly report on Form 10-Q which identifies certain factors that could cause the actual results to differ materially from those projected in any forward-looking statements made during this meeting. Copies of these reports and other filings are available through the company or online. I'll now switch over to the presentation part of the materials that are available on the portal. We've got a -- about a 20-page deck there, I guess. Let me just walk through and make a few highlight comments on several of the slides, and then we'll open it up to Q&A from the participants. We will -- I just read the forward-looking statements. So we'll switch to Page 3 of the proposal with a little bit of an overview of the company. I think first and foremost, especially in these strange and uncertain times with the COVID pandemic, it's important to remember that the timberlands that we own provide terrific stability to the underlying cash flows of the company. 80% of our gross asset value is represented by the 1.9 million acres of timberland that we own around the country, which support a growing and sustainable dividend. Another unique feature of PotlatchDeltic compared to the other 3 timber REITs is that a very high percentage of our business is leveraged to the price of lumber, not only because we have a large lumber business manufacturing approximately 1.2 billion board feet of lumber each year, but in Idaho, we also indexed the price of our sawlogs to the price of lumber, which results in about 57% of our EBITDA coming directly from the price of lumber. You can see Weyerhaeuser has a fraction of that in Rayonier and Catchmark because they don't have wood products operating businesses and don't have any leverage to the lumber market. We also think that's important with the fundamentals for housing if they continue to remain strong even through the pandemic. I don't think things have really remarkably changed there. Mortgage rates are still very attractive. We've got millennial ownership and a cohort group. That is a perfect age to buy homes with the largest component of the 29- to 30-year-old cohort makes up the largest population group in the country and its prime home buying age. Housing starts certainly have slipped a little bit, but homebuilding orders, we think, are going to snap back strongly when we get through the pandemic. We've got a real estate business where we sell mostly rural recreational land and increments of up to 5x timber value, sometimes more to people seeking a recreational property. And finally, I'll make some comments at this at the end. Underpinning all of this is a really important commitment that we've made to ESG principles, whether it's in environment, social responsibility, the diversity on our Board and our commitment to safety in our workplace. Commented quickly about the 1.9 million acres of company's timberland. You can see it's spread nicely throughout 3 geographic regions in the Inland West in Idaho, we're the largest timberland owner. In the Great Lakes area, where we're a large wood products manufacturer and a relatively small timberland owner. And then throughout 3 southern states, Arkansas, Mississippi and Alabama, where we have our largest concentration in Arkansas, along with the Wood Products facilities, you can see that are spread throughout all these states. Maybe a couple of comments before we move on about the rest of the company. That's just to highlight a couple of things from last year for stockholders. We had a number of significant accomplishments, and probably the most important was the sale of our MDF plant that we acquired in the Deltic merger in 2018. We sold the plant to Roseburg Forest Products early in the year for $92 million. And that really gave us the cushion that we needed to continue to repurchase our shares when we felt that they were fairly priced. And that was another major initiative last year. We purchased $25 million of PotlatchDeltic stock in the first and second quarter, and that's continued on in the first quarter this year with another $12 million of purchases. So overall, we've purchased $37 million worth of company stock in the last roughly 6 -- 5 quarters, I guess. We refinanced some loans, reduced our interest rate -- interest expense by about $5 million a year with the refinancing of some high deal debt that came due in January of last year. So that's a meaningful step change down in our interest expense annually. And importantly, we also committed and invested $39 million in capital last year, mostly in our Wood Products facilities, all that money in our Wood Products facilities to improve grade realization, improve productivity and improve their ability to produce more lumber in all of our facilities. It was the most aggressive program we've had in a long time. And that will pay dividends this year, and we saw that in the first quarter of this year where we had a terrific first quarter in our Wood Products business. Sure, top of mind for many stakeholders is the COVID situation. Just to make a few comments. As you know, in all the states that have stay-at-home orders, we've been deemed an essential business and have been allowed to operate, not only our timberlands activities and our real estate, but also our Wood Products manufacturing. We have a terrific group of employees across the company who have all been committed to work. And in many cases, we've had to add over time to meet customer demand during this COVID period. So at their own risk and peril, they've managed to come to work and worked successfully and safely. We have no -- have had no COVID incidents that required us to close any of our facilities, although we're prepared in the event that should happen with additional screening, cleaning and physical distancing going on in all of our facilities wherever we can. Our corporate offices and regional offices, we banned travel and group meetings of larger than 10 people are prohibited. So I think we've -- so far, we've been able to work pretty effectively for almost 7 weeks now through the COVID period. And importantly, for the company's financials, and we'll touch more on this as I go through the slides. Our priority has been to preserve liquidity in these uncertain times. We ended the quarter with a very comfortable cash cushion. We have no financial strain against any of our covenants with our banks, and our total liquidity was $460 million and a dividend that we feel is still well supported by the fundamentals in the business. So now let me transition back from kind of current topics to a little bit more about the background of the company, starting with the Timberlands segment. Just quickly, as I mentioned, 80% of our gross asset value is represented by the Timberlands segment. Importantly, in the lower left-hand panel, what drives the cash flows here is a sustainable harvest rate. Last year, we harvested about 5.6 million tons. The quantity this year initially, we projected to be about 6 million tons, and we've scaled that back a bit due to the COVID situation and closures of some of our customers for logs, primarily in the south. So I'd expect this year, we're in the range of 5.6 million to 5.8 million tons again. And the beautiful thing about the Timberlands asset is that if we don't harvest the trees now, they continue to grow. The biological growth of a lot of our southern forest and the Idaho forest is in the range of 4% to 6% annually. So those trees will get bigger, and we'll be back next year with harvest levels return more to our sustainable level of about 6 million tons a year. I'm on Slide 8 of the panels. Just to talk briefly about Idaho and the south separately, our principal timberland regions. Idaho is not a well-understood timberland asset, but it has extremely high productivity, very similar to what you find in parts of Western Washington and Oregon, where there's a lot more public information about the timber asset. If you look at our EBITDA per acre, you can see it's very similar to what Weyerhaeuser generates in Western Oregon and Washington. In Idaho, both of us are around $140 to $150 per acre in EBITDA. So it gives you an underlying idea of the productivity of the land. And uniquely in Idaho, almost 90% of the timber that we harvest is destined as sawlog material, sold into sawmills and plywood plants. We don't have a very large component of pulpwood in the Inland West, unlike the south. As you can see on the next slide, where about 53% of our harvest is sawlogs in the south, and 47% of its pulpwood. And the reason -- the large reason for that difference is the growing cycle are shorter in the south, roughly 25 to 30 years to grow a mature crop of trees, and we harvest pulpwood in a thinning format typically at age 15 or 20 within the forest, which generates a fair amount of pulpwood. That activity does not occur in Idaho. Importantly, in the south, we're also -- we're kind of uniquely featured, as you can see in the teeter totter slide at the top left of the panels there. We consume about 2.5 million tons in our 3 manufacturing facilities in Arkansas. And we only sell about 2.1 million tons of logs in the open market. So we're kind of naturally hedged as we've been in this long period of flat sawlog prices in the south. We're able to capture attractive margins in our manufacturing business. Our Wood Products business represented on Panel 10. We've talked about it a bit. I think the important thing to note there it's grown substantially with the merger of Deltic a couple of years ago. We've increased our shipments by over 60%, partly due to capital investments that we've made, but mostly due to the acquisition of the 2 new Deltic sawmills in Waldo and Ola, Arkansas. And we now produce about 1.1 billion to 1.2 billion board feet of lumber a year, which puts us easily in the top 10 lumber manufacturers in the United States, and I think we're about tenth or 12th in the entire North America. Finally, the Real Estate segment really is made up of 2 primary businesses. One, as I mentioned, is to sell rural recreational land, land that's not suited for production of timber, or it has much higher values for recreation, and these are typically 40- to 80-acre rural tracks of land that someone would buy to spend time on with perhaps an RV or spend time fishing or hunting or recreating in the rural landscape. The second part of the business is focused around Little Rock, Arkansas, where we have a large master plan community that Deltic developed originally 30 years ago and it's about half sold today. We have residential lots where we sell approximately 100 to 150 lots a year for residential home construction. We don't build the houses. We sell the bare lots to developers. And we also sell commercial real estate that's proximate to the residential neighborhood in Chenal Valley. Switch gears and talk about kind of a financial snapshot for the company. Capital allocation is obviously the most important activity that management and the Board focus time on and we've been able to return cash to shareholders in a variety of forms. We continue to pay a very attractive dividend, a sustainable dividend that's grown since 2012. The dividend yield is approximately 5.1% today, and we feel very comfortable that the dividend is well covered. We've also begun to repurchase shares opportunistically when we feel that the price of our Timberland and manufacturing facilities, as represented by our share price is grossly undervalued. As I mentioned before, we purchased $37 million worth of stock at an average price of $34 a share. Most recently in the first quarter, we bought $12 million of PotlatchDeltic stock at just over $30.70 a share, as I recall. So we will continue to focus on those opportunities when the market gives us that chance. We think it's a terrific way along with the dividend to return capital to shareholders. Capital structure, just a couple of comments. The company continues to be investment-grade rated by both Moody's and S&P. We have no real near-term debt maturities, which is very comfortable in this kind of COVID environment, although our banks have lots of capacity to lend money. We have a debt maturity due in the December 2020 for $45 million that will most likely be refinanced. And all of our debt metrics are in good shape with lots of liquidity, as I mentioned earlier. Finally, a comment about environmental and social governance. We made a lot of progress in this area. And increasingly, it's become of interest to investors and important to investors. We plant 25 million seedlings a year. There really isn't a more environmentally friendly business than forestry. It sequesters carbon, photosynthetic process certainly cleans water or cleans the air and provides clean water for drinking water in many of the communities where we own timberlands. We secure about -- sequester about 1.4 million tons of carbon a year. And nearly 100% of every log that tree that we harvest is used, whether it's the bark that's burned for fuel to generate steam or the lumber that's manufactured, the sawdust and wood chips typically are sold to somebody to make paper products. So the environmental piece of our business certainly has a lot of things going for. In addition that all of our forestry practices are third-party certified in places by both the Sustainable Forestry Initiative and the Forest Stewardship Council. We're committed to safety in the workplace. We've had a terrific safety year so far. And most of our manufacturing facilities, as I mentioned, we've been able to operate through the COVID pandemic with no outbreaks in any of our plants today. And we're committed to an independent and diverse Board. 25% of our independent directors are women and our commitment to try to improve that as we go along, both in management and our Board. So we think our incentives are well aligned with stakeholders' incentives in that regard. So with that, I'm going to pause, and we will give us a minute to gather the Q&A that's been submitted, and we'll address questions as they've come in. So at this time, there have been no questions submitted by the participants. I want to thank you for your interest today. And we thank you for participating in the webcast, the virtual meeting. A playback of this annual meeting will be available 24 hours after the completion, and it can be found on our website at www.potlatchdeltic.com. On behalf of the entire Board, our officers and employees, I'd like to thank you once again for joining us for our Annual Meeting of Stockholders. This concludes the meeting.

Ladies and gentlemen, that does conclude today's presentation. We do thank you for joining. You may now disconnect your lines.