PotlatchDeltic Corporation (PCH) Earnings Call Transcript & Summary

Yes. And then also on the 4Q earnings call, you did talk about a number of other investments that you're making across the system this year. Maybe just provide a quick overview of some of those investments. And ultimately, what made those investments attractive? And to the extent you can comment, what sort of contribution we should think about from an EBITDDA perspective from those investments?

Jerry?

Yes. Absolutely. So the main focus this year is Ola, getting that mill rebuilt. I mean that's obviously the biggest part of our team's attention as well as dollars we're spending. But we -- to your point, we did mention some other projects. 2 of them actually are at Ola. While the mill is down, we might as well get as much of the benefit as we can. So we have a log simulator and a trimmer optimization project that goes along with that. That's about $4 million to $5 million, what we're spending. IRR, about 32% between those 2 projects. And stepping back, your question is what drives some of those projects? And it really is -- when we have a choice, it's what is the return we can get? And kind of a minimum baseline that we said is about 20% IRR. So those clearly meet that spec. Another interesting project that we're doing is automating the poly -- or the patch line. I used to call it polypatch when I worked in the mill back in the day. But that's going to take out some labor, actually allow us to redeploy labor in a tight labor market and increase production over in the rest of the mill complex. But more importantly, has an ESG impact because it reduces the use of chemicals. But also, those chemicals are really high cost as well. So that project has a really nice return, well above that 20% threshold. So those would be some examples. When you think about the rest of, we're going to spend overall about $70 million this year before we get the insurance recovery. About $40 million of that is in the mill set, maybe just under that $40 million. And most of the rest of the spend actually is putting deposits down because the equipment vendors are still backlogged. It's putting -- saving our place in line for projects that will happen in future years.

Okay. And how should we think about CapEx on a go-forward basis? So based on the level of spending this year, how much do you think we're going to continue to see from a strategic growth perspective next year? And also what's your kind of baseline maintenance level?

Yes. So why don't I start with the back half of that question? So maintenance capital kind of a baseline for us is around $40 million. When you break that down, what's included, just to make sure that we understand the components here, about $18 million a year in timberlands, mostly to reforest. It's building some roads. It's doing some other things. But largely think about that replanting after we harvest. We have a master-planned community down in Little Rock, Arkansas, Chenal Valley. We've got to develop a lot, so we have product to sell. So that's about $8 million a year would be kind of the run rate or base. And then the remainder, call it, kind of that $14 million or so, $16 million or so, it would be kind of maintenance capital in the mills. We're always going to spend that at a base level. A lot of that is replacement and then we would flex above. And the example I gave is this year, it's $70 million versus that $40 million baseline. It will ebb and flow depending upon the projects that we have, the opportunities, et cetera. But I'd expect we're always spending a bit above that maintenance level in the mills, but it will ebb and flow depending on the year.

Okay. Are there any questions in the audience at this point? If not, we'll move on. Actually, go ahead.

[indiscernible] I wonder if you can [indiscernible] make sense for your timberlands. It's actually -- I assume prices will be essentially [indiscernible].

Okay. It's a great question, Salvator. And it's one that I think comes up in every investor meeting that I have, to be honest. It's got a lot of buzz and there's a lot of excitement about what this carbon revenue might be. Maybe to start with. When Eric talks about the positive ESG story, especially the environmental and the timberlands part, we're in a unique position where as a company, we're already net negative today. We actually sequester more carbon with the 1.8 million acres of timberlands that we own than we emit when we manufacture lumber, for example. So that's the positive story he's referring to. And then obviously, when you think about Paris accord and everything else, we've got to do our part to find ways to reduce greenhouse gas emissions and increase the carbon sequestration to the degree we can to benefit society. But to get to your specific question on carbon credits. There -- we actually have a new expanded micro site that we're going to publish on the web. It more of an interactive experience in terms of our IR materials. Probably early next week, I would expect it to publish. But in there, you're going to see some case studies, 3 case studies specifically to your question. And we did it based on the south because our Idaho timberlands are so profitable, given the index to lumber pricing. In fact, when you compare our timberlands in Idaho to what EBITDDA per acre is for timberlands on the west side of Oregon and Washington, which are widely viewed as the most productive, our indexed arrangement actually fix our timberland is more profitable. So the bar is so much higher from a carbon credit. So the scenarios are based on southern land. And one of them is, what if you bought raw land for, call it, $1,000 an acre. You plan a forest for a carbon regime. Number two would be you defer harvest, to the point of your question, 10 years. And the third one is, what if you fertilize when it's uneconomic to do it otherwise? What kind of a carbon credit do you need to incent you to speed up the growth of the forest? And to put it in context, carbon credits are running about $8 per ton today in NCX market, which is public. And they would at least have to be double in the harvest deferral in order to incent us to defer harvest for 10 years. The bar goes all the way up to $160 a ton, to put it in context, if we were to buy land and earn a reasonable return in a carbon regime. So I would say there's a lot of work going on in the space. There's a lot of energy. There's a lot of excitement. But I would say it's a longer-term prospect. And more importantly, the bar is lower when you have less productive and less profitable timberland. So think about maybe northern tier, leg states, maybe Maine, might be -- timberlands that might be better geared towards a carbon regime.

All right. Any other questions? Otherwise, I mean, certainly, if there's anything else you want to add on ESG sustainability, feel free to jump in. Otherwise, we can kind of move on to other areas. I guess just quickly just on Real Estate. We haven't really talked about this too much. Just kind of curious if you could talk about how this business has changed since you merged with Deltic? What have been some of the bigger changes that have happened? And ultimately, how do you see this business position for the longer term? And also, how we should think about EBITDDA, like kind of sales this business longer term?

Yes. So we merged with Deltic Timber back in 2018. And Deltic was -- had a very similar business model to Potlatch in many regards. They owned a lot of timberland. They owned mills. But they also had a master-planned community in Little Rock. So we inherited that master-planned community upon the merger. We didn't have a lot of familiarity with master-planned communities. I don't think that's something that the old Potlatch would have gone out and done on its own. But so much capital had already been sunk into developing Chenal Valley, which is the name of the master-planned community, that we looked at the future prospects for Chenal Valley. And we decided that it was attractive enough that we would keep it. And we did some analysis as to keep or sell, and we decided keep was the best option. And what's happened since 2018 is housing is only dramatically improved. So the demand for residential lots, particularly in Chenal Valley, has just -- it's gone through the roof. We just had a lot of draw there the other day. We -- a lot draw is when we introduce new lots to the market. We introduced 26 lots to the market and all 26 were snapped up. So it was very prudent for us to have kept Chenal Valley after the Deltic merger. Now that's on the development side of the equation. The other side of the equation is the rural land sales, which I mentioned earlier. Deltic had had a strategy really to not engage in the sale of raw land. People would approach the company and say, "Gee, we'd like to buy such and such acre." And the company would say, "Sorry, we're keeping it to grow timber." We're out to maximize value for our shareholders. And we stratify our acres. Every year, we go in and we look at each and every acre. And we decide, is an acre best suited for timber or is it best suited for HBU land sales? And since the merger -- and by the way, the enterprise value, the deal value, if you will, was worth $1.1 billion, more or less. We've now sold $50 million worth of Deltic real estate. And it's about 12,000 acres, more or less, that we've sold at $4,000 an acre. Values that are many times what that land would have been worth had we held it for growing timber. And I would tell you that we have got many more land deals that are in the pipeline to look forward to. So we think it's been a complete home run, the merger of Deltic, number one. And then number two, this land sales program that we've got and the Chenal Valley master-planned community, it's all worked out incredibly well. Going forward, demand for rural land remains strong. You think about COVID. You think about work from home. You think about the wanting to get away from large population centers and recreate, diversify your assets away from the stock market, maybe into raw land. There's just nothing but great times ahead for our Real Estate business.

Actually just to kind of add in to that, at least on the M&A side, whether it's in timberlands, whether it's in wood products, what are some of the key criteria that you're using to evaluate whether or not a deal makes sense?

Jerry, do you want to go on?

Yes. I mean probably the number one criteria is what price you're going to pay, because that drives obviously the return, the potential win. For us, we're not looking to grow the company just to make a bigger company here. It's really about driving shareholder value. And when it comes to capital allocation, we kind of risk -- we kind of rate the return opportunities, and that drives how we approach it. So return potential, obviously, it's got to fit our integrated strategy. It's got to fit our geography. It's got to be a quality set of assets, all the normal things you'd expect. But we really do pride ourselves on being disciplined and only pulling the trigger when it makes sense. And maybe just to give an example, we did 4 timberland acquisitions that we closed in the fourth quarter. 3 of those 4 were privately negotiated. So when you go out, and you have the bank-led 2-stage auction, generally, you have 20 or so deep pockets showing up. It's very competitive. It's very efficient. We were able to probably beat kind of a market discount rate by about 100 basis points by approaching it the way we did. And the largest of those deals was 51,000 acres in South Arkansas and North Louisiana. Coincidentally, you talked about Deltic a little bit ago, the Murphy family was largely behind a private S-Corp that own this 51,000 acres. And while we approached them 3 years, it took a little while to get it done. The relationship and what they saw out of the merger and how well that went, and they're happy with how that's played out. Certainly, they were only interested in talking to us when it came to Loutre timberland. So we try to find ways off the beaten track, if you will, to make sure that we're driving that shareholder value.

Okay. And now just on the net asset value, I mean, you've used this in part to kind of guide whether or not share repurchases makes sense at different points in value. Could you talk about how the different components of the net asset value have changed over the 2 last years, at least to the extent that it makes sense to share at this point?

Well, I'll kick it off and then Jerry can add to it. We have seen, I think, a marked step-up in what we view as our net asset value. Really driven by 2 different things. One is the power of the earnings in our Wood Products business. We think the new floor has been established in North America. It's widely publicized. The new floor is around $500 to $600 per 1,000 board feet. And that price floor really is being set by what's happening up in British Columbia. Log prices there have gone up. The duties -- lumber coming down in the U.S. have gone up. It's getting tougher and tougher to produce lumber in British Columbia. And they need roughly $500 to $600 to -- just to break even. So this new cost floor has been established. And so that translates into higher earnings power in the Wood Products business. That's number one. The second thing I'd point to is those higher lumber prices translate into higher log prices in our Timberlands business. So you think about the cash generation ability of our Timberlands business, our earnings have gone up twofold since where we were back in 2019. So you can't help but think that, that influences net asset value. So those 2 factors largely are behind what we view as a step-up in our NAV.

Got you. And any reevaluation in terms of the South? I mean we have noticed that some timberland values have started to creep up a little bit with what's going on in the broader market. But anything there?

Yes. I would -- what I would say is there's -- we're in a yield-starved world right now. We've seen rates creep up a little bit here over the past couple of months. But still, it's a yield-starved world. And if you're an investor looking for real cash flow, real yield, real dividends, it's hard to find it. And so we're seeing this trend towards real asset investing, and timberlands is a great place to go invest. It's generally considered an inflation hedge. And timbers always got value. And if you choose to not harvest your trees today, what happens? You defer the harvest. The trees only get bigger, and they're worth even more. So timber is a phenomenal asset class producing real cash yields. And so there has been a strong demand for timberland, not just from the public timber REITs, but also from private investors like TIMOs, the private equity of timber investing. And that has collectively driven discount rates down for timberland. They used to be in the, I don't know, low to mid-5% kind of range, real IRRs for timberland go back 3, 4 years ago. And today, I'd tell you, those yields are probably in the 4% or 4.25% kind of range. So that's driven down yields because prices have gone up. And that's true in the South as well.

Okay. And then my last question. Just if you could talk about the supply chain, in particular, as it pertains to 2021. Have things gotten better, worse? Any commentary on that?

It's horrible, I guess, it is the simplest way I can describe it. The transportation challenges that are out there have never been this bad. Now I would also say at the same time that we're finding a way to get around it, rail, truck issues are just intense right now. We still seem to find a way to get our product to market, but I don't see any signs of it easing anytime soon.

Okay. Thank you. Eric, Jerry, I don't believe there are any other questions in the audience so we'll wrap it there. Thank you.

All right. Thank you.

Thanks, John.