PotlatchDeltic Corporation (PCH) Earnings Call Transcript & Summary

Good afternoon. I'm Anthony Pettinari with Citi Research, and we're very pleased to have with us PotlatchDeltic CEO, Eric Cremers. This session is for Citi clients only. So if media or other individuals are on the line, please disconnect. Disclosures are available on the webcast and at the AV desk. For those in the room or the webcast, you can go to liveqa.com and enter code GPC24 to submit any questions if you don't want to raise your hand. Eric, we'll turn it over to you to introduce your company and team, provide any opening remarks and tell our audience the top reasons that investors should buy your stock today.

Yes. Thanks, Anthony. I'm Eric Cremers, I'm the CEO. I've been with the company for 17 years; CFO for 7 years, Chief Operating Officer for 7 years and now CEO for 3 years. And I'm joined here with Wayne Wasechek, our CFO, and he's been CFO now for a year and was Chief Accounting Officer for 5 years prior to that. So PotlatchDeltic. We're a timber REIT. We're headquartered out in Spokane, Washington. We have 3 business units in our company. Our first is our Timberlands business unit. We have a total of 2.2 million acres, about 600,000 of those acres are up in Idaho and 1.6 million of those acres are down in the southeastern part of the United States, running all the way from Arkansas, all the way over to South Carolina, spread across those states. With those 2.2 million acres, we harvest about 7.5 million tons per year. And it's split about 80% in the Southeast and 20% up in Idaho. And moving on to our Wood Products business. We have 7 mills in the United States, 6 of those are lumber mills and 1 is a plywood mill. And those lumber mills are in St. Maries, Idaho; Bemidji, Minnesota; Gwinn, Michigan; Ola, Arkansas; Warren, Arkansas; and Waldo, Arkansas. And with those 6 lumber mills, we produced about 1.1 billion board feet of lumber per year. So we're the 10th largest lumber producer in the United States. Our industrial-grade plywood mill also is up in St. Maries, Idaho. It's an industrial-grade plywood mill because it produces extremely high-quality plywood that's used in high-end products like boats and RVs and truck trailer panels and things like that. The last business unit that we've got is our real estate business. There's really 2 different segments in our real estate business. And the first is you can imagine having 2.2 million acres, some of those acres are going to be worth more money in some other applications besides for growing trees. So we stratify our 2.2 million acres, and we look for opportunities to monetize those acres at prices generally in the 3 to 5x the value of the timberland range. And typically, we'll sell roughly 1% of those acres, more or less, per year for a higher and better use sort of an outcome. Again, it prices 3 to 5x what the land would be worth if left in a timber growing sort of a state. The other product we have in our real estate business is our Chenal Valley master plan community in Little Rock, Arkansas. It's not something that we would go out and start build a new master planned community on our own. We inherited this master planned community from the Deltic merger back in 2018. It's a little bit of a gem. We sell about anywhere from 130 to 150 residential lots per year, no vertical development, just lots. Typical lot sells for $100,000 and about 50% of that is margin. We also sell commercial acreage in that Chenal Valley master planned community. It could be 5 to 15 acres per year at anywhere from $300,000 to $500,000 per acre. It's a great little business for us. So for a typical timberland REIT, we've also got natural climate solutions as an emerging opportunity for us. And there's several different types of opportunities for us in that opportunity set. And the first one is solar farms. It's a huge opportunity. We think we've identified about 60,000 acres that are going to work for a solar outcome. The second opportunity for us is for carbon offsets. We've got a carbon offset project underway right now. We hope to complete that in the third quarter of this year. And then the last opportunity we've got is, of course, carbon capture and storage is the other opportunity that we're looking at with NCS. So that's a quick overview of the company. Anthony, I'll turn back to you.

Great. I think among the timber REITs, you have the most leverage to lumber prices. And I'm wondering if you could talk a little bit about current lumber demand or kind of moving into the spring selling season for the homebuilders, how you're seeing demand and pricing in [ lumber mills ]?

Yes, we are the timber REIT most leveraged to the price of lumber, not just through ownership of our 6 lumber mills, but also because of the fact that 75% of our sawlog production in Idaho is indexed back to the price of lumber. So our earnings in our Idaho timberlands go up and down with lumber prices. Back to lumber prices. So we think we troughed in October of last year with the Random Lengths Index at around $366 per 1,000. And today, as we sit here, we're up around $400 per 1,000. And the reason prices have moved up is really there are several different factors. First, supply has come off of the market. There's been 2 billion board feet of capacity that's come out of the market in the past year, 1.5 years. Repair and remodel markets are fairly stable. The home centers, Home Depot, Lowe's, they've made comments about their comps for the year. They expect to be slightly negative 2%, 3% negative. But I think it can be true that they have got negative comps, and we have got a strong and growing lumber business with them. So the home centers have told us that they'll take every last stick that we can produce out of our mills that meet the criteria for the program that we're selling them, which is really a stud that's a 2x4, 8 or 9 feet in length. So I feel really good about the repair and model market segment. It's pretty stable. The homebuilding market or new residential market has shown remarkable signs of resilience. If you look at what Toll Brothers has said, Tri Pointe, Taylor Morrison, all the homebuilders have been making very favorable comments about the demand for new homes and the order flow and traffic that they're seeing in their various properties. So I think the demand on the new residential construction side is it fell last year, but it feels to me like it's getting stronger this year. And if we can just get to a place where the Fed cuts rates a time or 2 or 3, I think it could really, really spur homebuilding as the U.S. is underbuilt by 4 million to 5 million units. And I think affordability is an issue. And with lower rates, houses will be more affordable and demand would go up. So as we sit here today, the random lengths is around $400. Our view is that prices will be -- should be moving higher as we move through the year given the above factors that I just referenced. The backdrop is pretty favorable. The year is off to a relatively slow start compared to what I was expecting. But I think a lot of that was driven by the really inclement weather that we had back in January. Really, the entire country was basically shut down in January from really cold weather. And so demand for lumber just was zero that month. Well, it wasn't zero, but it was very subdued. So I think -- while I was expecting prices to start moving in January, I think it was delayed. And now as we're getting out and getting closer to spring, I think we're going to start to hear from the home centers. They're going to start to place their orders. And I think with this backdrop of better housing, I think there's an opportunity for lumber prices to improve.

And can you talk a little bit about where your system, you think it sits on the cost curve and in terms of improving profitability, absent price improvement, are you taking curtailments or running at lower operating rates or just kind of how your system is positioned?

Yes. So our mills are all highly competitive. They're either in the first or second. We may have one that's in the third quartile, but it's close to being the second quartile. So thankfully, we're not in that fourth quartile, which is where you don't want to be or you run the risk of having to close your mill in a downturn. And I think the reason our mills are competitive is because we're constantly looking for and putting capital back into our mills to make them more competitive. I think a great example of that is our Waldo, Arkansas mill. We're spending $130 million to expand that mill. A lot of that cost has already been spent. We've got another $40-some million to go to spend this year. But when we're done with that project, that will be a top 10 lumber mill in North America. And I think with that investment, we expect Waldo to produce an extra $25 million per year of EBITDA. And so I think, yes, by continuing to putting capital back into our mills, we keep them competitive and we keep them from slip it into the fourth quartile.

I think for a number of years, we've seen like BC sawmills come offline, higher cost mills. Is that dynamic still playing out? What inning are we in potentially? Are you seeing closures or curtailments in other parts of the U.S. or U.S. South? Just how do you kind of view that?

Yes. I do think there's more to go up in BC and in Canada. So we -- we haven't talked about the duty on imported lumber from Canada. There's been a trade dispute with Canada going back decades now. And the duty that the Commerce Department is assessed on Canadian exports to the U.S. today sits at 8%, by and large. And it's going to 14% in August. It's going to go up another 6%. And a lot of people are speculating that, that duty is going to go to 20-plus percent in August of 2025. So it's just going to make it more and more challenging for the Canadian producers to continue to thrive, if you will. So I do expect there to be more curtailments closures. It's hard to know, but I'd guess another 1 billion to 2 billion board feet is a strong possibility. And the closures that we've seen, they're not just limited to BC. We've seen closures in the Pacific Northwest. We've seen closures even in the U.S. South. And in any given region, you'll have great mills and you'll have bad mills. And I'm sure even up in BC, there are some great first quartile mills. But it's -- it's generally easy to characterize the South as being an area of strength. And places like BC where fiber availability is a real challenge as a weak market.

Maybe on lumber. Can you talk about sort of inventory levels maybe at dealer level and what those sort of normally look like and what they maybe look like now and in terms of sort of buyer psychology, if you think about kind of going into the spring, are dealers holding thin inventories or ready to stock up or how you think about it?

Yes. I think inventories are at very low levels. And part of it is driven by the nasty weather that we had back in January. So there was very little takeaway. I think dealers are -- they're learning to operate their business with kind of a just-in-time mindset. And they look at it and they say, "Oh, lumber prices are low." It's easy to pick up the phone and call a supplier and say, "ship me some lumber," so they can kind of get away with it for now. But what happens is when it turns, and it will turn, I mean the cure to low prices is low prices, right? Capacity leaves the market or demand comes back. So when that demand comes back, all of a sudden, lumber is going to be in short supply. The dealers won't have the inventory. They'll have to pick up the vendors, suppliers like us and say, "sell me some lumber," and we'll say, "yes, get in line." And that's when there's real price volatility. So I think these low inventory levels, they're going to cause price volatility down the road, and hopefully, it's to the upside.

Maybe just shifting to your timberlands and maybe we can start with Idaho because that is so linked to the lumber business. Can you talk about your ownership position in Idaho and what makes that kind of a unique market?

Wayne, do you want that one?

Yes. So we own -- in our Idaho portfolio, we have about 625,000 acres. We are the largest private landowner in Idaho. We do have a unique arrangement where we index 75% of our sawlogs to the price of lumber and not only price lumber but SPF lumber in that region. And what that does is it definitely creates especially what we've seen -- so last several years, the pricing on lumber really come to the benefit of our timberland's portfolio in Idaho. We talked about our direct leverage to lumber. This is another big piece of that leverage to lumber is our timberland portfolio. It's very unique to the industry. No one else has that. And that's really a function of ours where we are established as a big player in Idaho. That allows us to have that type of arrangement. It's set on a 1-month lag, the pricing. And so that just that timing works out for that. And then also, it's -- it continues just to be a very unique position that we found very favorable.

And given that it's kind of a unique ownership, is there an opportunity or an ability to kind of get bigger or smaller in Idaho or desire? And then I think we think of Idaho is experiencing a lot of the migration, a lot of population growth. Are there any sort of HBU or sort of optionality around that, that you can exploit? Or are you kind of in a different part of the state?

Yes. Taking your first question on -- we find Idaho to be a very attractive state to do business and frankly, we would like to acquire more timberland in Idaho. Trees grow quite fast in that region. It's a very attractive timberland ownership area. But there's really a limited opportunity. Large tracks don't come up for sale very often. So it's very difficult to really expand ownership in that area, but that's something we would certainly want to do if the right opportunity came up. I think to your second question on HBU, certainly, we saw a very active market, especially coming with -- in COVID coming out of COVID. There was a lot of interest, people remote recreating that created very strong interest, especially in our Idaho portfolio. We saw a significant increase in multiples on timberlands in Idaho, yes. And certainly, in this environment, higher interest rate, that's softened somewhat, but it's still a very attractive market. People are -- continue to saw interest in owning timberland or owning HBU property for personal purposes.

Great. And then maybe shifting to the south. Can you talk about where your timberlands are in the south and then closed the CatchMark transaction? Can you talk a little bit about that? And what you brought to the portfolio?

Yes. Certainly, we're very diversified across the south. Really, we look at it 2 primary regions. One kind of first, the Gulf South, Alabama, Arkansas, Mississippi, Louisiana. And then with the CatchMark acquisition, we entered into Southeastern Alabama, Georgia, South Carolina. So we own about, across those 2 regions, 1.6 million acres of timberland. And yes, it really allows -- and that's where our growth has been. Back in 2018, we did the acquisition of Deltic Timber, acquired 530,000 acres, primarily in Arkansas. And then as you mentioned, CatchMark, those are 350,000 acres in South Carolina, Georgia and Southeastern Alabama, which really allowed us to expand the footprint into a new strategic market for us.

And in terms of the relative attractiveness in the U.S. South between maybe more Inland regions, like Arkansas, and maybe more coastal regions, I'm just curious to kind of get your thoughts about that. It seems like in the pandemic, we had a large amount of price appreciation for logs in the coast, and Arkansas was kind of more stable, and a lot of that price appreciation in the cost seems to be kind of given back up. So just how do you think about those dynamics? And maybe from a long-term perspective, where do you see price appreciation?