PotlatchDeltic Corporation (PCH) Earnings Call Transcript & Summary

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Rayonier and PotlatchDeltic Merger of Equals call. [Operator Instructions] I would now like to turn the call over to Collin Mings, Vice President of Capital Markets and Strategic Planning of Rayonier. Sir, please go ahead.

Thank you, and good morning. Welcome to this morning's teleconference discussing the Merger of Equals between Rayonier and PotlatchDeltic. This call is being webcast at rayonier.com and potlatchdeltic.com. The presentation slides for today's call can be found on both companies' websites and have been filed with the SEC. I would like to remind you that in this presentation, we include forward-looking statements made pursuant to the safe harbor provisions of the federal securities law. This morning's press release as well as Form 10-K and 10-Q filed with the SEC by Rayonier and PotlatchDeltic list some of the factors that may cause actual results to differ materially from the forward-looking statements we may make. Throughout today's presentation, we will also discuss non-GAAP financial measures, which are defined and reconciled to the nearest GAAP measure where possible in our materials. With that, let's put our teleconference with opening comments from Eric Cremers, PotlatchDeltic's President and CEO. Eric?

Well, thanks, Collin, and good morning, everyone. Thanks for joining the call on relatively short notice. Earlier this morning, Rayonier and PotlatchDeltic issued a joint press release announcing that we have entered into a definitive merger agreement under which the companies will combine in an all-stock Merger of Equals transaction. I'm excited to be in Atlanta, Georgia this morning with Mark McHugh, Rayonier's President and CEO; and Wayne Wasechek, Chief Financial Officer of PotlatchDeltic to discuss this announcement, as we believe that the merger between our 2 companies will result in significant strategic and financial benefits beyond what either of us could achieve independently. Rayonier and PotlatchDeltic share complementary business models, similar cultures and a long-standing commitment to sustainability. This merger significantly increases the scale of both companies, as we will own nearly 4.2 million acres of timberlands across 11 states. The combined company will have an 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 and robust opportunities to provide land-based and natural climate solutions, such as leasing land for solar development or carbon capture and storage. Under the terms of the agreement, PotlatchDeltic shareholders will receive 1.7339 shares in Rayonier for each PotlatchDeltic share. This represents an 8.25% premium to PotlatchDeltic based on the closing stock price for both companies as of October 10th. Importantly, this structure will provide both Rayonier and PotlatchDeltic shareholders the opportunity to participate in the upside potential of this combination. The pro forma ownership will be approximately 54% Rayonier shareholders and 46% PotlatchDeltic shareholders. The merger has been unanimously approved by both of our Boards and is expected to close in late first quarter or early second quarter of 2026, subject to the satisfaction of customary closing conditions, including receipt and required military approvals and the approval of Rayonier shareholders and PotlatchDeltic shareholders. The name of the combined company will be determined prior to closing, and the company's headquarters will be in Atlanta, Georgia, where PotlatchDeltic already has an established presence. Notably, the combined company will be the largest private land owner in Georgia with nearly 900,000 acres of timberland. In addition, Heartwood Real Estate development project is located near Savannah, Georgia, and we see significant future opportunities associated with our combined portfolio in the state. Regional offices will be maintained in both Wildlife Florida and Spokane, Washington. On the financial front, the combined company will have a strong pro forma balance sheet as well as an enhanced capital markets presence. Through this combination, there is 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 anticipate having half of these synergies by the end of year 1 and the remainder by the end of year 2. We expect the transaction to be accretive to cash available for distribution per share as run rate synergies are achieved. Over time, we will strive to identify additional synergy opportunities through the sharing of best practices and a continued focus on optimizing costs across the combined organization. Follow closing of the merger, I will serve as Executive Chair of Board of the combined company, and Mark will serve as President and CEO. Wayne Wasechek, Chief Financial Officer, of PotlatchDeltic will serve as CFO of the combined company. In addition, Rhett Rogers, currently Senior Vice President of Portfolio Management for Rayonier, will serve as Executive Vice President, Land Resources, overseeing Timberland operations, rural land sales and land-based solutions. Ahslee Cribb, current Vice President of Wood Products and PotlatchDeltic will serve as Executive Vice President, Wood Products, overseeing the manufacturing operations. The Board of Directors of the combined company will be comprised of 5 existing directors from Rayonier, including Mark and 5 existing directors from PotlatchDeltic, including myself. Lead Independent Director will be selected by Rayonier. Our team of PotlatchDeltic has been impressed by the actions taken by Rayonier to bring value for its shareholders over the past several years through nimble capital allocation and active portfolio management. Likewise, I'm proud of how our team, at PotlatchDeltic, has executed on opportunistic M&A to create value for shareholders over time and how have engaged evolving low market dynamics with a strong focus on operational excellence and discipline. Building on these successes, Mark and I see a tremendous runway for the combined company. As a result of the merger, our collective shareholders will benefit from a more diversified timberland deal, a complementary Wood Products manufacturing business and an enhanced platform to unlock value through HBU real estate opportunities as well as natural climate and land-based solutions. We believe now is the right time to combine our portfolios and teams and to strive to unlock even more potential for our investors as a company with more scale and liquidity, a larger and more diversified geographic footprint and complementary businesses. With that, I will now turn the call over to Mark.

Thanks, Eric. I appreciate your comments. And likewise, the Rayonier team has long admired PotlatchDeltic's focus on shareholder value creation through disciplined capital allocation. I'm very excited by the opportunity to partner with you as we lead the combined company through this transformation. I'll start by offering some perspective on the road that led us to this transaction and then expand on the unique opportunities we see to create long-term value for all shareholders through this merger of equals. In November 2023, Rayonier outlined an asset disposition and capital structure realignment plan to reduce leverage and capitalize on disparity between public and private timberland valuations. With the closing of the sale of our New Zealand business this summer, we disposed of $1.45 billion of assets since late 2023, exceeding our original disposition goal and achieving our new leverage target in a manner that was both accretive to CAD and NAV per share, while also further concentrating our assets in regions with the most long-term optionality. At the same time, as we consider the path forward, following our disposition initiative, we became increasingly mindful of the advantages offered by a larger portfolio, especially as we look to grow our land-based solutions business and unlock value through land use optimization. We also consider the potential benefits associated with having some direct exposure to wood products manufacturing as well as the importance of scale when operating a public company in the current capital markets environment. Naturally, this led to discussions regarding potential merger with PotlatchDeltic. During the course of these discussions, the merits of a potential combination with PotlatchDeltic became increasingly clear, and we believe that our portfolios and our teams fit together quite well. In addition, we saw a strong alignment in our corporate values and our philosophy around capital allocation and shareholder value creation. Following the completion of our disposition and capital structure realignment plan as well as the strategic moves made by PotlatchDeltic to expand its portfolio in the U.S. South over the past several years. We and our respective Boards determined that the circumstances were well aligned to explore a potential combination. Ultimately, we both saw a compelling opportunity to create a premier land resources company with a strong balance sheet that will be well positioned to grow and create shareholder value going forward. Expanding on this point, in Eric's comments earlier, Slides 4 and 5 of our presentation outline key strategic and financial benefits of this merger as well as the key terms of the transaction which Eric reviewed. The executive leadership of the combined company will reflect a roughly equal balance of talent between the 2 companies. Initial executive appointments are shown on Slide 6. I'm looking forward to partnering these exceptional leaders upon the closing of the merger to integrate our organizations and advance our line strategy. Additional decision on key leaders for the combined organization will be announced between now and closing. Slide 10 lays out some key metrics on the pro forma company. The combination of the 2 platforms will result in a leading land resources company with roughly 2x the scale that either of us has independently. The pro forma EBITDA mix comprises a large component of relatively stable cash flow, but also still has meaningful leverage to the longer cycle. Moving to Slides 8 and 9. These slides illustrate what the asset profile of the combined company will look like in more detail, including roughly 3.2 million acres in the U.S. South, spread across 8 states, roughly 1 million acres in the Northwest, primarily in Washington and Idaho, 7 wood product facilities and 3 real estate development projects. Slide 9 offers a great vision as it highlights the diversification benefit of the merger. While the assets of both companies are in the same regions, they are concentrated in different markets with different supply-demand dynamics. So both of our shareholders will benefit from the diversification impact of the merger. Also most of the combined company's acreage is in the U.S. South, where we see meaningful long-term optionality and upside potential. Turning to Slide 10. PotlatchDeltic's existing platform for Wood Products will be the combined company well positioned to benefit from an eventual ramp-up in U.S. lumber production in response to higher duties on Canadian lumber imports new tariffs recently announced on wood products imports, the prospect of additional interest rate cuts and improved housing demand as we move forward. PotlatchDeltic's existing wood products facilities are largely top quartile levels that are poised to benefit from the targeted capital investments that PotlatchDeltic has made under the leadership of Eric and Ashlee over the past several years. Moving forward, the combined company will have a strong balance sheet with additional flexibility to make synergistic investments in the Wood Products business over time. We believe that this platform provides another lever with which to optimize the value of our overall land portfolio. Slide 11 highlights how both of our respective teams have been focused on increasing the premiums achieved on higher and better use land sales as well as the shift of both companies towards higher value development sales over the past decade. The larger portfolio will inherently create more opportunities for our teams to leverage their expertise to identify and execute on HBU opportunities across our mined land base. As it relates to our development projects, Slide 12 provides some additional detail on the 3 existing projects across both companies. As we discussed in the past, Rayonier's Wildlight and Heartwood projects have a significant runway ahead of them, and we anticipate that the contribution from these projects will grow significantly in the years ahead. While PotlatchDeltic's Chenal Valley project is relatively more mature, we expect to remain a steady contributor to cash flows moving forward. In addition, we look forward to the sharing of best practices among our teams as this project is in a different phase of its life cycle. Moving to Slide 13. On the land-based solutions and natural climate solutions front, we believe there's a lot of value in leveraging and diversifying the combined platform. Both companies have already made great strides on the solar front over the past few years. And through this transaction, both companies are gaining exposure to additional revenue streams. In fact, just a few days ago, PotlatchDeltic signed a new lithium lease for approximately 4,200 surface acres in the Smackover region of Southwest Arkansas. Further, we see a lot of upside potential in carbon markets over the long term. Key buyers of carbon offsets are increasingly looking for large-scale projects to meet their NetZero ambition, but we believe the combined company will be much better positioned as a potential supplier of choice. Turning to Slide 14. This chart offers additional perspective on the increased scale in capital markets relevance achieved through this transaction. The combined company will be among the largest publicly traded timber and wood products companies in North America. By mining forces, we believe we will be able to better leverage our costs, increase our portfolio diversification and optionality and realize an improved cost of capital over time, all of which will further enhance our ability to create shareholder value in the future. On Slide 15, we outlined our pro forma capital structure and debt maturity profile. On a trailing 12-month basis, our combined adjusted EBITDA has totaled roughly $439 million, resulting in conservative pro forma net debt to LTM adjusted EBITDA of 2.5x, before factoring in the upside from synergies. The combined company will further have a well-staggered debt maturity profile as well as a significant cash position to deploy opportunistically. To this end, as detailed on Slide 16, similar to the track record established by Rayonier and PotlatchDeltic as separate companies, the combined company will have a financial strategy focused on nimble capital allocation and prudent financial management. This strategy will focus on maintaining investment-grade credit ratings, returning capital to shareholders through a sustainable dividend that grows over time, opportunistic share repurchases and capital investments in our portfolio. Moving to Slide 17. We provided details on our anticipated pro forma dividend as well as the special dividend that was also announced this morning. Notably, the combined company plans to maintain Rayonier's current quarterly dividend level as adjusted to reflect the increased number of common shares issued in the special dividend. The special dividend is being paid to meet REIT taxable income distribution requirements in connection with Rayonier sale of its New Zealand business in June. The $1.40 per share special dividend will be paid to Rayonier shareholders in a combination of cash and shares during December. To equalize the economic impact of the Rayonier special dividend, the merger consideration payable to PotlatchDeltic shareholders at the closing of the transaction will be adjusted so that PotlatchDeltic shareholders will receive consideration of equivalent value. Additional details regarding the adjustment mechanism are provided in the press release and the 8-K filed in connection with the transaction. Slide 18 provides some highlights regarding our shared commitment to sustainability and corporate responsibility. Both companies have similar values and a long-standing commitment to the responsible stewardship of our land resources, which we look forward to continuing and further strengthening as a combined company. On Slide 19, we summarize the opportunity we see to bring these 2 great companies together. We believe that this combination will create a premier land resources company with a high-quality, well-diversified timberland portfolio, a dynamic real estate business, an established wood products platform that is poised to benefit from improving housing market conditions. Further, both organizations have a strong track record and commitment to safety, sustainability and the stewardship of our land resources, which I'm optimistic will serve to align our cultures and make this merger a success. I'll now turn it back over to Eric for some closing remarks.

Well, thanks, Mark. We both see this combination as a compelling opportunity in watershed moment for our companies, and we are committed to ensuring a successful transition. Before opening it up to questions, let me say again how energized we are to be combining 2 great companies with tremendous talent as well as a shared commitment to sustainability and legacy of excellence in delivering land resources to their highest and best use. We are confident about the financial underpinnings of this merger and its benefits for the shareholders of both companies, and I'm excited to work together with Mark to great value for our shareholders through this merger of equals. This concludes our prepared remarks, and I'll now turn the call back to the operator for questions.

[Operator Instructions] Your first question comes from the line of Kurt Yinger with D.A. Davidson.

Congrats on the deal. Mark, just wanted to start with a 2-parter for you. First, historically, Rayonier has sort of positioned the lack of wood products exposure as an advantage in terms of not being subject to that volatility. So I'd just love to hear your thoughts around how that plays into the vision of the combined company? And then second, with the improvements that have been made with the Rayonier balance sheet, a lot of capital allocation flexibility going forward. Just curious how you thought about this transaction in combination from a returns perspective, relative to maybe other alternatives or private timberland acquisitions that you're seeing out there in the market.

Yes, sure. Happy to take that. As we discussed in the prepared remarks, coming out of our disposition plan, we considered the potential benefits of having some direct exposure to wood products manufacturing. As you know, lumber mill economics can be quite volatile, but well-positioned lumber mills, we think can also generate strong returns over the cycle. We've also become increasingly mindful of the value inherent in being able to influence demand in markets that are important to our overall portfolio value. What we find attractive about PotlatchDeltic lumber business is that it generates relatively strong margins and it's a scalable platform. So overall, we think that this business will be a really nice complement to a 4.2 million acre combined timberland portfolio. And it really gives us another lever with which to optimize our portfolio value. As it relates to the second question, like you said, we have a lot of flexibility with the current balance sheet profile that we have. We're not going to get into details on overall process or other things that we considered. There will be a fair amount of disclosure around that in the merger proxy when it's filed. But suffice to say, we felt that this transaction was the best way to create value for both of our shareholders.

Got it. Okay. I appreciate the color. And then just lastly for Eric. At recent prices, at least the current exchange ratio, still a gap relative to where I think a lot of us have NAV. What about this transaction and combination, maybe gives you more confidence around crystallizing that value relative to how you thought about that opportunity on kind of a stand-alone basis.

Well, we're -- yes, Kurt, we're both trading at significant discounts to NAV. So I think from a starting position, we're both kind of in the same boat, if you will. But I would say, given the comparable size, the complementary asset profile, strong culture alignment of the 2 companies, we really saw this as an opportunity to create a win-win for both sets of our shareholders. By combining our assets, our talented teams, we're going to be able to realize benefits beyond what either 1 of us could achieve independently. And through the MOE structure that we've executed on here with relatively comparable pro forma ownership, our collective shareholders are going to be able to share equally in the economic value created by this merger. So that $40 million of synergies, for example, our own shareholders are going to benefit 46% from that and Rayonier shareholders are going to benefit 54% from that. So this really is a win-win for both sets of shareholders at the end of the day.

Your next question comes from the line of Anthony Pettinari with Citi.

Following up on Kurt's question on wood products. I guess the other publicly traded timber REIT with a meaningful lumber exposure has this kind of base plus variable dividend structure, which I think was put in place to kind of reflect or manage the volatility of wood products earnings. And I'm just curious how you think about that. I mean in the very -- over the very long term in terms of sustainability of a fixed but growing dividend given that wood products earnings have been historically somewhat volatile in recent history, very volatile.

I'd say that both Rayonier and Potlatch have always been very committed to a sustainable and growing dividend and neither has felt the need to implement a variable dividend strategy. So we really see this merger as an opportunity to grow cash flow over time and ultimately grow the dividend.

Okay. And then maybe just 1 follow-up. I mean, when looking at Southern sawlogs, it seems like Rayonier's message has been you're going to see sawlog price improvement given you're in some of these coastal regions that have pretty tight supply-demand balance. And with Potlatch, it seems like log price improvement was maybe not as much of a focus given sort of more of an indolent positioning. I'm just curious if you can just talk about sort of the general outlook for Southern sawlog price improvement over the midterm? And then just how the portfolio is positioned in that regard.

I don't think we're going to get into forecasting September price improvements on this call. What I will say is 1 thing about this transaction that was particularly appealing is just the diversification benefit that it offered to both sets of shareholders. We're in the same broad regions as we said in the prepared remarks. We're actually in quite different markets within the South and the Northwest. And so those markets don't always move in tandem. And so we think that, that diversification benefit is quite significant for both the shareholders.

Your next question comes from the line of Mark Weintraub with Seaport Research Partners.

Congratulations. Apologies, I'm a little late to the call, so hopefully, I don't ask something that has already been asked and answered. So compelling logic, totally understood. And this may be getting a little far out there. But -- so as you think about growing the business over time, would you anticipate that there'll be a fair bit of scope and/or focus to increase on the wood products manufacturing side, given the -- if the price arbitrage between private and public market timberland values were to consist? And if that's the case, would the focus be mostly on sawmills, or is there room to consider other types of wood products manufacturing as well?

Yes, this is Mark. Look, I think that we view that as creating another option within the capital allocation toolkit. We've both been pretty clear that we think it's tough to make the economics on private market timberland acquisitions, [indiscernible]. Again, just given that disconnect, between private market values and where the stocks have been. That said, I think the PotlatchDeltic mill system continues to have some pretty high return investment opportunities within it. And so I don't think that we're going to specify kind of different go-forward capital allocation strategy here. But again, it certainly gives us another arrow in the quiver, so to speak, as we think about deploying capital allocation strategy to maximize value per share.

Yes. When you think about it, Mark, this is Eric. The 1 thing that PotlatchDeltic is getting out of this transaction is we're partnering with somebody that's got a super strong balance sheet. And so to the extent that we do have those options to grow wood products, and it may not be growing with products volume. It could be investments to improve wood products cost structure. We're partnering with somebody who can really help us implement that kind of a strategy. So again, it really is a win-win when you think about it.

Okay. Great. And then please just tell me asked and answered, if that's been the case, again, I was late getting in, but in terms of the synergies, could you give kind of more specifics of how you get them and the timing of how they will come through?

Yes, Mark, this is Wayne. In our prepared remarks, we did mention $40 million of annual cost synergies, which really will primarily be driven by corporate and operating overhead savings. And there are several functions and costs associated with being a public company that can be consolidated and better leverage through our increased scale. And we have a detailed plan, we'll execute. We did a bottoms-up analysis. And over time, we think we'll even identify additional benefits based on our previous experience with previous deals. But yes, from a timing perspective, we think at least half of it will be achieved in the first year with the remaining in the second year.

Your next question comes from the line of Ketan Mamtora with BMO Capital Markets.

Maybe a question for both. We've seen this kind of discount to NAV, a pretty wide level for an extended period of time. From your respective perspective, can you talk about sort of what will help to drive or narrow that discount with this combination, right? I mean we've seen even larger peer trading at a significant discount, so I'm just curious, as you think about the potential benefit of this, how do you think about kind of the discount to private market timberland is? How does that narrow?

Yes. Ketan, this is Eric. I'll give my remarks and then Mark can chime in. From my perspective, public market investors are very focused on the near term. And for our businesses, we're really tied to the housing cycle at the end of the day. It's all about sawlog prices and to some extent, lumber prices. And as long as we're tied to that housing cycle, public company investors look at us, and they just found with such a relatively weak housing backdrop. Now that being said, I do think the tide is turning, the 10-year treasury was at 4% this morning. There's talk of it going down to 3 as we can get lower mortgage rates and lower finance costs for multifamily developers, I think demand will come back. It's not a question of if, but when. So when I think the housing story improves, I think investors will come back in the housing, and we're a great deep discount way to play the housing cycle.

Yes. I'd just add to that. Both of us have been pretty clear that we believe our stock prices are trading up pretty wide discount to intrinsic value. That said, because we're both trading at a significant discount. We thought that the relative valuation, you ultimately work for this deal to come together. Look, we think that this transaction is going to give the combined company a lot of flexibility to be nimble and opportunistic around capital allocation. In addition, as we said, with $40 million of estimated synergies, we think this alone will translate to a pretty material value uplift for the combined company. Of course, there are also benefits here in terms of a larger scale, which will translate to a better trading liquidity, and we think an improved cost of capital over time. So again, we really see a lot of value creation potential in this merger, and we believe that the combined company will be better positioned to close that NAV gap moving forward.

Understood. No, that's helpful perspective. And then 1 more. I mean, clearly, balance sheet coming out of this or the combined something will be really strong. As you sort of think about Tampa allocation, can you talk about sort of how would you think about whether it is growing in the wood product side or on the timberland side or kind of repurchasing stuff. Can you just lay it out for us in terms of where you think is -- you see the most relative attractiveness at this point.

Ketan, this is Mark. Look, our view around capital allocation has always been to be nimble and opportunistic with a view towards building long-term value per share. We don't go into any period of time with prescriptive capital allocation targets. We really try to play the hand that we're dealt. And I think PotlatchDeltic has really employed a capital allocation strategy with a very similar mindset. So we're very much align on that front. And so again, we're going to continue to execute a strategy on a go-forward basis as much as we have in the past. We're going to look at the opportunities we have available. Look at what we think is the best opportunity for our shareholders to deploy capital, and we're going to look to execute on that. And that could be investments in wood products mills, that can be timberland acquisitions. Right now, obviously, the buyback opportunity is still quite compelling. But the pro forma company will still have a quite strong balance sheet about 2.5x pro forma net debt to EBITDA. So we'll feel have a fair amount of capital allocation capacity. And look, as we realize synergies and grow the cash flow over time, that capital allocation capacity will just expand.

You have a follow-up question from Mark Weintraub with Seaport Research Partners.

So Mark, you just mentioned there how at the end of the transaction, you're about 2.5x net debt to EBITDA. How should we think about longer-term target levels for financial leverage or obviously, there's volatility in the earnings stream, so I don't know if it's necessarily just net debt to EBITDA. But what are kind of the longer-term debt levels that you think are optimal?

Yes. We laid out a high-level financial strategy in the IR deck that was published this morning. And I think, look, our mindset is relatively similar as it was coming into this. We had indicated a new leverage target of less than or equal to 3x net debt to EBITDA alongside our asset disposition and capital structure realignment plan. Obviously, we're going to be combining the Board. We'll be kind of reassessing overall strategy and financial policy. But I think we're both very committed to a conservative balance sheet as well as investment-grade credit ratings. It's obviously the introduction of the wood products manufacturing business. We'll introduce some more volatility into that kind of over-the-cycle earnings stream. But our general thinking is that we would still look to maintain very conservative leverage profile, factoring in having more of an over-the-cycle view of that lumber contribution.

Super. And I mean I believe Potlatch in the past has shared a view of kind of the over-the-cycle lumber contribution. Is it fair to say that, that's sort of the base understanding that you'll be using as you think that through as a combined company.

Yes, Mark. Our view is, over the cycle, lumber margins average $100 per $1,000. We're obviously nowhere near that level right now, but I do think the cycle is turning with these duties, with these tariffs, with interest rates coming down and improved housing backdrop. I saw the Senate put forward some bill this morning to improve housing conditions in the United States. So I do think there's going to be a turn here. And eventually, we'll get we'll get prices back up, and we'll get margins back up to $100 a $1,000 over the cycle.

Great. And 1 last 1 for me. I assume the merging of these companies has no implications for the pricing structure contracts that you have out in Idaho for sawtimber, is that correct?

Yes. No, that won't be affected by this.

That concludes our question-and-answer session. I will now turn the call back over to Collin Mings for closing remarks.

Thank you. I'd like to thank everybody for joining us this morning. Have a good rest of the day.

Ladies and gentlemen, this concludes this call. Thank you all for joining. You may now disconnect.