Q1 2022 Potlatchdeltic Corp Earnings Call
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We did not repurchase any shares during the during the first quarter.
As a reminder, we have a <unk> one plan in place this reflects our ability and commitment to repurchase our shares at attractive prices.
Capital expenditures were $19 million in the first quarter.
That amount includes real estate development expenditures, which are included in cash from operations and our cash flow statement.
I will now provide some high level outlook comments. The details are presented on slide 13.
We expect to harvest one one to $1 3 million tonnes in our timberlands segment in the second quarter.
Harvest volumes in the north are planned to be seasonally lower due to spring breakup.
We expect northern solid prices to decrease modestly in the second quarter due primarily to lower index saw log prices.
In the South we expect harvest volumes to be seasonally lower and log prices to be comparable to the first quarter.
We plan to ship 250 to 260 million board feet of lumber in the second quarter.
This assumes we can work through a myriad of transportation challenges that we and the rest of the industry currently face and both trucking and rail.
Our average lumber price thus far in the second quarter is approximately 7% lower than our first quarter average lumber price.
This is based on approximately 100 million board feet of lumber.
The combination of low field inventories steady demand in transportation bottlenecks have triggered what appears to be.
Firming trend in lumber prices.
As a reminder, at $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis.
Shifting to real estate, we expect to sell approximately 12000 acres of rural land in the second quarter and we have raised our annual sales outlook to 20000 acres.
We also expect to sell approximately 40 schnall valleys residential lots in the second quarter.
Additional real estate details are provided on the slide.
Our total capital expenditures are planned to be in the range of $70 million to $75 million in 2022, excluding acquisitions.
That estimate includes approximately $15 million to rebuild OLED, which we expect will be reimbursed by insurance.
Overall, we anticipate adjusted EBITDA will be lower in the second quarter in all three of our business segments.
This is based on expectations for lower lumber and index saw log prices.
Seasonal decline in harvest volumes and lower real estate activity.
All relative to an extraordinary first quarter.
We continue to be bullish on industry fundamentals.
Lumber prices remain at very attractive levels, and our second quarter expectations could prove to be conservative.
We expect to report a strong second quarter, and we are well positioned to continue growing shareholder value over the long term.
So that concludes our prepared remarks.
Now I'd like to open the call up to Q&A.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Your first question today comes from the line of Mark Weintraub with Seaport Research. Your line is now open.
Thank you just a quick clarification, you just said right at the end there Jerry that.
Your forecast for the second quarter could be conservative.
I guess I was not quite sure what that was a reference to because the only thing I really heard was that you thought your EBITDA would be lower than in the first quarter.
And then I guess you gave some some other specifics.
Is there I wouldn't have thought so but is there a scenario where you could see your EBITDA would be approaching the first quarter levels.
Yes, it's a great question, Mark and just to add more color on what I meant by the work by the phrase or the word conservative.
We've seen obviously, some really volatile lumber prices.
Lumber prices that quite frankly, more recently have surprised us to the upside and we will.
When we saw the six week price decline in our <unk>, our forecast were showing prices would drop to a lower level than where things have kind of bottomed out and we've seen a firming trend so.
Who is to say that some transportation issue bottleneck or some other supply chain challenge doesn't cause lumber prices to go on another run. So it's really just an acknowledgement that lumber price in particular could outperform our expectations.
Okay. Thank you and then just two.
A little bit more color.
So I think you mentioned that.
Date lumber prices are down 7% on that $100 million, where would they be currently.
So if prices were to stay where they are today just for kind of a framework perspective.
Where would the lumber prices end up relative to the prior quarter recognizing that we can be sure, though anywhere where they are today.
Yes, so mark this is Eric.
I'd tell you is that our spot prices, which is kind of like an average of a couple of days of activity prices are down about 10 or 11% from first quarter levels. So when you start saying well what does that mean for the quarter.
What we also said was that prices quarter to date are down 7%. So you've got roughly half the quarter down 7% and then you'd have the rest of the quarter down 10, 11, So I would guess you'd be looking at down 8% or nine something like that percent.
Okay. So order of magnitude 100 box relative to.
That's correct order.
Correct Okay.
Right. Thank you very much I'll stop there for now and I'll get back in queue.
Okay. Thank you.
Your next question comes from the line of Paul Quinn with RBC capital markets. Your line is now open.
Yes, thanks, very much morning, guys.
Sure.
It sounds like Youre pretty bullish on lumber, which which I share that sentiment and Eric you brought up the.
Russia, Ukraine or in European imports last year that was 165 billion. What do you think thats going to be in 'twenty two.
Wow that is such a good question Paul.
I do a lot of reading on this stuff some analysts say none of that lumber is going to find its way to the U S.
With the 4 billion board feet shortfall coming out of Russia, Ukraine, Belarus into Europe .
Some people say zero and some say, it's going to the words not going to have any impact on that volume is going to keep flowing I would guess, it's probably somewhere in the middle.
We lose about one 1 billion board feet of imports.
We're not a we're not big in that business, we don't have line of sight into.
Producing lumber in Europe , and exporting it but I would guess there is about 1 billion board feet of shortfall from the from the war.
Okay. Thanks for that and then you made the comment that interest rates are R&R is less sensitive to interest rates.
Whats the data behind that.
Well.
I can't point to any particular data set I just know that when people go to buy a new house.
Obviously, it's a much bigger check that the writing than it is for an R&R project.
And people got really high levels of home equity and if you've got a house that youre looking at that sort of appreciated considerably in value.
It's your largest investment for many many people.
They look at it and they say, yes, I'm willing to I'm willing to take out.
<unk>.
Home equity loan to further increase the value of my house and since my largest asset so.
So I don't know that Theres any one data source I've got for you I just it would stand to reason to me that.
R&R projects are less interest rate interest rate sensitive than buying a new home is.
Okay, and then just on guidance, yes. So.
The increase in the.
In the area of land sales up to 20000, but the.
Average sale price came down is that a mix issue or.
Because you described.
Real estate activity is very strong.
Yes, he is Jerry Paul Youre, absolutely correct. Its a mix is what's driving that average price.
When we ended 2021, we had about 10000 acres or so left in Minnesota and Thats some of our.
Sales for a lower price point than some of what we're doing in the south or in Idaho. So.
We actually have a contract to sell largely the bulk of that remaining Minnesota land and thats going to pull the average price down.
Got it alright looks.
Great. Thanks, guys best of luck. Thank you.
Your next question comes from the line of Kurt Yinger with D. A Davidson your line is now open.
Great. Thanks, and good morning, everyone.
Good morning.
Start off on log costs.
Just looking at the move in northern saw log prices. The drag on Q1 was still a bit less than I would've expected is it fair to think that as we get into Q2 youre going to see more of a hit I guess at the Idaho sawmill on logs and in Q1, even as your own log prices, perhaps not.
Great.
Yes, so when I think about.
The high cost, Idaho logs that are in or.
And our Idaho Mill complex Kurt.
Part of it's seasonality so we build log inventories starting in September and in the peak.
Kind of at the before the snow hit so we shut off deliveries in Idaho typically early to mid December So I think largely what you're seeing is a lag effect and then through the winter.
When there's not as much logging activewear spring breakup, we are drawing those log inventories down so.
I would expect you'll continue to see high log cost in that business, but I'm not sure. There is a real big Delta just because of that.
The pattern of the buying in the us.
Gotcha. So I mean, just looking at Q1, specifically your own Idaho saw log realizations.
Aren't necessarily going to be that impactful for the wood products business is that fair.
Sure.
Okay, Perfect and then last quarter, you highlighted how kind of the home centers were looking for more than contract volumes.
There's been a lot of commentary around how that has kind of reversed in the last couple of weeks, but.
Eric I think you made a comment around R&R remaining strong just hoping you could talk about what youre seeing on the demand side from some of those different customer cohorts and how you would characterize kind of channel inventories at this stage.
Yes, I did make a comment that our takeaway is still relatively strong we had a really rock solid first quarter volumes were higher than our expectations for for R&R. It slowed a little bit in Q2.
So home centers.
I would differentiate the home centers here.
On the one side.
It's a stud business for US there is the other side of the home center business, which has retreated product, particularly in the south for like decking.
And we sell to treaters, who in turn sell to the home centers, we have seen a little bit of a slowdown in that treater business and I think that has to do with the nature.
Of the product that you might or the project that we might be talking about so a lot of treated product goes home centers it winds up index.
To build a new deck is largely the cost is largely going to be for materials, so far that treated lumber.
And is that treated lumber has caused that to go from a 5000 dollar cost of $15000 cost.
Cause somebody to hit the pause button, but on the other side if somebody wants to finished basement and theyre going to hire a contractor to do the work.
The dollar value of the lumber involved in that project is going to be relatively small.
In the Grand scheme of things.
I guess.
I kind of characterize it as a home center business remains really solid.
Treat inside of the home center business.
Is probably a little bit on the weak side right now.
We sell to treaters, but we don't were not selling directly treated product to the home centers, but our stud sales to the home centers is really good and they've told us to keep keep the product flowing that theyre seeing good demand.
So.
It feels like we're in a pretty good environment right now.
Okay Alright.
Alright Thats helpful. And then just for my last question kind of a higher level one.
Would love to hear how you all think about just the change in potential kind of intrinsic value of your lumber assets in Idaho timberlands related to the lumber pricing environment, we've seen over the last two years.
Understandably investors are wary of extrapolating current prices into the future, but you can't just pretend hasnt happened either and ignore the potential that it could reoccur so.
A little bit of a long winded question, but just be interested if you have any thoughts there.
Yes, it's a good question Kurt I'd start by saying if you want to think about valuation of our saw milling assets.
You're seeing companies routinely spend a thousand bucks a thousand of capacity.
To build new capacity and I had referenced.
The Angelina forest product sale to West Fraser that was done at over 1000 Bucks.
I would also reference I think cam for just announced they're going to.
Do a remodel expand their Urbana, Arkansas mill.
And that's $130 million for 115 million board feet, if I'm not mistaken so again over 1000 Bucks a thousand or so.
I kind of feel like that's fair value for lumber capacity in the industry.
Sure.
And that's new capacity, so that's going to be super low cost, but it's also mill capacity that is going to take time to get up and running get the Kinks worked out.
And they're going to need to find.
Adequate workforce to make that happen. So I think about a thousand bucks a thousand to me seems like a fair valuation for our mills.
We have over 1 billion board feet of lumber capacity, so that feels to me like it's.
Rough numbers of 1 billion to 1 billion, one would be a reasonable valuation for our saw milling assets.
Now theres carryover to our Idaho Timberlands business.
Obviously, our log prices are indexed to lumber prices there.
We've shown time and again that the EBITDA that we can produce in Idaho is comparable to.
The west side values.
So.
I'd, probably say, it's a three grand in acre 3500, an acre feels like fair value to me.
And so the time 600000 acres that gets you to roughly $2 billion.
Got it okay, well I appreciate all the color and I'll turn it over thank you.
Thanks.
Your next question comes from the line of John Babcock with Bank of America. Your line is now open.
Okay. Thank you guys for taking my questions.
I just wanted to quickly.
Taking a step back and just talk about the special dividend a bit I was wondering generally what considerations, we should keep in mind, just as it pertains to the timing and potential amount of that dividend.
Assuming you decide to move forward with them.
Yes, John So it is very early in the year we.
We've got line of sight, probably through our P&L through kind of the mid may kind of timeframe.
So we still got almost two thirds of the year left to go.
Lumber prices can be volatile.
Our surprising us to the upside right now.
Had great results to start the year.
This continues we are almost certain to be forced to paying a special dividend just to maintain REIT status.
I don't want to get out in front of my My board on this issue because theres a lot of math involved.
But.
I think it's a pretty fair bet right now that we'll need to have another special dividend.
Got you thanks for that.
Another question I had actually I guess goes back to kind of the logging and trucking side.
But I guess just overall.
As it pertains to trucking I was wondering what youre seeing there, particularly around the rate side and especially for spot markets.
Some of our contacts have realized that the prices are dropping there. So I'm wondering about the extent to which that's impactful for you if you're also seeing that.
And any color on the extent to which that that could ultimately serve as a benefit to the business over the coming year.
Okay.
Think about our log and haul costs, John we certainly have it's probably the biggest inflationary pressure that we're feeling feeling right now and it comes in the form of diesel pricing is the biggest variance that we're seeing in terms of them.
Minder, we generally use probably about $10 5 million tonnes or gallon sorry of diesel per.
Per year as we harvest the timber.
All the logs.
To mills at the end of the day when you look at the Delta versus our budget costs are probably up 12 million Bucks.
So certainly we're seeing that inflationary pressure, but as far as getting capacity and seeing other price increases or pressures.
Certainly pales in comparison to the effect of diesel price.
Yes, I would just add to the second part of your question John about are we seeing trucking rates come down.
I asked our sales and transportation Department that question. This morning, because I read articles about spot truck rates coming down too in there like are you are you kidding no prices have not come down and maybe thats because we are using flat.
<unk> flatbed trucks.
We're not container type truck trailers.
So maybe there's a little bit of a mix issue there, but we're not we're not seeing pressures come off at all.
Okay interesting.
No.
Turning to the Ohio sawmill.
Any any chance you guys could you give us some sense as to like what amount of production you expect out of that mill. This year, recognizing it's still in the startup stage.
Yes.
Yes, and John we are running that mill today, we're running two lines. It's got a small line and a large line and the small line produces I don't know six 7 million feet a quarter.
As we get out into Q3, we're going to be starting the mill back up the large line and we'll turn the small line off at that stage.
We do expect it to be.
Gradual ramp up getting the Kinks out of machinery like this is never an overnight kind of a switch thing.
Our rough guess as we get more or less 50 million feet out of OLED for the full year this year.
So maybe ramping up from 67 million feet of quarter to maybe 10% in the third quarter up to maybe 30.
In the fourth quarter.
Our expectation our plan is to be at full capacity by early next year or 150 million feet per year.
Which is about its limitation from a resource and an environmental standpoint.
So hopefully plays out that way.
Alright, that's helpful. And then just last question before I turn it over just it just does seem like you're seeing pretty good momentum on the pricing front first.
For southern saw logs I was wondering if you might elaborate a little bit on the attention youre seeing there.
Maybe why youre not fully comfortable at this point thinking that this might actually be an indication of a structural shift.
Any additional detail there would be great.
That's a great question, John and I might start with the back end.
<unk> tongue in cheek I think we have a tendency would be a bit conservative and we certainly have been.
<unk> been staying lower for longer. So we're just we're cautious but very optimistic as much our census, something something very likely has shifted.
Thank you.
It's premature to kind of call. It if you will in terms of.
Getting on a different trajectory in terms of southern saw log pricing I mean, what we are what we have seen is a nice lift a 3% to 4% year on year 22021 versus 2022 in terms of southern saw log pricing, but we also saw various points in the year with the extreme winter weather early in 'twenty, one whether in.
The summer.
That felt like that might have been the factors attention log prices, having said that as we got into Q1 really favorable logging conditions and we didn't see log prices retreat. They actually continue to increase about 5% quarter on quarter. So everything feels good we're very optimistic I think just at the end of their comments are probably more in our tendency to be a little.
In terms of calling a new trend.
Alright understood. Thanks for all the detail.
Your next question comes from the line of Keith <unk> with BMO capital markets. Your line is now open.
Thank you and good afternoon.
Or maybe you can.
Talk a little more about the.
Your argument is kind of revenue opportunities in both timberland and from a real estate standpoint, where they are sold out of band of carbon credits and how do you see that revenue stream evolving over the next 234 years.
Well, yes Keaton.
We're extraordinarily pleased.
With our solar deal that.
We just announced was in Mississippi, and 7500 Bucks an acre the great thing is they let us cut all the trees off at first too.
And we're in.
<unk> with a number of other parties about the solar farms.
And as I as I mentioned earlier in the prepared remarks.
It's hard to know where we wind up at the end of the day, but our gut is telling us somewhere between 50 and $100 million.
Of solar deals going forward.
Honestly think that's very very doable.
That's not going to happen all in one year I'm not sure we're going to have another one yet this year.
I think it's probably fair to assume that we get something next year.
And probably each of the years next two years after that.
So.
This is a this is a real opportunity for us going forward.
So on the carbon capture and storage side of things I saw weyerhaeuser's announcement, obviously in our ownership in the south.
Clearly has the potential to participate in those carbon capture and storage markets as well our surface ownership overlaps geological formations that have been mapped by usgs's favorable to Sidoti <unk> <unk> and.
And in fact, our ownership is in close proximity to large point source cotwo.
Of course, the beauty of Ccs is that it's compatible with forestry.
We're in the really early innings of carbon capture and storage is a market opportunity but.
Certainly this could be another meaningful source of revenue for us down the road, we continue to be really impressed with our rural sales program.
Go back to back to the Delta deal that we did back in 2018, we've now completed nearly 90 90 different deals off the ground.
Roughly 14000 acres for some I don't know $55 million more or less in value.
It just shows you how important.
The real estate stream is for the timber Reits when you can when you can generate revenues and earnings.
Rural land like that.
So I don't know if that answers your question, but certainly we're optimistic about the.
The solar farm outlook in the carbon capture storage opportunity.
No. That's very helpful. Appreciate the perspective, and then switching to.
On the M&A side curious how the how the pipeline is looking.
And I was wondering.
If any of these kind of alternative streams are starting to have an impact.
On valuation, but also kind of infill.
Inflation and rates rising.
Is there any.
Change in <unk>.
<unk> talked around discount rates.
So what I would say is the timberland M&A market. It began showing signs of life late in 2020 kind of after a pause caused by by Covid.
2021.
Last year exhibited strong demand for timberland, roughly one 5 million acres traded hands at the end of the day.
However, things have slowed markedly at this point and Theres only a handful of deals coming to market.
I don't know whats going on but we suspect sellers are delaying deals because they got a view that stumpage prices are going to be moving higher improving timberland values or they're holding off selling waiting to see how these carbon markets are going to play out theres no doubt theres plenty of capital on the sidelines, both T modes, and Reits that are looking to pick up timberlands Theres no sure.
<unk> capital.
And I would I would guess that discount rate state still an awfully low levels, maybe they've moved up just a skosh due to do.
Due to the.
The debt financing markets interest rates, having moved up a little bit but.
Its not like Thats going to heavily influence the discount rate that people use for timberland given the view that timberland can be a nice inflation hedge.
We are not at this point, putting much credence into valuing timberland M&A with solar.
And then carbon capture storage things like that.
It's those those revenue streams.
Can be a bit elusive and generally we're buying smaller tracts of land that are bolt on deals.
And.
So it's harder to get your arms around.
Is there a solar deal or is there a.
<unk>.
Carbon capture storage opportunity with a small tract of land like that it's hard to evaluate.
So I don't know if that answers your question, but.
The timberland M&A market is.
Has really slowed down.
Got it that's helpful I'll turn it over good luck.
Thank you.
Your next.
Again comes from the line of Mark Wilde.
Mark Weintraub with Seaport Research your line is now open.
Thank you.
One quick observation or question the tax rate I know you raised that a little bit for this year is that primarily to reflect that you think youre going to make more money in wood products than you did three months ago.
Yes, you are absolutely correct, Mark I mean at the end of the day that rate can move around based on the mix of earnings between our taxable REIT subsidiary, which is largely the wood products and our real estate businesses in the REIT and our expectation for profitability in wood products, certainly has gone up and that's why the guide went up.
Okay. Thank you and then I'm looking at and I see consensus estimates have has EBITDA at less than half of what you made in the first quarter and I'm trying to put that with.
What I heard in terms of.
The indications that you have and I guess, if and I realized that lumber prices could fall off from where they are as you say they seem to have stabilized, but if I if I understand correctly, if those are down one.
100, Bucks and you make an order of magnitude $250 million.
So that would be $25 million I don't know if you can make more because you are actually producing more as well, but if we just use that and then.
Take take some haircuts to the resources into the.
And to the real estate business.
Seems to me that it would be significantly higher than that $120 million of consensus I mean, do you think it's fair to say that.
That the consensus numbers look very conservative from from your perspective for the second quarter.
Yes, that's a good observation mark.
I read multiple notes preview notes based on US releasing earnings yesterday that our estimates were under revision and certainly we heard her color from us today that lumber prices bottomed at a much higher level than we anticipated and I think everybody is catching up.
How strong lumber prices are and how much how much. This firming is going to benefit our bottom line. So I think it's fair to say that consensus right now looks really conservative at least when I compare it to our internal model and my expectation is we should see some healthy.
Increases in estimates coming out based on the information we've shared on this call and coming out of this out of this window.
Okay, Great and lastly.
Really appreciate Eric kind of some of the color you provided on assessments.
The manufacturing asset values, one way to look at it and also the Idaho Timberland.
Even if I use a very conservative numbers on your southern timberland assets.
And put some credit on <unk>, which I think is an interesting question to given the strength, we're seeing what type of additional upside you see in that asset versus historically.
And we think about the cash generation that you've achieved and in the short term are going to.
And I think it's pretty hard not to come up with.
I'll throw something out here.
Remember, but something certainly north of $70 on a kind of net asset value approach.
And.
Yes.
Far you got a 10 <unk> one in place, but you haven't bought back any shares. So just any sort of color on how to think about at what type of discounts or levels. You think it does make sense to do share repurchase recognizing you've got other potentially very attractive alternatives.
Yes, it's a good question Mark yes, we.
We have bought back shares none recently.
My My view I think our board's view is that most companies get share repurchases wrong, they're very bullish when conditions are just fantastic. They go out and they buy back stock and then conditions change their stock price drops and they've made share repurchases that were uneconomical compared to where future price.
<unk> might be.
So I think the way we look at it is we're very opportunistic we want to be deep discount buyers.
I would tell you as our view of NAV for the company has moved up in.
And the discount off that NAV, which we want to buy has moved up.
And we're going to keep that cash on our balance sheet waiting for a market dislocation.
Since our stock price lower and that's when we're going to be really opportunistic and buyback a lot of stock.
So.
In some ways I'm waiting for that market dislocation to happens so that I can I can put capital to work buying back stock, but at the same time, we have plenty of opportunities to invest that capital back into the business.
And we are actively chasing some things that.
That hopefully will use up some of that capital.
Okay, but it would be fair to surmise that you're not having bought back stock its not an indication that you don't think the stock is trading at a fairly wide discount to your assessment of NAV at this point.
Yes, no I don't I don't see that.
Okay, I think I would just I would.
I would just add to that Mark it's really I want to emphasize the opportunistic and others alternative uses of capital that have attractive return opportunities that we're looking at and also we're willing to be patient when it comes to deploying that cash as well.
We'd rather do something more meaningful in terms of share repurchases back to Eric's point on the dislocation in the opportunistic approach so.
We're perfectly happy to be patient and deploy.
Understood I appreciate it.
At this time I am showing there are no more questions I'll now turn the call back over to Jerry Richards.
Alright, Thank you Emma.
Thank you everybody for your questions and for your interest in Potlatch Delta.
As we said on the call 2022 is off to a really good start.
Looking forward to providing additional updates on our performance of our leverage to lumber strategy as well as our progress in increasing shareholder value.
Okay.
Thank you this concludes.
This concludes today's conference call. Thank you for attending you may now disconnect.
Okay.
Okay.