Q3 2024 PotlatchDeltic Corp Earnings Call
John: Good morning, my name is John and I'll be your conference operator today.
John: At this time, I would like to welcome everyone to the Pop-Law Staltic 3rd Quarter 2020 and 4 Conference School.
John: All lives have been placed in mute to prevent any background noise.
John: After the speaker's remarks, there will be a question in answer session.
John: If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.
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Speaker Change: Thank you. I would now like the Therendical Over to Mr. Wayne Wasechek, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.
Wayne Wasechek: Good morning and welcome to Pot-Lead Stelthix 3rd quarter 2024 earnings conference call.
Wayne Wasechek: Joining me on the call is Eric Cremers, Pot-Light Celtics President and Chief Executive Officer.
Wayne Wasechek: This call will contain forward-looking statements.
Wayne Wasechek: Please review the cautionary statements in our press release on the presentation slides and in our filings with the SEC regarding the risks associated with these forward-looking statements.
Wayne Wasechek: Also, please note that a reconciliation of non-gap measures can be found in the appendix to the presentation slides.
Wayne Wasechek: and on our website at www.poledgetheltic.com.
Speaker Change: I'll turn the call of Eric for some comments and then I will then review our third quarter results and our outlook.
Eric Cremers: Well, thank you Wayne. Good morning everyone. Thanks for joining us.
Eric Cremers: Yesterday, after the market closed, we reported third quarter total adjusted EBDA of $46 million.
Eric Cremers: These are solid results given up at challenging lumber markets and a macroeconomic environment we are operating in.
Eric Cremers: I appreciate our team's focus and strong operational execution today this year. Especially amid several company initiatives highlighted by our modernization and expansion project at our Waldo Arkansas Soundmill.
Eric Cremers: Turning to our third quarter business results, our Timberland's division generated adjusted EBITDAV, $36 million in the third quarter.
Eric Cremers: and Total We Harvested 2 Million Cross are Northern and Southern Regions in the third quarter.
Eric Cremers: In Idaho, all those strong, cedar prices supported our aggregate solog prices. The overall softness in lumber markets continued to exert downward pressure on indexed solog prices.
Eric Cremers: Meanwhile, Southern Salawg prices remained relatively stable, despite the typical seasonal increase in log supply and measured milk consumption.
Eric Cremers: At the end of September, Hurricane Helene made a historic landfall in the U.S. southeast.
Eric Cremers: and the American State Department of Health and the State Department of Health and the State Department of Health.
Speaker Change: Based on our initial assessment of our Georgia Timberlands, we estimate the damage to be limited to approximately 2,000 acres, which will not have a significant impact to our operations.
Speaker Change: We have already secured log-in-haul crews and commenced salvage operations to monetize the down timber, which will minimize the financial impact of the storm on our business.
Speaker Change: Moving to our Wood Products segment results, adjusted EBITDA was a loss of $10 million in the third quarter.
Speaker Change: Our financial performance was weighed down by two factors.
Speaker Change: First, the overall ongoing weakness in lumber markets where supply continued to outpace demand and second, the start-up costs of our recently modernized Waldo's sawmill, which adversely impacted the TNL by about $3 million.
Speaker Change: Early in the third quarter, lumber markets hit cyclical lows, reaching their lowest points since the onset of the pandemic in early 2020.
Speaker Change: However, by mid-quarter, lumber markets began a slow climb out of a very deep trough as supply and demand dynamics improved.
Speaker Change: spurred by an estimated 3 billion board feet of indefinite and permanent North American capacity to determine since the start of the year.
Speaker Change: Lumbermark has improved considerably since July with the random links composite having improved from a low of $359 up to a recent $418 or increasing 16%.
Speaker Change: Now turning to our Waldo, Arkansas sawmill modernization and expansion project, we successfully completed construction in Q3 as scheduled and within budget.
Speaker Change: Early in the quarter, the mill experienced a limited period of downtime to integrate the new equipment, reducing our lumber production by approximately 25 million board feet for the third quarter.
Speaker Change: Following completion, we immediately transitioned the mill into the planned ramp-up phase. Based on other brownfield projects in the industry, we expect it will take six to twelve months to reach the mill's new capacity of 275 million board feet per year.
Speaker Change: As we advance through the ramp-up phase, I am very encouraged by the mill's performance, especially given that we are in the early stages of this phase.
Speaker Change: As a reminder, we expect that the completed project will increase the mill's annual capacity by 85 million board feet, improve recovery by approximately 6%, and reduce cash processing costs by about 30%.
Speaker Change: Once the ramp-up phase is completed, we expect the mill to generate approximately $25 million of incremental EBITDA annually under a mid-sales cycle environment.
Speaker Change: As we navigate the challenging lumber markets, we remain focused on the areas within our control such as optimizing our product mix, efficiently running our mills, and effectively managing costs.
Speaker Change: By maintaining this focus and continuing to increase production at Waldo, we expect improvement in unit manufacturing and log costs within our Wood Products Division as we head into the fourth quarter.
Speaker Change: Now shifting to our real estate segment, this business generated 32 million dollars in adjusted EBITDA in the third quarter.
Speaker Change: On the rural real estate side of the business, we sold 65 acres at over $3,700 an acre.
Speaker Change: We continue to benefit from a healthy demand for rural properties, which produce value-added transactions at significant premiums to underlying timberland values.
Speaker Change: For the development side of our real estate business, we sold 53 residential lots at an average price of $205,000 per lot in our Chenal Valley Master Plan community in Little Rock.
Speaker Change: This average price per lot is a record and reflects a heavy mix of premium lots located on or near the community golf course.
Speaker Change: Additionally, we are encouraged by the steady interest in our recent small to mid-sized lot offerings from regional builders in the Chenal area.
Speaker Change: Regarding our emerging national, excuse me, natural climate solutions opportunities, we continue to build momentum in this space.
Speaker Change: Beginning with solar, we look to capitalize on the growing demand for renewable energy by offering select tracks for solar development.
Speaker Change: Our pipeline of option contracts with solar developers continues to grow, with several new contracts added since the last quarter.
Speaker Change: We now have solar option contracts for over 35,000 acres, or over 1% of our timberland ownership, with an estimated net present value of about $400 million.
Speaker Change: Our pace of execution of Solar Option Agreements for 2024 has exceeded our previous estimate and we continue to have discussions with several high-quality counterparties to build upon our existing portfolio.
Speaker Change: Another natural climate solutions opportunity for us lies in southwestern Arkansas, where the smack over formation is partially located. This region has gained attention recently for its lithium deposits, in fact one of the largest known deposits in the world.
Speaker Change: This is an exciting prospect for us due to the growing demand for lithium for electric vehicle batteries and renewable energy storage.
Speaker Change: We believe that our southwestern Arkansas land base is ideally located to participate in this opportunity.
Speaker Change: We are evaluating the potential magnitude of this emerging initiative and are in negotiations with key developers to lease subsurface rights within our ownership for lithium development.
Speaker Change: Shifting to forced carbon credits, recent disruptions in voluntary carbon credit markets have been driven by the demand for greater transparency in governance of credits.
Speaker Change: Carbon credit projects for forestry are complex and we are carefully assessing potential project methodologies from the leading registries as they continue to evolve.
Speaker Change: After our analysis is complete, which is expected in the next few months, we will have a better sense of timing to bring a high-quality, high-transparent carbon project to market.
Speaker Change: We believe that carbon projects with these traits will attract the highest demand and consequently command premium pricing.
Speaker Change: In addition to the projects I just mentioned, we are also exploring other NCS opportunities, ranging from carbon capture and storage to bioenergy and biofuels. Although these initiatives are not as far along as our other NCS projects, we believe they have the potential for significant long-term value creation.
Speaker Change: We continue to believe that these natural climate solutions opportunities will ultimately boost demand for our rural land, likely driving timberland values higher.
Speaker Change: Switching to capital allocation, we remain disciplined stewards of our shareholders' capital. Our priorities include returning capital to our shareholders, investing in high return capital projects, and identifying strategic acquisition opportunities.
Speaker Change: We always prioritize long-term value creation when considering each alternative.
Speaker Change: This quarter, share repurchases remained an attractive capital allocation option as we continue to trade below our estimated net asset value.
Speaker Change: In the third quarter, we repurchased $2 million worth of shares. Year-to-date, through the end of the third quarter, we have returned $27 million to shareholders through share repurchases, leaving us with $98 million remaining under our repurchase program.
Speaker Change: Turning our attention to the U.S. housing market, homebuyers have remained hesitant due to elevated interest rates, along with concerns about the overall economy slowing.
Speaker Change: Despite these headwinds, new home sales have been resilient as sales in September reached the highest level in 16 months.
Speaker Change: Large homebuilders have continued to offer rate buy-downs and other incentives to drive new construction demand.
Speaker Change: As a result, single-family starts have hovered near or above 1 million starts for the past year.
Speaker Change: As for multifamily construction, activity has been hampered by glut of units coming into the market, along with restrictive construction financing.
Speaker Change: On the broader economic front, cooling inflation data prompted the Federal Reserve to lower interest rates in September for the first time in four years.
Speaker Change: As the Federal Reserve begins to ease its restrictive rate policy, we believe this will promote growth in single-family construction and help alleviate financing constraints in multifamily housing.
Speaker Change: Additionally, this should accelerate existing home sales from homeowners locked into low mortgage rates.
Speaker Change: Long-term housing fundamentals remain strong, supported by an undersupply of homes, favorable demographics, and increasing household formations.
Speaker Change: We believe that improved housing affordability from lower interest rates, coupled with these strong fundamentals, will create significant tailwinds for lumber market demand, fueling growth in our businesses.
Speaker Change: Now regarding the repair and remodel segment, which of course is the largest demand driver for lumber, activity has been sluggish throughout the year particularly in the do-it-yourself sector.
Speaker Change: Recent challenges in this segment appear to stem from the pull forward of projects during the pandemic, higher financing costs for discretionary home projects, and low turnover of existing homes, which usually stimulates repair and model activity.
Speaker Change: However, the fundamentals for repairing a model remain positive with an aging housing stock averaging over 40 years and elevated home equity levels.
Speaker Change: Additionally, with the Federal Reserve beginning its rate-cutting cycle, we anticipate an increase in residential improvement and repair spending due to pent-up demand and the acceleration of new home construction and sales of existing homes.
Speaker Change: Looking forward, we maintain a favorable outlook on demand fundamentals in housing, repair to model, and natural climate solutions opportunities, all of which support growth in our businesses. Additionally, we remain focused on maximizing operational and financial performance across all of our business segments.
Speaker Change: With an investment-grade balance sheet, ample liquidity, and a disciplined capital allocation strategy, we are well positioned to deliver long-term value for our shareholders.
Speaker Change: I will now turn it over to Wayne to discuss our third quarter results and our outlook.
Wayne Wasechek: Thank you, Eric. Starting with page 4 of the slides.
Wayne Wasechek: Total adjusted EMA was 46 million dollars in the third quarter.
Wayne Wasechek: to $103 million in the second quarter.
Wayne Wasechek: The 34,000-acre sale to FIA for four-year-old, average-aged Southern Timberland completed in the second quarter drove the quarter-over-quarter decline in EBITDA.
Wayne Wasechek: We'll now review each of our operating segments and provide more color on our third quarter results.
Wayne Wasechek: Information for our Timberland segment is displayed on slides 5 through 7.
Wayne Wasechek: The segment contributed $36 million in EBITDA to our third quarter results, which is slightly higher compared to the second quarter.
Wayne Wasechek: Our harvest volume in Idaho was 427,000 tons in the third quarter. This volume is seasonally higher than the 365,000 tons we harvested in the second quarter.
Wayne Wasechek: Our Idaho saw log prices were three percent lower on a per ton basis in the third quarter compared to the second quarter.
Wayne Wasechek: Higher cedar saw log prices partially offset the negative effects of price resets on index saw log volume.
Wayne Wasechek: Index prices were at their lowest point this year during the third quarter.
Wayne Wasechek: Turning to the south, we harvested 1.5 million tons in the third quarter, which is consistent with our harvest volume in the second quarter.
Wayne Wasechek: Our southern saw log prices were generally stable during the third quarter.
Wayne Wasechek: Southern pine saw log prices moderated slightly lower in the third quarter due to a seasonal increase in log supply and lumber demand dynamics. This decline was offset by a higher seasonal mix, hardwood saw log volumes, and increased pricing.
Wayne Wasechek: Moving to Wood Products on slides 8 and 9.
Wayne Wasechek: Adjusted EBITDA loss widened from $7 million in the second quarter to $10 million in the third quarter.
Wayne Wasechek: The decline was driven by lower average lumber prices led by softness and southern yellow pine.
Wayne Wasechek: Also, as we anticipated, unit manufacturing costs increased due to planned downtime and the restart of the Waldo, Arkansas sawmill for the expansion and modernization project.
Wayne Wasechek: Our average lumber price utilization decreased 5% from $423 per thousand board feet in the second quarter to $402 per thousand board feet in the third quarter.
Wayne Wasechek: By comparison.
Wayne Wasechek: A random length framing lumber composite price was approximately 1% lower in the third quarter compared to the second quarter.
Wayne Wasechek: Note, that our regional mix and product mix is not the same as the composite. There is also a timing difference between our sales and the composite.
Wayne Wasechek: Lumber shipments decreased by 19 million board feet from 286 million board feet in the second quarter, 267 million board feet in the third quarter.
Wayne Wasechek: Decline in shipment volume was due to reduced production associated with the planned Waldo Salmo outage and subsequent ramp-up.
Wayne Wasechek: Shifting to real estate on slides 10 and 11.
Wayne Wasechek: The segments adjusted EBITDA was 32 million dollars in the third quarter compared to 90 million dollars in the second quarter
Wayne Wasechek: EBITDA generated by rural sales was lower in the third quarter as the second quarter included the 34,000 acres southern land transaction for 57 million dollars.
Wayne Wasechek: We continue to see strong demand for rural land, as reflected in our third quarter performance, by selling over 6,500 acres for an average of $3,700 per acre.
Wayne Wasechek: Even from a real estate development business.
Wayne Wasechek: increased in the third quarter compared to the second quarter.
Wayne Wasechek: driven by higher residential lot sales at our Chenal Valley Master Plan community. In the third quarter, we closed on the sale of 53 residential lots at a higher average price due to our greater mix of premium lots.
Wayne Wasechek: Unlike the second quarter, where we recorded six million dollars in commercial revenue, there were no commercial land sales in the third quarter.
Wayne Wasechek: Commercial land sales typically take longer to materialize due to the complexity of commercial real estate and third-party financing structures usually involved.
Wayne Wasechek: Turning to capital structure, which is
Wayne Wasechek: Our total liquidity was $460 million. This amount includes $161 million of cash on our balance sheet, as well as availability on our Undrawn Revolver.
Wayne Wasechek: We repurchased 57,000 shares at $42 per share for a total of over $2 million in the third quarter.
Wayne Wasechek: We have $98 million remaining on our $200 million repurchase authorization.
Wayne Wasechek: As you're aware,
Wayne Wasechek: We have 176 million dollars of debt maturing in the fourth quarter, which we intend to refinance.
Wayne Wasechek: We recently finalized discussions with our lenders and in conjunction with the refinance we are utilizing 125 million dollars of our existing notional forward-starting interest rate swaps to reduce our borrowing rate below current market rates.
Wayne Wasechek: This strategy allows us to reduce our existing annual interest costs by about $150,000 and maintain our total weighted average cost of debt at approximately 2.3%, despite the current higher interest rate environment.
Wayne Wasechek: Post-refinance, we will still have $75 million of notional forward starting interest rate swaps available for future debt refinancing, which will allow us to maintain a lower cost of borrowing.
Wayne Wasechek: Capital expenditures were $35 million in the third quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement.
Wayne Wasechek: Our full-year capital expenditures are projected to range from $100 to $110 million excluding any possible Timberland acquisitions.
Wayne Wasechek: This estimate includes approximately $44 million for the final installments on the modernization and expansion project at the Waldo, Arkansas sawmill.
Wayne Wasechek: with about $7 million remaining spent this year.
Wayne Wasechek: We expect that our annual CapEx will significantly decrease and return to a more normalized level next year.
Wayne Wasechek: Because we do not plan to undertake any major projects comparable to Waldo initiative next year
Wayne Wasechek: I will now provide some high-level outlook comments. The details are presented on slide 13.
Wayne Wasechek: We expect to harvest 1.8 to 1.9 million tons in our Timberland segment in the fourth quarter with approximately 80% of the volume in the South.
Wayne Wasechek: Harvest volumes in the north are expected to decrease in the fourth quarter following seasonal peak harvest volumes in the third quarter. We anticipate northern saw log prices to increase two to three percent in the fourth quarter reflecting slightly higher index saw log prices.
Wayne Wasechek: For the south, we expect our southern sawlog pricing to moderate slightly in the fourth quarter as we expect to have a lower seasonal mix of hardwood volumes.
Wayne Wasechek: We plan to shift between 275 to 285 million board feet of lumber in the fourth quarter.
Wayne Wasechek: This forecasted shipment volume reflects a higher production level compared to the third quarter due to the ongoing ramp-up at our Waldo, Arkansas sawmill. Additionally, we anticipate lower unit manufacturing and log costs as a result of the expected increase in production.
Wayne Wasechek: Our average lumber price thus far in the fourth quarter is $33 per thousand board feet or $8 or 8% higher compared to our third quarter average lumber price.
Wayne Wasechek: This is based on approximately 100 million board feet of lumber. As a reminder, a $10 per thousand board foot change in lumber price equals approximately $12 million of consolidated EBITDA for us on an annual basis.
Wayne Wasechek: Shifting to real estate.
Wayne Wasechek: We expect to sell approximately 5,500 acres of rural land in the fourth quarter for over $2,900 per acre.
Wayne Wasechek: For real estate development, we expect to sell approximately 40 Chennaul Valley residential lots in the fourth quarter. Additional real estate details are provided on the slide.
Wayne Wasechek: Overall, we estimate our fourth quarter total adjusted EBITDA to be relatively comparable to our third quarter results.
Wayne Wasechek: This forecast anticipates higher lumber prices and improved cost recovery in our wood products business.
Wayne Wasechek: balanced by seasonal decline in harvest volumes and a lower level of rural land and real estate development activity.
Wayne Wasechek: That concludes our prepared remarks. John, I would now like to open the call to questions.
John: Thank you. We will now begin our question and answer session. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again.
John: If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Thank you.
Speaker Change: Your first question comes from the line of Anthony Pettinari from Citi. Please go ahead.
Speaker Change: Hey, good morning.
Speaker Change: Is there, you know, kind of a new level or average, you know, average cost support for maybe a high-cost producer, a Canadian producer, any kind of, like, new post-pandemic level that you think
Speaker Change: You know
Speaker Change: These guys are generating cash out.
Speaker Change: Yeah, Anthony, this is Eric. I do think the recent uptick in lumber prices is largely supply driven.
Speaker Change: You know, we've seen something like $4 to $5 billion of capacity come out of the market.
Speaker Change: here this year and last year even more.
Speaker Change: You know, we also had those hurricanes come through the south.
Speaker Change: That took out some production.
Speaker Change: So, I think people looked at it and said, you know, the industry is losing money, this is obviously not sustainable, lumber prices really can't go lower, they can only go higher.
Speaker Change: and so, you know, people stepped in to buy.
Speaker Change: And you saw the duties go up from 8 to 14% in August. I think that probably helped support lumber prices as well.
Speaker Change: And then finally, we saw the Fed, you know, finally pull the trigger and make some interest rate cuts. And so, while I don't know that there's been a real step change in demand just yet,
Speaker Change: I think people are looking at it saying, okay, the Fed is now embarked on this
Speaker Change: Great cutting cycle, and that's going to have effects across all the different, you know, demand segments for lumber, whether it's single-family or multi-family or large R&R.
Speaker Change: So, while right now I think the immediate price response is largely supply driven, I think people are looking at it saying, huh, demand ought to be forthcoming here in the not-too-distant future.
Speaker Change: Yeah, now regarding your second question regarding, you know, is there some new price floor, you know, the one thing I will say is if you look up to British Columbia...
Speaker Change: I think the median mill up there today, break-even, is around 400 bucks, so that's the median mill. So half are making more money and half are making money and half are losing money.
Speaker Change: But if you think about, so that's a $400 number, which is I think about where SBF is trading today.
Speaker Change: If you think about what's going to happen when we get out to the fall of 2025.
Speaker Change: you're going to see that duty it's going to kick up anywhere from I don't know 25 to 35 percent. All of a sudden break-evens are going to move up who knows a hundred a hundred bucks.
Speaker Change: so and I think kind of think of BC as a marginal cost producer right now for for North America given the relatively high cost structure so I think that that that floor that it is moving higher especially as we get out to next year
Speaker Change: Does that answer your question?
Speaker Change: Yeah, no, that's super, super helpful.
Speaker Change: But at the same time, I mean, general inflation in the economy is maybe up 20%, maybe 25%. I'm just wondering if you could talk about the ability of Southern...
Speaker Change: blog prices to kind of at least match inflation, you know, is there a level of starts or inventory drawdown that would
Speaker Change: Blah.
Speaker Change: Yeah, Anthony, this is Wayne.
Wayne Wasechek: Ultimately, yeah, it really comes down to where lumber markets are headed. Certainly, we're more optimistic about 2025 and we think, you know, as those markets improve, you know, log prices will follow and, you know, in the South we would expect
Wayne Wasechek: log markets to improve across the board. I mean it certainly depends from
Wayne Wasechek: Woodbasket to Woodbasket and what those tension markets are like, but when we think about our business and looking at our different regions in the South
Wayne Wasechek: not as much on our Gulf South, because we've just historically seen that because of where tension markets are at.
Wayne Wasechek: and we saw that drop-off happen a little more rapidly in the Southeast, so we would expect it to ramp up. Prices improve more in the Southeast as markets become more tensioned. So when we look forward, I think that's what we're expecting.
Wayne Wasechek: with an optimistic outlook in 2025.
Speaker Change: Okay, that's super helpful. I'll turn it over.
Speaker Change: Your next question comes from the line of Keith and Mamtora from BMO. Please go ahead.
Speaker Change: Thank you for taking my question. Hey, Wayne, a quick clarification on that Norman Solow pricing. You said up...
Speaker Change: I think 2% to 3%, but as I recall, there is also a negative density component in Q4 to the tune of about mid-single digit. So your 2% to 3% net, is it net up or is it sort of before taking into account the density component?
Wayne Wasechek: Keaton, it's on a net basis so you are correct there is a there is a density factor and that that's netted so that that two to three percent includes that seasonally heavier log.
Wayne Wasechek: So we have, you know, we're thinking indexing and mixed out log prices will be up over the quarter and that'll be offset slightly by season or heavier logs, that density factor.
Speaker Change: Okay, that's helpful. And then, you know, on NCS, I'm curious, Eric, how do you think about, you know, sort of the timeline on some of these option contracts becoming, you know, kind of finalized and when do you expect these to start to show up in TNL?
Speaker Change: Are you seeing any sort of change given that we are in a wait-and-watch mode with the elections? Any change in approach from some of your potential customers on solar?
Eric Cremers: Yeah, you know, Keaton, I'm more bullish than ever on solar going forward, and it starts with everybody's trying to get to net zero around the world.
Eric Cremers: And, you know, certainly solar is a great way to generate energy if you're trying to get to net zero. So I think there's no stopping solar.
Eric Cremers: We are seeing incredibly strong demand for solar options. We're going to be taking a look at our land holdings again. I think we've talked about, you know, we thought our potential was 60,000 acres in total. We think that may be higher, so we're going to undertake another study here.
Eric Cremers: of options that got executed in, well, really this past year and perhaps 2023. Most of those option agreements have got anywhere from three to five year periods on them.
Eric Cremers: And so when you think about something that got executed in 23 and it's got a five year life on the option, that means that the developers got until 2028 to pull the trigger and execute the option. Now, they're not all out that far. Some can get executed in 2027. Some can get executed in 2026.
Eric Cremers: There's a chance one or two trickle in next year, but really it's going to start hitting the P&L in 2026.
Eric Cremers: But I think, given where we're at today, that is a really low number compared to what I would expect. I think it could be 75% likelihood of those options getting exercised, just because the counterparties that we're dealing with are, you know, they're some of the largest companies in the world.
Eric Cremers: not because they don't like, you know, the project that we're that we're looking at. So yeah, I'm really optimistic on solar. It's not going to happen in a big way in 25, but it's really going to start hitting in 26 and then 27.
Speaker Change: Understood, that's helpful. And then just one last one for from me. Can you talk about sort of what you are seeing so far as you know Timberland deal activities concern what the appetite like right now?
Speaker Change: Well, yeah, the Timberland M&A market is really paused here. There's virtually no high-quality properties that are available. Several low-quality deals have kind of resulted in kind of busted deals, if you will.
Speaker Change: And I think, you know, market activity is sluggish here. We're in a, you know, kind of an uncertain economic environment. You've got these higher rates.
Speaker Change: You've got, you know, people potentially waiting for NCS opportunities, sellers waiting for NCS opportunities to materialize, you know, everybody knows lumber prices have been in the doldrums.
Speaker Change: So, sellers are not really excited about bringing properties to market, but I do think on the buy side, there's plenty of capital out there looking to buy.
Speaker Change: Timberland, whether it's a new investor that's come into the asset class, interested in nature and biodiversity or carbon, or it could be a new investor that's interested in Timberland purely from a carbon credit standpoint.
Speaker Change: So, I think there's no shortage of demand for quality timberland. It's really, more than anything, reluctance of buyers to bring quality properties to market.
Speaker Change: Understood. That's helpful perspective. I'll turn it over. Good luck.
Speaker Change: Thanks.
Speaker Change: Your next question comes from the line of George Staphos with Bank of America. Please go ahead.
George Staphos: Hey Wayne, hey Eric, good afternoon.
George Staphos: Go through maybe with a bit more detail to the extent possible what you think your manufacturing costs
George Staphos: with the Waldo ramp up, both in place but also now winding down and getting into more of an operational mode there.
George Staphos: The question behind the question, given where prices are right now, and with maybe some puts and takes on manufacturing, could we see maybe a break even in EBITDA for the wood products segment in the fourth quarter?
Speaker Change: Well, I you know, it's we're halfway through the fourth quarter at this point George and I would tell you
Speaker Change: We had to eat some startup costs at the Waldo Mill in Q3. Thankfully, that is behind us. So we will see a sizable drop in per-thousand processing costs as we move out into Q4. And frankly, I think we're setting up for a good 2025.
Speaker Change: The market, our stock and our peers are selling off this morning because the tenure is trickling up again. But I look collectively at what's going on with supply and demand, and I'm pretty bullish on next year and even more bullish on 26.
Speaker Change: But yeah, getting back to your question, we will see a sizable drop in processing costs as we work our way through Q4 and then as we get into next year.
Speaker Change: Erica, you've given us a lot of detail there already, but is there a way to maybe size that? And if you want to punt on that, we totally understand, but I figured we'd try it one more time if there's a way to maybe dimensionalize that.
Speaker Change: Dimensionalize.
Speaker Change: The drop in processing costs sequentially or over the next couple of quarters. Oh.
Erica: Yeah, I mean, I will just, I'll tell you that all across our entire lumber segment, processing costs are going to drop. Now, this is, remember, this is a rough Q3 for Waldo, so processing costs here were very high, but it's going to drop from $185 a thousand down to $151 a thousand.
Erica: Okay.
Speaker Change: Appreciate that. And then question for you on salvage activity. What is that going to mean in terms of results both in terms of tonnage and P&L over the next you know quarter or two? How should we phase that in and how long will the salvage activity take into 2025?
Speaker Change: Yeah, for us directly it's really going to have a minimal impact. You know, like we've said in the prepared remarks, we've already commenced salvage operations.
Speaker Change: I think, you know, based on down timber, we estimate that that activity to take maybe
Speaker Change: six months or so. But overall, we think that'll be directly a minimal impact to us now.
Speaker Change: Look, we don't have a direct line of sight into how much salvage activity is out there across the region, but intuitively we would anticipate that
Speaker Change: There would be more volume of pulpwood coming on the market, so that could have some downward pressure on pulp prices in the very near term.
Speaker Change: You know, you only have so much log and haul capacity, so if there's a lot of capacity shifting to pulp, then you may not be getting as much saw log capacity, and with that, you know, we think that may also push saw log pricing up slightly, just kind of that shift. But, you know, we'll see what happens.
Speaker Change: You know, George, when you step back and you think about it, we're talking about 100,000 tons here.
Speaker Change: and across our 7 point whatever 6 million ton harvest profile per year and 50 of that 100,000 tons is going to going to happen in Q4 and then 50,000 tons is going to happen in Q1 so in the grand scheme of things it's virtually no impact, financial impact, not that important.
Speaker Change: I appreciate that. Last question for me and I'll turn it over. Are you seeing any kind of chin...
Speaker Change: change in, you know, supply trade flow on lumber markets into the US from Europe elsewhere, you know. How are you seeing that impact the market at this juncture? You already talked about Canada, obviously, you know, over time maybe seeing some trade flow slowing because of duties. But what are you seeing out of Europe? Thank you.
Speaker Change: Yeah, so I can only tell you, George, what I hear anecdotally, which, you know, I look at the numbers and imports from Europe are down about 10% this year. You know, it's logical that imports would slow this year. We've come off those really high prices where we were at in early, what, 23, when imports surged.
Speaker Change: So prices have really come way off. That beetle kill timber that was over in Central Europe, you know, most of that salvage activity is now behind us.
Speaker Change: Now, I will say going forward, I think the Europeans were smart. They got a toehold in the U.S. market, and if we see prices revert back to really high numbers again, they're going to be able to flip the switch and start exporting more back into the U.S. So they will be a governor going forward.
Speaker Change: on pricing. But for now, I think they've backed away and, you know, I think prices have, or import levels have moderated, and I think they're going to stay that way for some time.
Speaker Change: Thank you, Eric.
Speaker Change: Thanks.
Speaker Change: Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Please go ahead.
Speaker Change: Hi, good morning. Just one question for me, excuse me.
Speaker Change: You've talked about having some other high return projects in your wood products portfolio And it certainly seems like we're seeing a bit more support from lumber prices
Speaker Change: I think Wayne talked about not pursuing anything on the same scale as Waldo next year, but are you able to share any preliminary thoughts on how you'll approach capital spending in 2025 and maybe talk about what your priorities for capital spending will be?
Speaker Change: Yeah, Matthew, we're always looking at ways to improve our P&L.
Speaker Change: with the idea that we want a strong return on our invested capital.
Speaker Change: in our mill network, or it can be through replacing discrete pieces of equipment that we have in our mill network that are more efficient.
Speaker Change: and we haven't gone through our budgeting process yet for for 25 so I'm reluctant to really really comment on what we have planned for next year but you know we've got a couple things that we're that we're looking at but it's it's too early to talk about them
Speaker Change: Okay, fair enough. The rest of them I haven't asked. Thanks, I'll turn it back.
Speaker Change: Thanks.
Speaker Change: Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead.
Mark Weintraub: Thank you. First, I apologize, a bit of an accounting-type question. Just, DD&A obviously had the changes at Waldo and the accelerated depreciation going away. As we think about depreciation in the wood products...
Mark Weintraub: segment and maybe for the company as a whole or dDNA, is the third quarter rate the one to use going forward or does that pop up a little bit as Waldo kicks into full operation?
Speaker Change: Yeah, Martha Swain. I think you're referring to, yeah, we have a little bit lower dDNA this quarter and that's a function of, it is a function of the Waldo sawmill.
Speaker Change: We had back in 2022 and we announced the project, we had started accelerating depreciation on the existing assets that we were replacing and that that was about
Speaker Change: I would say, kind of on a yearly basis, our depreciation will be down about five million dollars annually, just with that kind of shift from that acceleration to what we've put on the balance sheet.
Speaker Change: Great. And so, I mean, you're obviously indicating you're kind of looking for a flat-ish EBITDA overall, 4Q versus 3Q, and given the guidance you've given us on Timberlands and real estate, that that does suggest a pretty big pickup in wood products.
Speaker Change: And so I'm just curious, what type of, you mentioned you're up 30 bucks.
Speaker Change: I think it was a 33 bucks quarter to date.
Speaker Change: Maybe I'll ask two related questions. One, if lumber prices were to stay where they are today, roughly how high would your 4Q lumber prices be relative to 3Q and is that basically what you're embedding in your guidance?
Speaker Change: Yeah, I think, Mark, you know, we lumber prices have had a nice run here. We think there's a chance they pull back a little bit as we get out into December.
Speaker Change: Companies, especially private ones, will tend to pull down inventories at the end of the year for tax reasons. So there could be a minor pullback in December, but full quarter over full quarter, Q4 versus Q3, I think our lumber prices we expect to be at 5% quarter over quarter.
Speaker Change: Um...
Speaker Change: 4Q over 3Q?
Speaker Change: Excuse me, 4Q over 3Q.
Speaker Change: flat 4Q over 3Q EBITDA. But let me circle back, maybe my math is wrong. Yeah, and that could be a conservative number too. We've been surprised by the strength in lumber prices.
Speaker Change: and you know I talked to the sales department yesterday before this call and what they're saying is that they're selling stuff above where the random lengths print is at right now. So they're you know it could be better than just a 5% run in Q4 versus Q3. Okay, very good.
Speaker Change: Good. And then, in terms of NCS, so obviously you indicated, you know, very excited about solar, but mostly show up in 26 and 27.
Speaker Change: Is there anything really in NCS at all?
Speaker Change: showing up in EBITDA in 24, and is there anything you're really expecting in 25, recognizing that the big kick-up is probably solar into gear in 26?
Speaker Change: Don't forget, Mark, we're getting option payments as we speak. When we enter an option agreement with a solar developer, they start paying us for that acreage to be under option. So, you know, we're making a couple million dollars a year off that.
Speaker Change: We are selling carbon offsets from a carbon project that we put in place down in Arkansas back in, oh my gosh, 2006, something like that. We started selling credits in 2014, I believe it was.
Speaker Change: These are not significant numbers, but I think we've sold something like $3 million of carbon offsets from that project going back to 2014.
Speaker Change: So, yeah, we're getting dribs and drabs of money in NCS today. It's not meaningful amounts of money like we expect it will be.
Speaker Change: If we enter into a lithium agreement here, we expect to get some payments.
Speaker Change: Understood. And you mentioned carbon credits. You expect to maybe have some more clarity in the next few months. Is that true for lithium as well or can give us sort of a timeline or is that not yet really?
Speaker Change: Evident
Speaker Change: Yeah, this time. That's it.
Speaker Change: Yeah, that's a tougher one. We're really highly dependent on the Arkansas, I think it's the Oil and Gas Commission.
Speaker Change: that sets some royalty rate.
Speaker Change: for what Lithium Brine goes for. There's been a lot of meetings down in Arkansas.
Speaker Change: The developers have proposed a, I think it's a 2% royalty.
Speaker Change: The landowners, the ones that own the mineral rights like us, have proposed a 12% royalty.
Speaker Change: So, I think there's a little bit of a wait and see here because the range of outcomes are just enormous. But I'm very excited about this opportunity for us going forward. But again, it's going to take a few years before the money really starts to flow.
Speaker Change: understood and then lastly you you mentioned kind of CapEx would go back to more normal
Speaker Change: What would you consider more normal to be? And then relatedly, other capital allocation priorities if lumber does sort of kick into better gear and you're generating more earnings. I am assuming share repurchase would be high on the list if the stock's anywhere where it's at, but maybe color and thoughts you might provide along those lines.
Speaker Change: Yeah, on CapEx, Mark, I mean, we, you know, our range for this year is 100-110, that includes, you know, almost 45 million for Waldo, and like we said, you know, we're not undertaking a project of that nature, you know, in the foreseeable future, so...
Eric Cremers: yeah like Eric said we're not going to we're still going through budgeting process and ultimately a discussion with the board on you know what our capital projects and plan is for next year so we're not going to provide any more detailed guidance on that
Eric Cremers: As far as capital allocation priorities...
Eric Cremers: We've also, you know, we mentioned, you know, we won't be de-levering, you know, with the attractive interest rates, we're able to lock up on our debt refinance, you know, we're refinancing debt. So, that really just...
Eric Cremers: It ultimately comes down to share repurchases, attractive acquisition opportunities, but it really depends on what presents itself as we head into each quarter.
Speaker Change: Appreciate it. Thanks guys.
Speaker Change: Your next question comes from the line of Michael Roxland from Truist Securities.
Speaker Change: Please go ahead.
Speaker Change: Hi guys, this is Nico Piccinion from Micro-Oxalant. Thanks for taking my questions.
Speaker Change: Morning.
Speaker Change: I guess you mentioned being encouraged by, you know, steady interest from the regional builders at Chanel. I'm just curious on what the split in Chanel is between the smaller regionals and the large nationals and then likewise, you know,
Speaker Change: What are you hearing from your builder customers, maybe those buyers regarding...
Speaker Change: you know, sentiment, general sentiment among homebuilders given some kind of mixed 4Q or 3Q earnings from them and then also that mortgage rates have trended higher since really the end of September and despite the rate cut announcement.
Speaker Change: Yeah, Nico, you know, looking at the builder profile in Chenal, it's much different than, you know, from a national builder. These are all regional builders. There are no national builders.
Speaker Change: and Chenal. So when we think about these regional builders, they're not
Speaker Change: you know kind of well capitalized or highly capitalized and you know the ability to offer incentives and and other you know rate buy downs for for the the ultimate buyers
Speaker Change: Thank you.
Speaker Change: Based on our Q3 results and the outlook at least we've given for Q4, we've been very optimistic about how the year will ultimately end. We saw a take-up across all our product offerings from the more affordable offering to the premium offering.
Speaker Change: and you know we think that was certainly stimulated by
Speaker Change: you know what the fed did you know there in September? And then as we looked to Q4, you know we also saw a better take up than we expected you know again across even our more affordable
Speaker Change: Product offering and where we thought, you know, maybe that's that is where more the rate sensitive buyers are but nonetheless We were encouraged by what we saw now, you know that that's really our
Speaker Change: Our insight is into through the end of the year. You know, we'll see as we head into next year kind of what the sediment is but, you know, kind of in the shorter term outlook that's certainly what we're seeing and and what actions the regional builders have taken.
Speaker Change: Understood. Thank you. I'll turn it over.
Speaker Change: At this time, I'm showing there are no more questions. I'll turn the call back over to Wayne Wasechek.
Wayne Wasechek: Thank you.
Wayne Wasechek: Thank you for everyone for joining this morning and your continued interest in potlatch deltas.
Speaker Change: This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.
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