Q4 2024 PotlatchDeltic Corp Earnings Call
Rob: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch Deltic fourth quarter 2024 conference call.
Rob: All lines have been placed on mute to prevent any background noise.
Rob: After the speaker's remarks, there will be a question and answer session.
Rob: If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.
Speaker Change: If you would like to withdraw your question, again, press star and the number one. Thank you. I'd now like to turn the call over to Mr. Wayne Wasechek, Vice President and Chief Financial Officer for opening remarks. Sir, you may proceed.
Speaker Change: Good morning and welcome to Potlatch Deltics fourth quarter 2024 earnings conference call.
Speaker Change: Joining me on the call is Eric Cremers, Outlatch Deltics President and Chief Executive Officer.
This call will contain forward-looking statements.
Please review the cautionary statements in our press release.
Speaker Change: on the presentation slides and in our filings with the SEC regarding the risks associated with these forward-looking statements.
Speaker Change: Also, please note that a reconciliation of non-GAP measures can be found in the appendix to the presentation slides and on our website at www.potlatchdelta.com.
Speaker Change: I'll turn the call over to Eric for some comments, and then we'll review our fourth quarter results and our 2025 outlook.
Eric Cremers: Well, thank you, Wayne. Good morning, everyone. Thanks for joining us.
Eric Cremers: These results reflect the strong performance of our real estate business and the stability provided by our Timberlands operations.
Eric Cremers: Our wood products results for the year were challenged by a relatively weak lumber pricing environment, which only began to improve towards the latter part of the year.
Eric Cremers: Despite market conditions, we remained focused on effectively managing our controllable operational metrics across all business segments. Additionally, we successfully achieved several strategic initiatives for the year, highlighted by the modernization and expansion of our Waldo sawmill.
Eric Cremers: Our Timberlands division generated adjusted EBITDA of $139 million dollars for 2024. We harvested a total of 7.6 million tons across our northern and southern regions, which was in line with our plan at the beginning of the year.
Eric Cremers: Despite overall softness in lumber markets, log markets in both Idaho and the southern regions showed resilience.
Eric Cremers: In Idaho, stronger cedar prices driven by regional demand bolstered our aggregate saw log prices.
Eric Cremers: As we move into the new year, we are seeing improvements in Idaho saw log prices due to improved lumber prices, particularly under our indexed saw log arrangements.
Eric Cremers: Meanwhile, southern saw log prices remained relatively stable throughout the year despite challenges stemming from measured mill consumption and a generally abundant log supply.
Eric Cremers: In our Wood Products segment, Adjusted EBITDA was a loss of $8 million in 2024. However, the Division's financial performance shifted positively in the fourth quarter with $9 million in Adjusted EBITDA on improved lumber prices.
Eric Cremers: Our 2024 financial performance faced several market dynamics, including cautious buyer sentiment, ample lumber supply, and soft demand in end markets.
These factors exerted downward pressure on lumber markets.
Eric Cremers: Later in the year, lumber markets became more balanced due to capacity curtailments, which we believe have contributed to the recent upward trajectory in lumber prices, with the Random Lengths Lumber Composite spot price increasing $37, or 9%, per thousand board feet in the fourth quarter alone.
Eric Cremers: And in what is generally a seasonally weak period for lumber prices, the composite has held steady since the beginning of the year. With a more balanced supply-demand dynamic, our 2025 outlook on lumber markets is cautiously optimistic, especially as we approach the spring building season.
Eric Cremers: We ship just over 1.1 billion board feet of lumber during the year, setting a new record for the company in annual shipment volume.
Eric Cremers: This achievement came even while we incurred a brief period of downtime during the year at our Waldo sawmill to integrate new equipment for a modernization and expansion project.
Eric Cremers: The successful completion of construction and the positive trajectory of the Mills ramp-up is a testament to the team's performance. I would like to take this opportunity to thank the Waldo team for their dedication and effective execution of this project.
Eric Cremers: As a reminder, we anticipate that the project will increase the mill's annual capacity by 85 million board feet. Additionally, we expect recovery rates to improve by approximately 6% and cash processing costs to decrease by about 30%.
Eric Cremers: Once we complete the ramp-up phase, we project that the mill will generate approximately $25 million in incremental EBITDA annually, assuming a mid-cycle sales environment.
Eric Cremers: With the construction phase now behind us and major capital expenditures completed, our focus is on maximizing returns and generating strong cash flow from this strategic investment.
Eric Cremers: Shifting to our real estate segment, this business had a very strong year contributing $147 million in adjusted EBITDA. In our rural real estate division we sold over 57,000 acres at $2,300 an acre.
Eric Cremers: Our real estate team is focused on pursuing opportunities that drive shareholder value beyond our regular recurring sales of real estate.
Eric Cremers: This was exemplified by the sale of 34,000 acres of very young, average-aged, 4-year-old timberland for $57 million, or $1,700 per acre, in the second quarter of 2024.
Eric Cremers: While we don't anticipate a similar sale of this nature and magnitude in 2025, demand for our typical rural properties remains strong. We expect to continue capitalizing on opportunities to sell rural land at significant premiums to timberland value.
Eric Cremers: On the development side of our real estate business in 2024, we successfully closed on a $6 million sale of commercial land for $500,000 per acre and sold 135 residential lots at an average price of $146,000 per lot in our Chenal Valley Master Plan community in Little Rock.
Eric Cremers: Despite a challenging interest rate environment, the number of residential lot sales we achieved this year aligns with our historical average.
Eric Cremers: This year's sales volume highlights the desirability of living in the Chenal Valley community, along with the premium lot offerings we brought to the market.
Eric Cremers: In 2024, we made meaningful progress on our natural climate solutions initiatives and are excited about the potential value these opportunities will create in the future.
Eric Cremers: Over the course of 2024, we doubled our solar options under contract and the associated net present value of these contracts. By year-end, we had solar option contracts covering over 35,000 acres with an estimated net present value exceeding $400 million.
Eric Cremers: We continue to see strong demand for solar projects and do not anticipate this opportunity to subside under the new U.S. administration.
Eric Cremers: Solar energy can play a crucial role in addressing America's growing energy needs and its pursuit of energy independence.
Eric Cremers: On lithium development, we continue to pursue opportunities to lease subsurface rights on our land in southwestern Arkansas, where the Smackover Formation is partially located. We are currently negotiating a brine lease agreement, which we expect to execute in the coming weeks.
Eric Cremers: The ultimate potential of this and other emerging opportunities in the region will depend on several factors, including the determination of royalty rates and future pricing and demand for lithium.
[inaudible]
Eric Cremers: Regarding forced carbon offsets, we are engaged with a couple well-respected project developers to pursue high-quality carbon projects under either a quote build-to-suit scenario for an identified buyer or a broader market opportunity. Given the complexity and care necessary in developing a high-quality, high-transparent carbon project, we don't expect to bring this project to market this year.
Eric Cremers: In addition to these projects, we are actively exploring other long-term natural climate solutions opportunities, such as carbon capture and storage. We believe these initiatives will ultimately increase demand for our rural land, likely driving timberland values higher.
Eric Cremers: Moving on to our capital allocation strategy, in 2024 we deployed a balanced and disciplined approach while navigating the challenging lumber markets and macroeconomic uncertainty.
Eric Cremers: Our priorities were centered around returning capital to our shareholders through our quarterly cash dividend and value enhancing share repurchases, investing in high return capital projects such as the Waldo Modernization Project, and making an accretive Timberland acquisition.
Eric Cremers: For the year, we paid $142 million in cash dividends. With our stock trading at levels we believe are well below our estimated net asset value, share repurchases were an attractive option for capital allocation.
Eric Cremers: In the fourth quarter, we purchased $8 million of our common stock, bringing our full-year repurchases to $35 million, averaging $41 per share.
Eric Cremers: This leaves us with $90 million remaining under our repurchase program. Our solid financial position, coupled with our liquidity profile, allows us to continue being opportunistic with capital deployment as we move into 2025.
Eric Cremers: Turning our attention to the U.S. housing market, although the Federal Reserve issued three interest rate cuts totaling 100 basis points since September, the rate on the 30-year fixed mortgage actually increased over this period.
Eric Cremers: As a result, the home buying market is still somewhat depressed as elevated mortgage rates continue to influence near-term demand and hold back construction activity.
Eric Cremers: Regarding supply, although existing home inventory has risen, it is still below historical levels as existing homeowners wanting to move are continuing to choose to stay in their current homes due to the lock-in effect of their low mortgage rates.
Eric Cremers: Despite this market landscape, the single-family home building segment has remained relatively resilient. As single-family starts have held near 1 million units on a seasonally adjusted basis throughout 2024, bolstered by large homebuilders providing incentives such as interest rate buydowns.
Eric Cremers: On the other hand, the multifamily home building segment remains anemic as an oversupply of multifamily units combined with the restrictive construction financing environment continues to limit multifamily starts.
Eric Cremers: While these trends highlight the current state of the housing market, the long-term housing fundamentals continue to remain strong. These fundamentals are supported by an undersupply of homes, favorable demographics, and growth in household formations.
Eric Cremers: We believe that improved housing affordability, once low mortgage rates take hold, coupled with these strong fundamentals, will create significant positive momentum for lumber market demand, fueling growth.
Eric Cremers: Several factors have weighed on this segment, including a cautious buyer sentiment under an uncertain economic backdrop, suppressed housing turnover, and higher financing costs for discretionary home improvement projects.
Eric Cremers: Despite these challenges, the leading indicator of remodeling activity published by the Joint Center for Housing Studies at Harvard University predicts modest gains in 2025 for home remodeling as a solid labor market and rising home values are anticipated to support greater activity.
Eric Cremers: Looking at our own business, we are seeing strong takeaway from our big box retail customers, such as Home Depot, Lowe's, and Menards.
Eric Cremers: Additionally, medium to long-term fundamentals for R&R remain favorable as a number of structural drivers are expected to support the sector, including an aging housing stock with a median age over 40 years, home equity levels at historic highs, and people continuing to work from home.
Eric Cremers: As we look ahead in 2025, we are optimistic about the prospects of improving lumber markets.
Eric Cremers: Driven by capacity reductions, supportive consumer sentiment, and a solid employment backdrop. Regardless of market fluctuations, we remain committed to executing our strategy and maximizing operational and financial performance across all of our business segments.
Eric Cremers: Additionally, we continue to focus on our core corporate responsibility and issues around forest, planet, people, and performance. With a strong balance sheet, ample liquidity, and a disciplined approach to capital allocation, we are well positioned to deliver long-term value for our shareholders.
Eric Cremers: I will now turn it over to Wayne to discuss our fourth quarter results and our 2025 outlook.
Thank you, Eric.
Beginning on page 4 of the slides
Eric Cremers: Total adjusted EBITDA for the fourth quarter was $53 million, an increase from $46 million in the third quarter.
Eric Cremers: This quarter-over-quarter increase was driven by higher lumber prices and improved cost recovery in our wood product segment.
Eric Cremers: I will now review each of our operating segments and provide more details on our fourth quarter results.
Eric Cremers: Information regarding our ticketing segment can be found on slides 5 through 7.
Eric Cremers: In Idaho, our harvest volume for the fourth quarter was 345,000 tons. This volume is seasonally lower than the 427,000 tons we harvested in the third quarter.
Eric Cremers: Idaho saw log prices were 4% higher per ton in the fourth quarter compared to the third quarter, reflecting increased prices for index saw logs which reached their highest price point this year in the fourth quarter.
Eric Cremers: In the South, we harvested 1.5 million tons in the fourth quarter, consistent with our harvest volume in the third quarter.
Eric Cremers: Our southern salad prices moderated slightly lower in the fourth quarter as compared to the third quarter. This price decline was primarily driven by mix.
Eric Cremers: with a higher volume of smaller diameter saw logs and a lower volume of hardwood saw logs in the fuller quarter.
Eric Cremers: Moving to wood product segment shown on slides 8 and 9.
Eric Cremers: Adjusted EBITDA for the 4th quarter was $9 million, an increase of $18 million from the 3rd quarter.
Eric Cremers: The increase was driven by higher average lumber prices and improved cost recovery.
Eric Cremers: In the third quarter, we incurred the planned downtime and the restart of the Waldo, Arkansas sawmill for the expansion and modernization project.
Eric Cremers: By the fourth quarter, the mill was operational, and as we have progressed through the ramp-up curve, per-unit manufacturing costs and log recovery has significantly improved.
We expect to complete the ramp-up phase by mid-year.
Eric Cremers: Our average lumber price realizations increased $43.11 from $402 per thousand board feet in the third quarter.
$445 per 1,004 feet on the fourth quarter.
Eric Cremers: In comparison, a random length framing lumber composite average price was approximately 12% higher in the fourth quarter compared to the third quarter.
Eric Cremers: It's important to note that a regional mix and product mix differs from the composite and there's also a tiny difference between our sales and the composite.
Eric Cremers: Lumber shipments increased by 16 million board feet, rising from 267 million board feet in the third quarter to 283 million board feet in the fourth quarter.
Eric Cremers: Next, let's look at the real estate segment on slides 10 and 11.
Eric Cremers: The segment generated adjusted EBITDA of $19 million in the fourth quarter compared to $32 million in the third quarter.
Eric Cremers: and a real estate business in the fourth quarter, we sold 5,900 acres at an average of $2,900 per acre.
Eric Cremers: Notably, our fourth quarter results included a conservation land sale in Alabama for nearly $10 million.
Eric Cremers: at $2,500 an acre, we continue to capitalize on a healthy demand for rural real estate, particularly for recreational purposes and conservation outcomes.
Eric Cremers: In the development side of our real estate business, we sold 45 residential lots at an average price of $100,000 per lot in the fourth quarter.
Eric Cremers: Demand for lot offerings has remained steady across each of our price points. The fourth quarter included a higher mix of smaller lots compared to the third quarter, which featured a significant number of premium lots.
Turning to our capital structure summarized in slide 12.
Eric Cremers: At year end, our total liquidity is $451 million, which includes $152 million of cash in our balance sheet, as well as availability on our undrawn revolver.
We repurchased 180,000 shares.
Eric Cremers: at $42 per share for a total of $8 million in the fourth quarter.
Eric Cremers: We have $90 million remaining on our $200 million repurchase authorization.
Eric Cremers: Additionally, we refinanced $176 million in debt that matured in the fourth quarter by utilizing $125 million of notional forward-starting interest rate swaps within our portfolio
Eric Cremers: We achieved a weighted average interest cost of 3.2%, which is net of estimated patronage. This strategy enabled us to reduce our annual interest costs by $150,000 and maintain our total weighted average cost of debt at approximately 2.3%.
Eric Cremers: Under the refinance, we also spread the term loan maturities over three outer years, smoothing out our debt maturity ladder.
Eric Cremers: We have $75 million of notional forward-starting interest rate swaps available for future debt refinancing.
Eric Cremers: which will allow us to maintain a lower cost of borrowing.
Capital expenditures were $20 million in the fourth quarter.
Eric Cremers: This amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement.
Eric Cremers: I will now provide some high level outlook comments. The details are presented on slide 13.
Eric Cremers: We plan to harvest approximately 7.4 million tons in our Timberlands segment by 2025, with about 80% of the volume coming from the South.
Eric Cremers: The modest decline in our planned annual harvest volume, compared to the 7.6 million tons harvested in 2024, is attributed to normal variability in our harvest plan and due to our land sales activities.
Eric Cremers: Harvest volumes in the North are expected to be seasonally lower in the first quarter at levels comparable to those in the first quarter of 2024.
Eric Cremers: We anticipate northern saw log prices to increase by approximately 5% in the first quarter due to higher cedar and index saw log prices.
in the South.
Eric Cremers: We plan to harvest 1.4 million tons in the first quarter, and we expect our southern saw log pricing to remain relatively stable.
Eric Cremers: We plan to ship 1.2 billion board feet of lumber in 2025.
Eric Cremers: This projected shipment volume includes ramping up to the expanded nameplate capacity at our Waldo Sawmill by mid-year. In the first quarter, we expect to ship between 270 million to 280 million board feet of lumber.
Eric Cremers: Our average lumber price thus far in the first quarter is $448 per thousand board feet, which is roughly 1% higher compared to our average lumber price in the fourth quarter. This is based on approximately 90 million board feet of lumber.
Eric Cremers: Shifting to real estate, we expect to sell approximately 26,000 acres of rural land and 130 residential lots in Chennaul Valley during 2025.
Eric Cremers: For the first quarter, we plan to sell approximately 7,000 acres at an average price of $3,100 per acre and approximately 10 residential lots at an average price of $100,000 per lot.
Eric Cremers: Additional details regarding real estate can be found on the slide.
Eric Cremers: We estimate that net interest expense will be approximately $2 million in the first quarter and about $10 million per quarter for the remaining quarters in 2025.
Eric Cremers: Interest expense is lower in the first quarter as this is when we receive our annual patronage payments from the farm credit banks.
Eric Cremers: These amounts also include non-cash interest charges and our net estimated interest income, which we expect to be lower in 2025.
regarding capital expenditures.
Eric Cremers: We are planning to spend between $60 to $65 million in 2025. This range excludes a final closeout payment of $6 million for the Waldo Sawmill project and any potential Timberland acquisitions.
Eric Cremers: With the construction of the Waldo Modernization and Expansion Project completed, our planned level of capital expenditures for 2025 returns us to a more normal spending level.
balanced out by seasonal decline in Timberland harvest volumes.
Rob: That concludes our prepared remarks. Rob, I'd now like to open the call to questions.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. Your first question comes from the line of George Staphos from Bank of America. Your line is open.
George Staphos: Thanks. Hi, everyone. Good morning. Thanks for all the details, guys. Morning. And congratulations on the year. I guess the first question I had, I know you attributed it to normal...
variability in the harvest profile.
George Staphos: and that is pretty much all encompassing. But if you step back and say where you were six months ago, would you have been expecting to harvest only about 7.4 million tons?
George Staphos: for $25,000. On the margin, things look like they're getting better. You said you're cautiously optimistic. Pricing is up.
and Lumber.
Speaker Change: Is there anything else beyond normal variability in terms of why we weren't seeing a little bit more in terms of timber harvest?
A related question, just in general, on harvesting.
You know, we've seen...
Speaker Change: You know, in the cellulose markets, you know, a bit more of a premium than normal on softwood versus hardwood, you know, again, in the pulp markets, are you seeing any of that filter into demand for softwood, pulpwood, and in turn, you know, demand, you know, you know, in the next, you know, couple of quarters?
Speaker Change: Yeah George, this is Wayne. So taking your first question on the harvest volumes for 2025, yeah it really comes down to a couple things. So as we discussed in our prepared remarks, first it's normal variability of our harvest volumes.
Speaker Change: Every year we have fluctuations. It can fluctuate either way a couple hundred thousand tons. Second thing is land sales activities.
Speaker Change: Now, our land management practices always aim to maintain a sustainable harvest profile, but that's impacted by forest growth rates, how we maximize NPV generated by our timberland harvests.
Speaker Change: But now, on the land sales activity, you know, we're portfolio managers. We're always looking at options to generate attractive returns.
Speaker Change: three times TMV and you know we had that initially in our 2025 harvest plan now which we had to adjust our 25 outlook because of that land sale so so it really comes into play of those those two pieces
Speaker Change: Understood. And just on softwood and in particular pulpwood, if you can talk a little about what you're seeing there, just with the perspective of what's going on the pulp markets.
Speaker Change: Yeah, on the pulp side, certainly that hardwood volume has an impact on our pricing, our average pricing from period to period, given a level of how much hardwood is in the mix.
Speaker Change: Certainly, I think, right now, what we saw in the fourth quarter on the...
Speaker Change: the output side, it depends, you know, each market is unique.
Speaker Change: Some of our markets, we saw a little bit elevated mill inventories on the hardwood side, which pricing may have come down maybe one or two percentage points. On the flip side, we also saw other markets that were more tensioned and
You know pricing was was actually up
Speaker Change: several basis points. So it really depends on the unique market where we're at.
Speaker Change: overall so and I think that'll hold true as we continue to move forward on the Heartland County.
Speaker Change: So what you're saying, Wayne, is you're not really seeing any sort of greater-than-normal versus recent-period demand for softwood, pulpwood, you know, given what we're seeing in terms of the cellulose markets themselves, kind of steady as she goes at this juncture, that'd be fair.
Yeah, that's right.
Speaker Change: Alright, so based on all that dialogue, I would imagine you're not seeing much in the way of log cost inflation over the next couple of quarters in the wood products business, but how would you have us think about that across?
Speaker Change: The, you know, the geographies and then kind of my last question, and it's one you get periodically and we all appreciate how thoughtful you are about capital allocation at Potlatch, but
You know, you talk about buying...
Speaker Change: stock back opportunistically, you talk about being portfolio managers, you talk about the fact that, you know, the NAV is much higher than the current value.
Speaker Change: Why do you have to be necessarily opportunistic with your buybacks? Why not just if with things getting better and the NAV being where it is relative to the price as you see it, why not be a little bit more aggressive there? Thanks guys, I'll turn it over.
Eric Cremers: Yeah, so so thanks George. I'll answer those questions. So on the on the log cost side as it relates to wood products you know, we did have a little bit of favorable P&L effect Here in the fourth quarter. I think our benefit was about two million dollars
Eric Cremers: There will be a little bit of benefit in Q1. We're estimating it to be about a million dollars. But generally, across the whole business, we expect things to be relatively flat for the year in terms of log costs for wood products.
Eric Cremers: Now, regarding capital allocation, I think we've said in the past that we're never going to move fast on any one capital allocation opportunity. We move slow and steady, and we do that intentionally.
Eric Cremers: And the reason is, as we sit here today, we can look at it and say, yeah, wow, with a $41, $42 stock price, we're trading well below NAV. And certainly by virtually every analyst, we are trading well below NAV. But that doesn't mean it can't trade even lower.
Eric Cremers: And, you know, we're in this period of time where, you know, who knows what Trump is going to do with these tariffs and what's going to happen to the world economy and what's going to happen to interest rates and...
housing, and so we always want to remain...
Eric Cremers: open to having options down the road. And if we spend our cash hoard now buying back stock, that means we can't take advantage of an even bigger opportunity down the road. So while I find today's prices attractive, they could get even more attractive, and they could also get less attractive if markets play out the way we planned.
Eric Cremers: But I think you can look at our $200 million repurchase authorization and see that we put our money where our mouth is and we've bought back $110 million of stock now.
Eric Cremers: So, slow and steady wins the race, in our mind, as it relates to capital allocation.
Okay, we appreciate the thoughts. Thanks, Eric.
Thanks.
Speaker Change: Your next question comes from a line of Keaton Mamtora from BMO. Your line is open.
Thank you very much.
Speaker Change: Pretty good progress on, you know, getting those unit costs down with the startup of Waldo. Certainly more than what we were expecting.
Speaker Change: I'm just curious, as we move into Q1 and into the first half of 2025, how much more do you think you've got coming at you in terms of lower unit costs?
Speaker Change: Yeah, so quarter over quarter, I do think there's more room for us to push unit costs down.
Speaker Change: and certainly you'll see that as we move into Q1. We expect costs to come down, not as much as we saw Q3 to Q4, but there's probably another couple million dollars of costs to come down.
Speaker Change: And then when we get to Q2, we expect to have Waldo fully operational. So we won't see further benefit as we get to Q2. But there's a little bit more room here in Q1.
George Staphos: Understood. Okay, that's helpful. And then, you know, switching to Timberland deal activity, Eric, I'm curious, kind of, you know, what you are seeing out there in the market.
Speaker Change: right now. As you think about your portfolio, I'm curious, what is your appetite for larger deals?
Speaker Change: Yeah, Keaton, that's a good question. You know, the Timberland M&A market, it's pretty quiet right now. Over the past several years, you know, generally three to four billion dollars that Timberland changes hands each year, and I think last year only something like a billion dollars traded hands.
Speaker Change: And, you know, to your second question about will we do more large deals, I think we would certainly be open to doing large Timberland deals.
Speaker Change: You know, the one caveat is it has to be at a price that creates shareholder value. And we're not going to chase the Timberland deal, you know, if it comes in with the IRR that's less than our cost of capital. And our cost of capital today at the low end sits at around 6% real.
Speaker Change: So, you know, while our competitors may make Timberland acquisitions and do it at prices that drive IRRs below cost of capital, that's not something we're going to do. And I do think there will come a point in time where things will get back into balance.
Speaker Change: Either prices will come down in the M&A market, or returns are going to come up to justify a higher price, one of the two. But, you know, we've been on the sidelines for the past couple of years, and I think we'll continue to be on the sidelines until something changes.
Speaker Change: That's helpful. And then just one final question from me. We've seen a number of sort of, you know, pulp and, you know, paper mill closures here in the U.S. South over the last few years.
Speaker Change: You know, curious, you know, from a Timberland perspective, kind of impact for you guys and also as we think about sawmills and finding a home for those chips, how do you think about that as you think about next two, three, five years?
Speaker Change: Yeah, I think when we look at it, it's, you know, each market, Timberland market is...
Speaker Change: unique. Each individual one is unique. So we look at it market by market. When we look at M&A deals for Timberlands, we're certainly looking at...
Speaker Change: what's the current market look like? How tensioned is it? Where do we think it's going to go? And that certainly plays into how we...
Speaker Change: you know, each one is unique, so, but I think overall we have, you know, a positive outlook, we think.
Speaker Change: Kimberlin and Kimberlin byproducts, so I think we're still very optimistic and positive about the outlook.
Speaker Change: And on the residual side, Keaton, I would just say we've got a great team that handles the residuals that come out of a sawmill, and we've got supply arrangements into consuming pulp mills in the various areas that we operate in. It's challenging. I feel like every year I see lower and lower residual costs as pulp markets continue to dry up.
Speaker Change: But you know there are like Wayne said there are a number of new technologies coming whether it's
Speaker Change: you know, bioplastics or sustainable aviation fuel or pellets or, you know, Drax has got this
Speaker Change: You know, the Carbon Capture and Storage BEX project they're working on to spend $12.5 billion in the South. I do think people see an opportunity to utilize low-cost pulpwood in a variety of applications, and it's just going to take time for all those facilities to get built.
Speaker Change: Thank you. That's very helpful. Good luck in 2025. I'll turn it over.
Thanks.
Speaker Change: Your next question comes from the line of Michael Roxland from Truist Securities. Your line is open.
Speaker Change: Thank you, Eric and Wayne, for taking my questions. This is Nico Bichignon from MicroExcellent.
I guess starting out, the new U.S. administration
Speaker Change: suspending offshore and onshore wind power leasings and paused some of the other approvals, permits, and loans.
Speaker Change: Do you have any early read on the impact of natural climate solutions, mainly around CCS and wind? Because as I understand, I think solar has been left out from a lot of those pauses and temporary holds.
Speaker Change: Yeah, so we're following this, needless to say, very very closely. I do think that some areas of NCS are more vulnerable than other areas of NCS.
Speaker Change: from government cutbacks, and my sense, our sense, is that solar is going to be unscathed. I think lithium is going to be just fine.
Speaker Change: I think carbon credits gets a little bit dicier. Now you're at the beck and call of what do companies want to do to pursue their...
Speaker Change: Net Zero initiatives that they have, and there may be less government pressure on them to pursue Net Zero, so that could change the outlook for carbon offsets.
Speaker Change: Then I think CCS is the most vulnerable of all the different NCS opportunities and that one to me is going to be highly dependent on government subsidies.
Speaker Change: So, I do think it does vary from category to category, and thankfully, most of the near-term opportunity for us is in solar and lithium, and those two are continuing to move on down the track.
Speaker Change: And maybe just, sorry, for some further clarification, what for solar specifically gives you confidence that that won't
it'd be dragged into this lecture.
Speaker Change: Yeah, I think something like I've heard that like 80% of the money is getting spent in red states at the end of the day and
Speaker Change: I read that 18 House members sent Speaker Johnson a letter saying don't don't touch this this this money
Speaker Change: So, you know, I haven't heard Trump say anything negative about solar. I'm sure he's not happy about solar panels being manufactured in China, by and large.
But he's really come out pretty publicly against offshore wind.
as well as lithium, EV mandates.
Speaker Change: But those two areas get the most of the attention from him and not the other areas. Nobody really knows what's gonna happen in the end, but it's just a bit of a guess right now, reading between the lines.
Speaker Change: He seems to be after the EV mandate, and so we'll see how that plays out.
Speaker Change: Yeah, and I would add that, you know, on the solar side, even post-election, we continue to see strong interest from solar developers, you know, we continue to pursue
Speaker Change: additional option contracts with these developers and yeah we just yeah continue to see that strong activity at the election.
Speaker Change: Yeah, and just to give you a sense of it, I mean we're at 35,000 acres as we said in our prepared remarks now.
Speaker Change: 45, 46,000 acres under solar options. So like Wayne said, we see no slowdown in that part of our business.
Speaker Change: Understood. Sounds like solar is maybe safer and then forced carbon and CCS on the other end of that spectrum.
Speaker Change: Yeah, correct. Perfect. I appreciate the call. I'll turn it over. Thank you.
Thanks.
Speaker Change: Your next question comes from the line of Gregory Andriopoulos from Citi. Your line is open.
Hey, good morning, gentlemen.
Gregory Andriopoulos: Just a quick one on southern log prices this morning for 2025.
Speaker Change: You know, we've seen some wood products capacity come out of more coastal southern markets this year. Would you say you're more positive on those coastal markets or more of the inland markets?
Speaker Change: in 2025 in terms of year-over-year log price growth. And then based on your view there, does that inform your decision on 2025 harvest plans for inland legacy PCH lands versus the coastal lands you acquired in the catchmark deal?
Speaker Change: Looking at pricing for 2025, our view would be that the coastal area, Timberlands, have more of an opportunity to increase in pricing. Those are the more tensioned markets.
for us.
Speaker Change: So when with a little more, you know, pricing demand pickup, we would see see pricing move there first, you know, on our inland side and Gulf South, you know, we haven't seen prices.
Speaker Change: Even with a softer demand dynamic those those prices have remained a little more stable, so we wouldn't see those
Speaker Change: have as much price appreciation as the coastal areas. From a harvesting profile perspective, look, we have solid demand across our portfolio in the South and yeah, that hasn't.
Speaker Change: You know the pricing or where we see it going has an influence where a harvest plan is. You know we maintain a long-term sustainable harvest yield and plan and you know we're focused on that.
Speaker Change: Just one quick follow-up on solar. You mentioned doubling your option contracts from $200 to $400 million MPV or above $400 million MPV. Is there any way to quantify your ambitions for 2025 in terms of options?
Speaker Change: And then kind of relatedly, when should we start expecting these option contracts to convert into full lease agreements? Is that 2025, 26, or further down the line?
Speaker Change: Yeah, so our plan this year anticipates us getting another 10 to 12,000 acres under option.
Speaker Change: for the year, which would have an NPV of approximately $151 million.
Speaker Change: So by year end, we expect to be somewhere 45, 47,000 acres of roughly $575 million of net present value. That's not the end of the opportunity for us in solar. There will be more beyond what we get done this year, and we'll talk about that at a later date.
Speaker Change: But in terms of when we see these options actually get exercised, we don't anticipate one getting exercised this year.
the earliest we could see one happening.
Speaker Change: and then in 2027 we might see quite a few get exercised, but it won't really start happening next year, not this year.
Got it. Thank you very much.
Speaker Change: Our next question comes from a line of Mark Weintraub from Seaport Research Partners. Your line is open.
Mark Weintraub: Thank you. So, a couple of follow-ups. One, is there any meaningful contribution you expect in 2025 from any of the natural climate solution profit pools, or is that now likely
Mark Weintraub: No, you know Mark we're getting option payments as we sit here today. It's probably I don't know four million dollars more or less
Mark Weintraub: those option payments. So we're getting money today as we sit here for doing absolutely nothing and we manage that timberland at our own free will.
Mark Weintraub: So that's that's where we sit here today. We'll get a little bit more when we get this first lithium brine lease executed but you know it's this is not big money the big money will come at a later date but we're getting a little bit as we sit here today.
Gotcha.
Mark Weintraub: Second, in terms of mix, just remind us, what was the...
Mark Weintraub: saw log mix in the U.S. South in 2024. Is that similar to what we're expecting in 2025, or is there a change? And if there's a change, why the change?
Mark Weintraub: No, we don't expect a mix, I think, in the saw log volume, and we were roughly around 55%. We continue to, our outlook is near that 55% level. That's in the U.S. South, and our mix, you know,
Mark Weintraub: Saw log mix in Idaho is very heavily weighted towards saw log. We don't see that changing that drastically.
Mark Weintraub: Okay, good. Just one point of clarification, so stumpage in the U.S. South, is that is that considered upward or is that a mix?
Mark Weintraub: That's a mix, so it's both, it's both saw logs and pulpwood.
55% of saw log, well that includes stumpage as well.
Speaker Change: Okay, gotcha. All right. And then lastly, you kind of raised a little bit about, you know, tariffs, and obviously we also have the
Mark Weintraub: potential for likelihood of higher duties from Canada later this year as well. Can maybe just provide a little bit more color on your thoughts of potential impacts from those variables recognizing there's, you know, there's uncertainty.
Mark Weintraub: Yeah, so there's a lot of moving pieces right now as you can imagine in terms of the lumber price outlook, Mark.
Mark Weintraub: and a lot of it stems from this possibility of tariffs.
Mark Weintraub: What we do know is that duties are going to go up. It was going to be August, and I think the government has pushed it back to November. But the lumber duties from Canada to the U.S. are going to go up from 14 percent to somewhere between 25 and 30 percent. And I heard one firm estimate it could go as high as 40 percent.
Mark Weintraub: So, duties are going to go up no matter what. There is a potential for tariffs to go up, you know, any day, depending upon what Trump decides to do. And I think what that's going to do is it's going to raise the floor on pricing for the Canadians.
Mark Weintraub: and you know I heard a large Canadian producer a week or two ago make a comment that if if there's a duty put in place
Mark Weintraub: They plan on raising their prices to their U.S. customers to capture 100% of that duty. Now, will they be able to get all that 100% of whatever the duty is or not? Who knows what will ultimately wind up happening, but their plan is to pass that along to consumers.
Mark Weintraub: And I'm frankly a little bit surprised that lumber markets haven't moved on some of this talk.
Mark Weintraub: because we're not very far away from that. I think Trump's talked about a February 1st tariff date. Now, he's known to talk a lot and then choose to do other things, but we really haven't seen much lumber price movement as it relates to the potential for tariffs.
Mark Weintraub: And as you know, BC produces, I don't know, 6 billion board feet of lumber today and Canada exports, I don't know, 25% or, you know, the U.S. market needs Canadian lumber.
Roughly 25% of U.S. consumption comes from Canada.
Mark Weintraub: And I think after these duties get passed along, the B.C. mill, the medium B.C. mill is going to need north of $500 lumber just to break even. And you know, SPF today, Western's probably, I don't know, $450 more or less.
Mark Weintraub: So, you know, when I think about the lumber price outlook, to me, you know, the risk is clearly to the upside from here, not to the downside.
Mark Weintraub: and this Canadian producer that I referenced at the start of my comments, they talked about lumber prices fluctuating between $425 and $500 for the year. You know, and that actually feels like a reasonable forecast to me.
Certainly interesting times. Thank you very much.
Speaker Change: Your next question comes from a line of Matthew McKellar from RBC Capital Markets. Your line is open.
Matthew Mckellar: Good morning. Thanks for all the detail and for taking my question. You touched on it briefly in your prepared remarks. I was wondering if you could just provide a little bit more detail on your forest carbon initiatives, including how project redesign under the core carbon principles has gone and what you're thinking in terms of timeline to achieve a sale of credits, given that you're not expecting any sales this year.
Matthew Mckellar: Yeah, like we said in the prepared remarks, we're certainly pursuing a carbon credit project. You know, we're actively working with...
Matthew Mckellar: Carbon Credit Buyers and Top Quality Developers to design a project. Now, this project, you know, buyers can be a targeted
at the information.
Matthew Mckellar: We're still in the due diligence phase of identifying, you know, how to take this project.
Matthew Mckellar: But nonetheless, we'll develop a high-quality project, and we feel that would demand certainly higher pricing.
Matthew Mckellar: But I I guess from a timing perspective, you know, keep in mind these projects, you know, they're very complex They take time to develop, you know anywhere, you know, almost probably 18 months to two years You know with that timeline that that puts us
Matthew Mckellar: You know probably closer to the end of 26 to bring a project to market
Matthew Mckellar: So we're really, you know, there's much work to do there, but we're actively pursuing it.
Speaker Change: Okay, thanks very much and just one last cleanup for me.
Speaker Change: Can you give us a sense of when you expect better clarity on what the lithium royalty rates in Arkansas will be and what the size of that opportunity looks like for you?
Speaker Change: But then the other big unknown is what does the Arkansas Oil and Gas Commission, what royalty rate do they set for mineral rights owners in Arkansas?
Speaker Change: So, you know, who knows? We're at the mercy of the AOGC, but I think it will get resolved by the end of the year.
Speaker Change: Okay, thanks very much for the help. I'll turn it back.
Thanks.
Speaker Change: Your next question comes from the line of Kurt Jinger from DA Davidson. Your line is open.
Kurt Jinger: Great, thank you and good morning everyone. I wanted to start off with the home center business, sounded like that was a point of strength in the order book.
Kurt Jinger: Are you seeing orders kind of up nicely year-over-year or just maybe tracking with what you would expect seasonally and I guess as you talk to those customers do you get the sense that that's...
Kurt Jinger: you know, advantageous buying, you know, just at what are still kind of relatively depressed prices or actual kind of sell-through activity that they're seeing improving as well.
Kurt Jinger: No, I think the home center business, to us, it looks like it's starting to turn. It's always been very strong, very steady, very stable for us, and they'll take every one of our premium studs that we produce.
Kurt Jinger: is, if you look at the Home Center comp store sales forecast for 2025, now this is the analysts that cover Home Depot and Lowe's because they're publicly traded.
Kurt Jinger: and of course those analysts spend their life studying what happens to Home Depot and Lowe's.
Kurt Jinger: The consensus is for both of those two companies to have positive comp store sales.
Kurt Jinger: in 2025 in the order of 1 to 2 percent. Now 1 to 2 percent may not sound like a lot.
Kurt Jinger: but over the past two years comp store sales for those two companies have been running negative and I think that the worst point they were negative five percent more or less.
Kurt Jinger: So, for them to be turning positive gives me confidence that 2025 looks to be like a pretty good year, and it's consistent with what they're telling us that they're seeing in their business, that they expect to have a strong year. So, lots of things can happen. It's early in the year, but we think the outlook looks pretty good for R&R.
God
Speaker Change: How should we think about kind of a level set range kind of sustainably going forward from here and does that 5.9 million kind of fall at the low end the middle how should we think about that?
Yeah, I...
Speaker Change: Yeah, I won't, you know, give specific guidance on, you know, future periods or years, but, you know, what I would say is if we look ahead, we do maintain and analyze the long-term harvest profile, and, you know, we look
Speaker Change: I would say between 7.1 and 8.2 million tons. So as you can see over time, we'll have some variability.
Okay, perfect. Thank you for the color. Appreciate it.
Speaker Change: At this time I'm showing there are no more questions. I'll now turn the call back over to Wayne Wasechek.
Speaker Change: Thank you. I appreciate your interest in Potlatch Delphic and have a great day.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.