PotlatchDeltic Corporation (NASDAQ:PCH) reported a total adjusted EBITDA of $30 million in the first quarter of 2024, with significant contributions from its Timberland segment, which generated $35 million. The Wood Products segment achieved breakeven after a loss in the previous quarter, and the Real Estate segment generated $6 million. The company highlighted a $131 million sawmill modernization project in Waldo, Arkansas, expected to be completed in Q3. PotlatchDeltic's collaboration with solar developers is yielding substantial contracts for solar land sales and leases, and its carbon credit initiative is projected to generate over 500,000 credits in its first year. Despite facing a challenging US housing market, PotlatchDeltic remains committed to operational and financial performance and shareholder returns, with total liquidity at $479 million and plans for $100 million to $110 million in capital expenditures for the year.
Key Takeaways
- Timberland segment's strong performance with $35 million in adjusted EBITDA.
- Wood Products segment recovers from a previous loss to breakeven.
- Real Estate segment contributes $6 million in adjusted EBITDA, with increased sales expected.
- Sawmill modernization project in Waldo, Arkansas, with a $131 million investment.
- Nearly $200 million in contracts from solar land sales and leases collaboration.
- Over 500,000 carbon credits expected from the carbon credit initiative.
- Total liquidity stands at $479 million, with a capital expenditure plan of $100-110 million.
- Anticipated increase in lumber prices and rural land sales in Q2.
Company Outlook
- Expectation of higher adjusted EBITDA in Q2 from increased rural land sales.
- Plans to sell around 43,000 acres of rural land and 24 residential lots in Q2.
- Anticipation of lumber industry curtailments due to excess supply.
- Lumber prices expected to improve in Q2 with demand returning in the summer.
- Real estate lot availability anticipated to increase in the second half of 2024.
Bearish Highlights
- A 3% decline in the first quarter compared to the previous quarter due to a lower mix of hardwood sawlogs.
- Adjusted EBITDA for the Real Estate segment decreased to $6 million in Q1.
- Harvest volumes expected to be lower in Q2 due to seasonal factors.
- Many mills in the industry not covering their cash variable costs.
Bullish Highlights
- Improved lumber prices and lower processing costs leading to a breakeven for Wood Products.
- Lumber shipments in Q1 were the second-highest Q1 shipment volume on record.
- Strong demand for high-quality timberland.
- Stable timber market pricing expected in the near term.
Misses
- No commercial land sales in the Real Estate segment.
- Decline in adjusted EBITDA for the Real Estate segment in Q1.
Q&A Highlights
- The board to discuss share repurchases at an upcoming meeting.
- Completion of the FIA sale may influence share repurchases.
- Active pursuits in bioenergy with carbon capture sequestration and other initiatives.
- Openness to selling timberland assets at the right price.
- Expectation of flat operational EBITDA in Q2 compared to Q1.
PotlatchDeltic's first quarter of 2024 reflects a company navigating through market challenges while investing in growth and sustainability initiatives. With strategic investments in modernization, solar collaborations, and carbon credit projects, PotlatchDeltic is positioning itself for future profitability and resilience in the face of a dynamic housing market and timber industry.
InvestingPro Insights
As PotlatchDeltic Corporation (PCH) maneuvers through the complexities of the market, several key metrics and tips from InvestingPro provide a deeper understanding of the company's financial health and stock performance. Notably, PCH's market capitalization stands at approximately $3.26 billion, reflecting the company's valuation in the current market context.
InvestingPro Data reveals that PCH holds a high Price/Earnings (P/E) ratio of 70.28, which indicates that the stock may be trading at a premium compared to its earnings. This is further amplified when looking at the adjusted P/E ratio for the last twelve months as of Q1 2024, which skyrockets to 285.74. This could suggest that investors have high expectations for the company's future growth or that the stock may be overvalued.
Despite a challenging revenue environment, with a decline of 15.56% in revenue over the last twelve months as of Q1 2024, PotlatchDeltic has maintained its commitment to shareholder returns. This is evidenced by the company's impressive track record of maintaining dividend payments for 54 consecutive years, boasting a dividend yield of 4.5% as of the beginning of 2024.
InvestingPro Tips highlight that the stock is trading near its 52-week low, which might present a buying opportunity for value investors. Additionally, the company's liquid assets exceed its short-term obligations, suggesting a solid financial position to meet its immediate financial liabilities.
For readers interested in a more comprehensive analysis, there are additional InvestingPro Tips available that could provide further insights into PotlatchDeltic's performance and outlook. By utilizing the coupon code PRONEWS24, readers can access these valuable tips with an additional 10% off a yearly or biyearly Pro and Pro+ subscription at https://www.investing.com/pro/PCH.
Full transcript - Potlatch Corp (PCH) Q1 2024:
Operator: Good morning. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic First Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call 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 PotlatchDeltic first quarter 2024 earnings conference call. Joining me on the call is Eric Cremers, PotlatchDeltic’s President and Chief Executive Officer. This call will contain forward looking statements. Please review the warning statements in our press release, on the presentation slides and in our filings with the SEC regarding the risks associated with these forward statements. Also, please note that a reconciliation of non-GAAP measures can be found in the appendix to the presentation slides and on our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments and then I will review our first quarter results and our outlook.
Eric Cremers: Well, thank you Wayne and good morning, everyone. Looking at our first quarter results we reported total adjusted EBITDA of $30 million after the market close yesterday I'm pleased with the solid operational performance delivered by our team despite market and weather-related challenges during the quarter. Our Timberland segment generated adjusted EBITDA of $35 million in the first quarter. We harvested $1.9 million tons achieving the upper range of our Q1 harvest plan. Our Wood Products segment's adjusted EBITDA was breakeven in the first quarter compared to a loss of $6 million in the fourth quarter. The year kicked off to a challenging start for lumber markets as severe weather across the country restricted construction activity in January. Despite this difficult start to the typical inventory building season, lumber prices modestly trended upward throughout the first quarter driving the improvement in our Wood Products results. As for our elevated 2024 capital plan, we are approaching the final phases of our $131 million Waldo, Arkansas sawmill modernization and expansion project. Vertical construction and equipment installation is well underway with project completion continuing to remain on track and within budget for startup early in the third quarter. Following completion of the project, we anticipate a ramp up in production through Q4 and into next year. Based on other brownfield additions in the industry, we have seen we expect it will take 6 months to 12 months to reach the mill's new capacity of 275 million board feet per year. As a reminder, the project will increase the mill's annual capacity by 85 million board feet. It will improve recovery by 6% and reduce cash processing costs by about 30%. Once the ramp phase is completed, we expect the mill to generate approximately 25 million of incremental EBITDA annually. Our Real Estate segment generated six million of adjusted EBITDA in the first quarter. On the development side of the business we sold 24 residential lots at an average price of about $120,000 per lot in our Chenal Valley master-planned community in the Rock Arkansas. On the rural side of our real estate business, we completed the sale of 800 acres at nearly $3,100. An acre is important to note that the volume of transactions in rural real estate can fluctuate significantly from quarter to quarter. Although, we experienced a subdued level of rural real estate transactions in this period, we expect the sales pace to accelerate as we move through the second quarter. The interest in our rural land remains quite high. The highlight of our anticipated rural real estate activity in the upcoming second quarter includes the previously announced deal to sell 34,000 acres of Southern plantation timberlands which have now have an average age of just under four years for a total of $58 million or $1,700 per acre. Now let me transition to our emerging natural climate solutions business. Our collaboration with solar developers continues to grow as evidenced by the optioning of an additional solar deal in the first quarter. Currently, our option contracts for solar land sales and leases are valued at nearly $200 million on a net present value basis, representing roughly 1% of our total timberland ownership. Additionally, we are in the process of finalizing negotiations on several more lease options. At the end of 2024, we expect to have approximately 30,000 acres of solar land sale and lease options under contract valued at over 300 million on a net present value basis. Our Southern timberland carbon credit initiative continues to move forward. We're anticipating generating in excess of 500,000 carbon credits in the first year with an estimated 100,000 credits each year, for at least a decade thereafter. The extensive scope and high-quality nature of these credits, necessitates a thorough verification process which is lengthy and complex. We have initiated preliminary marketing activities and are targeting placement and sale of credits in the market towards the end of the year. Nonetheless, the completion of this project timeline is heavily dependent on various third-parties involved in the accreditation process. We've also identified potentially valuable prospects in Carbon Capture and Storage as well as bioenergy. These opportunities, along with other Natural Climate Solutions are currently under discussion with various other parties. Although they are not imminent, we are optimistic as to their potential value. Furthermore, we continue to believe that all of these Natural Climate Solutions opportunities will boost the demand for our rural land, likely driving timberland values higher. Moving to capital allocation, we continue to be committed to our disciplined and opportunistic approach. And we constantly evaluate all, our capital allocation opportunities to grow shareholder value overtime. Timberland M&A was our main priority during the quarter. As we previously announced, in Q1, we acquired 16,000 acres of high-quality mature timberlands in Arkansas, through a privately negotiated one-on-one transactions for 31 million or about $900 per acre. Also the acquired timberland has strong real estate potential, including solar opportunities. We employ stringent criteria when evaluating timberland M&A, and for this particular transaction we expect to achieve an approximate 8% real IRR which is well above our cost of capital. We did not purchase any shares in the first quarter. However share repurchases remain an important component of our capital allocation strategy, especially when we are trading well below our estimated NAV. We consistently assess and prioritize our capital allocation options, taking into consideration the economic backdrop. We have $125 million remaining on our 200 million share repurchase authorization. Turning our attention to the US Housing Market, existing home inventories for sale continue to persistently hover at historically low-levels. The scarcity in this segment of the market poses challenges in meeting housing demand. However, new housing has emerged with an affordability advantage, over existing housing. Large homebuilders are enticing buyers with rate buy-down incentives, making new home construction more financially attractive especially given today's mortgage rate environment. Consequently, new single-family residential construction demonstrated resilience, by maintaining over one million starts for the fifth consecutive month, providing some level of stability to the market. In addition homebuilder confidence has been steady and in positive territory, in spite of the recent up-tick in mortgage rates. Nonetheless, new residential construction continues to underperform, as challenges in the economy persist, driven by the uncertainty of inflation and the direction of interest rates. In particular the multi-family segment of new residential housing has been under pressure, in large part due to excessive financing costs, the timing and pace of potential rate cuts by the Federal Reserve add to the level of uncertainty. However, we anticipate that once rate cuts begin to decline -- once rates begin to decline, possibly later this year it will likely spur pent-up housing demand, ultimately benefiting lumber markets. Longer-term we retain a positive outlook on housing fundamentals and underlying shortage of housing stock -- stock which some pundits estimate of four million units and favorable demographic trends will provide tailwinds to the housing market. We continue to expect that U.S. housing starts will return to levels above the long-term average of 1.5 million units per year, once mortgage rates decline in homes become more affordable. Turning to the repair and remodel segment, demand in this market appears to have moderated somewhat with some weakness in the DIY segment. That said, our home center business remains solid. The overall resilience in the repair and remodel market is underpinned by several factors, including strong consumer balance sheets, record home equity levels across the US, steady labor markets and existing homeowners staying in their homes due to the prevailing higher interest rate environment. Looking ahead, long-term trends indicate that the fundamentals of the repair and remodel market will be favorable. This optimism is bolstered by an aging housing stock leading to increased repair activity as well as elevated home equity levels and the ongoing prevalence towards remote work. In closing, we remain committed to enhancing operational and financial performance across all of our business segments. As part of this commitment, we are diligently focused on completing our strategic modernization expansion project at the Waldo sawmill on schedule and within budget. Also, returning capital to our shareholders remains a core tenet of this strategy. With our investment grade balance sheet and ample liquidity, we possess the flexibility and the solid foundation to continue creating long-term shareholder value. I will now turn it over to Wayne to discuss our first quarter results and our outlook.
Wayne Wasechek: Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $30 million in the first quarter compared to $41 million in the fourth quarter. A sequential quarter-over-quarter decline in EBITDA resulted from fewer rural real estate sales, partially offset by improved wood products segment results, stemming from higher average lumber prices. I will now review each of our operating segments and provide more color on our first quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment's adjusted EBITDA increased from $33 million in the fourth quarter to $35 million in the first quarter. EBITDA benefited from improved per unit log and haul costs and seasonally lower forest management costs which more than offset a decline in Idaho sawlog prices. Our sawlog harvest volume in Idaho was 327,000 tons in the first quarter which is consistent with our fourth quarter harvest volume. Harvest volumes in the first quarter were adversely impacted by mild winter weather limiting available holidays. Our Idaho sawlog prices were 5% lower on a per ton basis in the first quarter compared to the fourth quarter, price decline is primarily a result of the effect of seasonally heavier logs. Turning to the south, we harvested 1.6 million tons in the first quarter. This level of activity slightly exceeded our Q1 planned harvest volumes, as we benefited from favorable logging conditions. Additionally, demand for sawlogs and pulpwood in the south generally remained stable throughout the quarter. Our Southern sawlog prices were 3% lower in the first quarter compared to the fourth quarter. The decline was primarily driven by a seasonally lower mix of hardwood sawlogs and higher mix of smaller diameter softwood sawlog. Moving to wood products on Slides 8 and 9. Adjusted EBITDA increased from a loss of $6 million in the fourth quarter to breakeven in the first quarter. Higher average lumber prices and lower per unit cash processing costs drove the improvement. Our average lumber price realizations increased $15 per thousand board feet or approximately 4% in the quarter. This price increase is comparable to the Random Lengths framer framing lumber composite on a percentage basis. Our lumber prices increased each month during the quarter, specifically our average lumber price realizations per thousand board feet were $405 in January $427 in February and $443 in March. Lumber shipments in Q1 totaled 271 million board feet compared to 285 million board feet in Q4 of last year. Sequentially. Lower shipment volume in Q1 was influenced by seasonal factors, but nonetheless, marks the Company's second highest Q1 shipment volume on record. Shifting to real estate on Slides 10 and 11. The segment's adjusted EBITDA was $6 million in the first quarter compared to $22 million in the fourth quarter. EBITDA generated by our rural real estate business decreased due to the sale of fewer acres. EBITDA generated by our Chenal Valley master-planned community declined primarily due to the lack of commercial land sales this quarter. Commercial sales tend to be lumpy but our pipeline of potential future land sale opportunities continues to remain attractive. We closed on the sale of 24 residential lots in the first quarter at a 12% higher average price than in the fourth quarter due to a different mix of what price points. Turning to capital structure, which is summarized on slide 12, our total liquidity was $479 million. This amount includes 180 million of cash on our balance sheet as well as availability on our undrawn revolver. This level of liquidity is after utilizing cash on hand to acquire 16,000 acres of bolt-on timberlands in Arkansas for 31 million, as Eric previously discussed. We have $176 million of debt that is scheduled to mature in October and November this year. Our decision to pay off a portion or refinance all this debt will occur later this year. We still have 200 million of notional forward swaps valued at 36 million on our balance sheet, which we can deploy to issued debt at below market rates. Capital expenditures were 14 million in the first quarter. That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statements. For the full year, we continue to expect CapEx spend of $100 million to $110 million excluding potential Timberland acquisitions. That estimate includes approximately $44 million for the final installments on the Waldo, Arkansas sawmill modernization expansion project. I will now provide some high-level outlook comments. The details are presented on slide 13. Harvest volumes in the north are planned to be seasonally lower in the second quarter compared to the first quarter due to spring breakup. We expect Northern sawlog prices to increase approximately 6% in the second quarter due to resetting the prices index volume to reflect improved Q1 lumber prices and seasonally lighter logs. In the South, we plan to harvest approximately 1.4 million tons in the second quarter. We expect our Southern sawlog prices to decrease modestly, primarily due to seasonally smaller sawlogs in the mix. We plan to ship 275 to 285 million board feet of lumber in the second quarter. Our average lumber price thus far in the second quarter is flat compared to our first quarter average lumber price. This is based on approximately 115 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. Shifting to real estate. We expect to sell approximately 43,000 acres of rural land, which includes the sale of 34,000 Southern acres for 58 million as Eric previously mentioned. Additionally, we expect to sell approximately 24 additional value residential lots in the second quarter. Additional real estate details are provided on the slide. Overall, we expect our total adjusted EBITDA will be higher in the second quarter, primarily attributable to more rural land sales, driven by the Southern land sale to FIA. That concludes our prepared remarks. Dee, I would now like to open the call to Q&A.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Anthony Pettinari from Citi. Please ask your question.
Anthony Pettinari: Good morning.
Eric Cremers: Good morning, Anthony.
Anthony Pettinari: Hey. Obviously, lumber prices are pretty dynamic and it's early in the year. But I'm just wondering as you think about the kind of cash flow that you could generate this year and with just spending on Waldo. Can you just talk a little bit more around kind of capital allocation and supporting the dividend potential opportunities to delever? You know at a time when the stock does seem like it's trading at but maybe near record discount to NAB. Just wondering if you talk a little bit more about that given it seems like there's a few options here.
Eric Cremers: Yes. Thanks for the question, Anthony. So regarding capital allocation, I mean I think first and foremost, we're going to we're going to protect our balance sheet. We're going to we're going to maintain investment grade status. But moving beyond that from a rate, we view our dividend is sacrosanct or nearly sacrosanct. So that's always going to be the highest priority for us. I will say that as our stock drops lower in a tough lumber market environment, share repurchases look more attractive to us than otherwise. But I would also say that, we're constantly thinking about M&A. And in the first quarter, we completed what we call Project Ritch Wood, our $31 million acquisition in Arkansas and I think that kind of pushed share repurchases to the back burner a little bit. We also like investing in our mills quite a bit. We like wood products CapEx. Obviously, it might not feel good doing it right now and worse in such a tough lumber price environment. But lumber prices are historically very volatile. And this too shall pass, the industry cannot continue to run at breakeven or for a lot of mills below breakeven levels. So, continuing to keep our fleet of mills from first or second quartile mills is always going to be our objective, assuming we can find private projects to generate the needed returns. So, I think that's CapEx is always a given strong consideration amongst our capital allocation levers. Regarding debt paydown, I think it all comes down to what our refinance costs are going to be and how do those refinance cost compared to other options that we have. We're just now really getting into those discussions with our banking partners. And so it's a little premature to speak to delevering at this point. And we also have those. As Wayne mentioned, we still have 200 million of swaps sitting on our balance sheet that we can deploy to bring down our borrowing costs. So, it's a little bit premature to talk about delevering at this point, but certainly that'll be that will be in the mix of our capital allocation decisions.
Anthony Pettinari: Got it. Got it. That's very helpful. And then just picking up on one thing. You mentioned I mean, if you're running EBITDA breakeven in lumber, presumably there's a lot of other producers who are burning cash here and yes, I'm not asking you to speak for other competitors here, but I'm just wondering, if you are you surprised that we haven't seen more capacity curtailments in lumber year to date? Are you starting to see them? And just any kind of industry dynamics that would keep some of this capacity on maybe for longer? Is there an import dynamic? I'm just wondering, if you could talk generally about the supply side of supply demand in lumber?
Eric Cremers: Yes, that's a great question, Anthony. So capacity utilization across the industry, I think it's running in the high 70% kind of range which is frankly quite low. It hasn't been this low since I don't know 2012, 2013, something like that relative to demand. There is a lot of excess supply in the industry, particularly in southern yellow pine, where we've seen a lot of new capacity come online. So far this year, we have seen nine mills close up and several were in BC which had some in the Pacific Northwest. And then you had some in the South. But given where we sit today with pricing, where it's at today and I've seen cost curves for the industry. There's no doubt that there are a lot of mills that are hemorrhaging cash right now. And so, I would not be surprised if we see more curtailments in the coming months, especially when you take into consideration the fact that duties are going up on Canadian lumber from 8% to 14% here in just a couple of months. So there's still more pain yet to be felt. So yes to answer your question there, I'm almost certain, there will be more curtailments. Everybody's got to make their own decision, but nobody likes hemorrhaging cash. That's for sure.
Anthony Pettinari: Got it. Got it. That's very helpful. I'll turn it over.
Operator: Our next question comes from the line is Ketan Mamtora from BMO Capital Markets. Please ask your question.
Ketan Mamtora: Thank you and good morning everyone. Can you talk a little bit about sort of your operating rate in lumber in the first quarter and perhaps talk about sort of we know how your order books are trending thus far, given that we are in all pretty close if not already in the busiest time of the year?
Eric Cremers: Yes. So Ketan, so we've been running our mills as hard as we possibly can, producing as much volume as we can. And it's because we've got good efficient mills. Now you might look at it and say why you had breakeven EBITDA, why would you bother running so hard. But you have to take it one step further, because our administration costs to running your mills, if you look at each mill individually, each mill individually can make money, but then you add up the earnings from those individual mills and that offset administration costs. And after you offset those administration costs, we ran at a breakeven level in the first quarter. So the point is that, the mills themselves or individually are doing just fine, barely doing just fine. But in this environment, it still makes sense for us to run as hard as we can. Now I will say, our mills are better than a lot of mills. And I generally know where they sit, on the cost curve as it relates to know industry-wide competition, and I know that there are a lot of mills that are not covering their cash variable costs and those are the mills, I'm sure, the owners are having tough discussions about what to do. So for us, we're continuing to run as hard as we can, but I'm sure it's a different discussion at other mills.
Ketan Mamtora: Got it That's helpful. And how are your order books for this time of the year Eric, in lumber
Eric Cremers: You know I would say our order books are there adequate -- they're not. What will generally happen is when we have a point of view that markets are going to get better, we'll keep our order book short, basically saving lumber that we can sell what we think is going to be at a high at a higher price. When prices are really strong, will tend to extend our order books and sell lumber out as much as I don't know, four weeks out into the future. Today, our order books are relatively short and the reason it's short, is not necessarily because of lack of demand, it's because our sense is that things are bottoming and we want to save lumber to sell at a future higher price. That makes sense
Ketan Mamtora: No, that's helpful. And then just one last one from me. I want to come back to capital allocation again. You've talked about during Q1 you were going through the asset purchase and to that -- to some degree that sort of push the share repurchases to the back burner. So as we think about now, as you move past that, how do you approach that? And I'm just curious, how does this for the net leverage, which is of course driven by depressed lumber prices, which is sitting at enough buybacks right now. How does that sort of influence and sort of your decision as you think about share repurchases in particular?
Eric Cremers: Yes. So Ketan, we started out the year, we were pretty optimistic on where markets were headed. You think back, I think the market was expecting six rate cuts by the Federal Reserve by the end of the year, suddenly that went to three interest rate cuts. Last I heard, we were down to maybe one rate cut perhaps in December, and I don't know after some employment cost index data this morning, we may be at zero cuts for the year. So -- what kind of an economic environment are we in? Is this -- we have a hard landing and have a soft landing. Is there going to be no landing?. It's really murky, what the outlook for the economy is right now. And so it's hard to have a lot of conviction about where markets are headed, with this kind of a kind of a backdrop. So I think that's one of the factors that weighed into the discussion. The Board meets every quarter to talk about share repurchases and certainly that will be a topic of conversation at an upcoming Board meeting. Now, I would I would also tell you that, what we look at, we don't we think about our five-year plan our five-year model for what our dividend ought to be and what leverage ought to be. They're going to be periods of time where markets are blowing and going, like they were during COVID and they're going to be periods of time where the industry gets stressed and we get stressed like we are right now. This too shall pass. I do think markets are going to get better. I do think lumber markets are going to get better. I do think supply is going to come down. I do think demand is going to come back. Capacity utilization in the industry will come back and earnings are going to come back to our Wood Products business. And I would also add that as I think about our interest coverage and leverage and all that, our current forecast has our cash balances running higher than where they are today by the end of the year. So, I feel pretty good about where we're at in the environment. The only question I have is where is the economy headed? It's very, very unclear at this stage.
Ketan Mamtora: And that's fair. And do you still have a 10b5-1 program in place, Eric?
Eric Cremers: Yes, we still have one in place.
Ketan Mamtora: Okay, perfect. I'll turn it over. Thanks for all the clarifications.
Eric Cremers: Thanks. Yes.
Operator: Our next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead.
Mark Weintraub: Thank you. And first question. So in the slides, it indicates you're expecting higher lumber prices 2Q to 1Q. You mentioned that Eric to-date flat and presumably the spot is lower than where it was on average. So that seems to convey some optimism that there's going to be some improvement. And can you kind of just clarify that that'd be pretty soon. I totally understand the conversation about why we're at lows or toward lows over the cycle of what gives the confidence that we're going to get some improvement hopefully sooner rather than later?
Eric Cremers: Yes, we do expect prices to improve and we do think we're feeling some weakness right now particularly multifamily using project finance costs move up also R&R treated markets in particular in the south is under bit of pressure. I think the one thing that gives me hope or optimism Mark is that we are moving into the spring demand build time of the year. Markets haven't completely fallen out of bed. Demand is not phone completely out a bed. Single-family starts are hanging in there at over $1 million. As we said for several months in a row now. I think Home Depot (NYSE:HD) said their comp store sales are going to be down 1% for the year I think lows was maybe minus two to minus 3% for the year. And so things haven't completely fallen out of bed. And as we get into the summertime and people start taking on more and more repair and remodel projects. And I think demand will come back and there's an opportunity for prices to move higher. It's just it's hard for me to see prices not getting better given that. Given that so many mills across North America are below breakeven right now.
Mark Weintraub: I totally understood. But it just there's nothing though that you're seeing right in this moment I'm over reading it. If I if I conclude that you're seeing something that's going to lead to like a near-term improvement necessarily reasons you gave all very valid although the timing I guess unclear on most of them? Or am I missing something?
Eric Cremers: Yes. I mean our forecast as things dip in May and then they come back in June we'll see.
Mark Weintraub: Okay. And then second kind of on the almost a flip side of that is I see sawlog prices expected to be up 6%. I guess the strength that we've seen in the West I would have thought there would have been a bigger increase given though in -- the way it lags through. Maybe if there's just a word on the dynamics or if there's something that's going on there that wouldn't be obviously apparent.
Eric Cremers: Yes. I mean looking at the north on the sawlog prices, I think it did actually trend pretty close to where we see the when you lag during random lengths to where to where we came out. I think it parallels fairly close actually at least. So that really the story was for the quarter just the dynamics around heavier logs. It was really the density issue more than the indexing pricing itself.
Mark Weintraub: Yes. I mean I apologize. I meant the second quarter outlook the 6% improvement when I would have thought you would have been and positioned for a bigger increase given what happened in like inland Hemlock and et cetera over – in the lag. I apologize if I can take this offline and go through.
Wayne Wasechek: Yes. Well -- yes I mean as it looks for the outlook where we head into Q2. I think there is again you get the seasonal lighter log mix. There is an improvement. But I think the other consideration is there is the lag there. But you also have to think about where spring breakup is and there's no calling in that period as well. And so the timing lag is a bit extended. So I think that factors in.
Mark Weintraub: Okay, and then lastly on. So when is the FIA sale expected to be completed?
Wayne Wasechek: Second quarter, yes.
Mark Weintraub: Can you give us kind of more specifically within the quarter? Is that a very soon or might it be towards the end of the quarter?
Wayne Wasechek: I mean mid to later in the quarter's expectation.
Mark Weintraub: Okay, great. And then on presumably, does that then -- is that likely to put share repurchase more to the front owner given, I guess you'd given the explanation in the first quarter that you had the -- the acquisition, and now the share price is lower and you'd have the money is coming in? Or I mean is the consideration of how things work with the refi, need to be kept in as a part of the equation as well. What would -- how would you have us kind of understand your sentiment on priorities as that $58 million comes in?
Eric Cremers: I think that that clearly, Tom, is the moves are likely to share repurchases a little bit more forward. But you've got to remember, there's a couple of other big factors that are in the back of our minds. One is the Waldo start-up. How does how does that go? Because we've seen some mills in the South have disasters startups and others have gone well. We expect ours to go well, but that remains a little bit of an unknown. I'd also like to see, lumber markets improve. And we'll see how we'll see how that goes. And then part of it is going to be what happens with the -- with the refinance equation and what happens to our view on our expected borrowing costs. So there's a couple of moving -- a couple of moving pieces there. But certainly some all things equal, completing the FIA sale will derisk things for us.
Mark Weintraub: Okay. Appreciate that. Thank you.
Operator: Our next question comes from the line of Matthew McKellar from RBC Capital Markets. Please go ahead.
Matthew McKellar: Hi, good morning. Thanks for taking my questions. Firstly,…
Eric Cremers: Good morning.
Matthew McKellar: … I think last quarter you talked about modest signs of slowing and take-up of lots and Chanel Valley your guidance for 24 lots in Q2 and 130 lots for 2024, seems to imply a significant pickup in sales in the second half of the year. Can you just talk about the visibility you might have to a stronger sales in Q3 and Q4?
Wayne Wasechek: Yeah, Matt, it's Wayne. The timing of our outlook on real estate lots is really driven off of inventory availability. So we expect to bring more lots to market in the later half of the year. We tried to really closely manage our CapEx for real estate. We don't trying to get out over our skis and create excess inventory. So we really tried to stay just in front of demand. And yeah, our outlook for the rest of the years when we were bringing a couple sub-developments to the market and those will be completed here in the coming months. And then be available for market later this year. So that's really -- its lot availability and what we're bringing to market and that's what's driving the timing.
Matthew McKellar: Great. Thanks for the detail. There. And then, I wonder if you could just provide a bit more commentary on the state of the timberlands markets for M&A. Maybe just what you're seeing whether there have been any changes in sentiment in the markets? And what have you maybe since your last update?
Eric Cremers: Yeah. So -- so I think the best way to describe it is that the market is relatively quiet right now. I would say in general, $3 to $4 billion of timberland changes hands each year and we'll see where we wind up this year. But I think it's going to wind up being a relatively light year. So far, the trade rags and the industry have highlighted the fact that, we've had four busted deals in the industry so far this year, deals that did not get done. And now I would also say that they were generally speaking, from what I know about them, they were very low quality deals. So it's no surprise that they didn't get done. But I do think demand for high-quality timberland remains quite high. And it's just that right now there isn't a lot of high-quality timberland on the market. So we'll see how the market shakes out. But I think there's no doubt demand is still out there.
Matthew McKellar: Great. Thanks for that. And it's all for me and I'll turn it back. Thanks.
Eric Cremers: Thanks.
Operator: Our next question comes from the line of Nico Piccini from Truist Securities. Please ask your question.
Nico Piccini: Hi guys. This is Nico on for Michael Roxland today. Just mean…
Eric Cremers: Good morning.
Nico Piccini: Good morning. First off, can you talk about any early indications on demand for carbon credits realizing that you're a little ways away from actually placing in the market? And then, has that changed at all since you began pursuing forest carbon grades.
Eric Cremers: No. You know our carbon credit deal it's going to be a voluntary project. And we've had the price discussions with our broker and with the party that we think is going to wind up buying them into. And we think the price stock is still in this $20 to $30 ton range and we still feel pretty good about it. Wayne, do you have anything to add to that?
Wayne Wasechek: Yeah, no. I think Qinnan. It's more of the updates we gave in the past. We're still on track and moving the project forward, trying to target later this year, but we'll see now it's a complex and we're developing high quality credits and that takes time. And we're also dependent on third parties that are involved in the accreditation process. So we'll ultimately that'll drive completion. But yeah definitely, we think there's strong demand there.
Nico Piccini: Understood. Thank you for that. And just realizing that so for solar and carbon credits seem to be the more mature as just initiatives not just for Potlatch, but the industry. Is there any -- can you give any update or maybe an estimate of when we might see those other initiatives come into play like bioenergy with carbon capture sequestration?
Eric Cremers: Yeah. I mean certainly, we're in the early innings on biomass maybe brine lithium. We're looking at carbon storage and sequestration. Yeah, those are -- we're developing all those opportunities. We continue to make progress. I think it's difficult to put a exact timeframe on, when we would see monetizing some of these type of projects, but -- and we're very active in each one of those and pursuing each of those opportunities with outside parties. We're under some NDAs as it relates to CCS, as we continue to look at that opportunity. I think we estimate at CCS, we may have around or up to about 150,000 acres that are suitable for CCS. And we're active in looking at that geological formations that I think will support CCS. So we're active in all those areas aggressively pursuing each of those opportunities.
Nico Piccini: Got it. Thank you, guys. I'll turn it over.
Wayne Wasechek: Thanks.
Operator: Our next question comes from the line of George Staphos [ph] from Bank of America (NYSE:BAC). Please ask your question.
Unidentified Analyst: Hi. Thanks everybody, and very good morning.
Wayne Wasechek: Good morning.
Unidentified Analyst: Just want to come -- how are you doing? So the harvest levels in the first quarter were a touch better I think than your initial guidance. Was that just a weight issue? Are there other things that were driving the slightly better harvest profile. And then maybe staying on that same topic as we look to the south, and again, we all know that these are local markets. We can't look monolithically. Nonetheless, pricing remains relatively flat in the South it's been relatively flat and flat for a long time. When do you see the inflection coming in timber pricing in the south?
Wayne Wasechek: Yeah, George. So your first question on harvest volume yeah, we were I would say slightly ahead in the south as first quarter compared to what we had planned and we had just favorable harvest conditions. And we took advantage of those conditions and drove a slight uptick in our and our harvest volume. But we continue to maintain and our overall outlook for harvest volumes for the year somewhere around probably 1.6 million. Yeah. So no real change there. I think it's just taking advantage of conditions when you can. And as far as pricing is concerned, yeah, I think you're right. We've been in a pretty stable environment. I think that's our near-term outlook both on the demand side and the pricing side even when we've looked across and kind of digging deeper into both of our markets whether that's kind of on the Gulf South side or the Southeast I think we see pricing relatively stable across the board. When that turn? Yeah, I think as markets continued attention, especially in the southeast side, where we see a premium because markets are more attention, I think when the lumber demand picks up, those tension markets you'll see a bigger increase in pricing in that region probably compared to where we were a little bit less tension in the Gulf South region. So that will probably lag but there is additional capacity coming online. So timing is difficult to ultimately say, but we do think those markets will tension over time as well. But yeah, I think as soon as we see demand picking up you can see those especially those tension markets really turning around much quicker.
Unidentified Analyst: I mean the log and lumber markets have decoupled in the south for a long time. Is your view that we're getting to a point maybe in within the next year that they will recover. And so, as we start to see lumber prices moving are we actually will see a higher propensity to pay for logs? Or is that still kind of too hard to call at this juncture with all the branches that was the answer.
Wayne Wasechek: Yes, I think that's a bit of color. I mean look, we haven't the prices have been fairly stable. When we saw the historic run-up in lumber prices, we didn't see a huge increase in log prices in the South I mean, but we continue to add capacity in the South. And I think as those tension, you'll see prices come up over time. But it's difficult to pinpoint exactly when that will be. I mean there's a lot of variables involved.
Eric Cremers: And I think George you got to step back and think about like what happened after the great financial crisis. All those mills closed in the south when you think about what happened to growth to drain. The forest was growing much faster than the harvest each year. And so a lot of standing inventory went on the stone each and every year for 15 years. And the latest industry data that I saw, it had drain actually equaling or maybe even slightly exceeding growth. So now the standing timber inventory in the south has now reached an equilibrium. And if you look out over the next five years in fact drain is going to be higher than growth. So you'll start to see those standing inventories come back down again. Now to Wayne's point every market is going to be a little bit different, right? The already tension markets are going to show more tension assuming lumber demand continues to improve and you'll see those tension market show better price appreciation on the non-pension markets. But the reality is even the non-pension markets are expected to get to get better over the over the coming years as drain exceeds growth.
Unidentified Analyst: Would you be maybe more willing now than in past years to consider selling in areas where you're not going to see that tension in next several years given that inorganic 15 plus years since the crisis?
Eric Cremers: Well as portfolio managers, we're always open to selling. I mean just take a look at our FIA transaction where we sold four year old trees for 1,700 bucks an acre. That's good core timberland for sure, but it's just we've got young trees that have no cash flows or virtually no cash flows for 20 some years. So, we're always opening -- open to the idea of selling. But I think that the thing you got to keep in mind is you don't want to be just in the tension markets, look at the pullback that we've just had over the past year to what's -- which markets have taken it the hardest in the South. It's been those most attention to markets, because those are the areas where capacity comes out first. So, I think you want to play in both pension and non-pension markets frankly. The sawmill expansions the additions that we're seeing, they tend to be in more of the weaker markets and the fact that capacity is going in those weaker markets is what in turn is going to drive log prices higher. But at the end of the day, like I said at the start, we're portfolio managers at the right price. We'll sell just about anything.
Unidentified Analyst: No. Understood. And I appreciate the thoughts on that. I guess my final question and I'll turn it over, recognizing the land sales we'll make for a nicely improved 2Q versus 1Q. If we hold that aside and we look just at Timberland and wood products, Wood Products lumber volumes might be up a touch from what we saw in the first quarter. But pricing right now is relatively stable and actually may you're expecting to be lower in timberlands. Harvest lines are now recognizing if you're going to be opportunistic. It will be a touch lower than the first quarter, where you've got Northern prices up, Southern prices down. So it seems like, operationally, EBITDA kind of flat 2Q versus 1Q. Would you agree with that very, very quick analysis?
Wayne Wasechek: I think that was pretty quick analysis. I mean my expectation is yes, lumber markets are weak. We actually had a decent April, not a great April, but it was certainly better than say the first quarter. So I think wood products could be to be a little bit better. And I think timber lands ,I don't know. It may be flattish, but yes real estate should be up significantly.
Unidentified Analyst: Okay. Thank you very much guys for the thoughts. Good luck in the quarter.
Wayne Wasechek: Thanks.
Operator: At this time, I'm showing there are no more questions. I'll now turn the call back over to Wayne Wasechek.
Wayne Wasechek: Thank you for your questions. and your interest in PotlatchDeltic. That concludes our call.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.