Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- PotlatchDeltic Corp (PCH, Financial) reported a significant increase in total adjusted EBITDA to $103 million in Q2 2024, up by $73 million from Q1.
- The Timberlands division exceeded its Q2 harvest plan, generating $34 million in adjusted EBITDA due to favorable weather conditions and higher sawlog prices in Idaho.
- The Real Estate segment achieved strong financial results with $90 million in adjusted EBITDA, driven by the sale of 43,000 acres at an average of $2,000 per acre.
- The company is progressing well with its $131 million Waldo, Arkansas sawmill modernization and expansion project, which is on track for completion in Q3 2024.
- PotlatchDeltic Corp (PCH) has a robust inventory of solar option contracts, representing 27,000 acres with an estimated value of approximately $300 million, indicating strong future potential in renewable energy.
Negative Points
- The Wood Products segment reported an adjusted EBITDA loss of $7 million in Q2 2024, primarily due to challenging lumber market conditions and historically low prices for southern yellow pine.
- Despite strong real estate performance, the company fell short of its residential lot sales outlook in Q2 2024.
- The US housing market continues to face challenges due to elevated mortgage rates and affordability issues, impacting new single-family residential construction.
- PotlatchDeltic Corp (PCH) anticipates a decline in total adjusted EBITDA in Q3 2024 compared to Q2, driven by reduced rural real estate activity.
- The company is facing higher per unit cash processing costs, particularly associated with the ongoing modernization project at the Waldo, Arkansas sawmill.
Q & A Highlights
Q: On your full-year lumber shipment guidance, would you consider curtailments given the prolonged profitability challenges?
A: Eric Cremers, President and CEO: We are taking some downtime at our Waldo mill, which will lower shipments by 25-30 million board feet in Q3. However, we are covering our cash variable costs at all mills, so reducing volume would hurt our P&L more. Each competitor's situation is different, but for us, running at full capacity is the best approach.
Q: What is driving the recent uptick in lumber prices, and do you see this trend continuing?
A: Eric Cremers, President and CEO: July is likely the low point for lumber prices this year. We've seen 2.5-3 billion board feet of capacity come out of the market, and demand appears to be bottoming. With interest rates potentially coming down, housing starts could increase, and the R&R market could rebound next year, leading to better lumber prices.
Q: How much of the weakness in housing starts is due to smaller builders lacking the resources of larger builders?
A: Eric Cremers, President and CEO: Smaller builders, who don't have the big balance sheets of larger builders, are significantly impacted. Larger builders can offer incentives like mortgage rate buy-downs, which smaller builders cannot afford, leading to market share shifts.
Q: Can you provide more details on the initiatives to improve profitability in your mills?
A: Eric Cremers, President and CEO: We are focusing on necessary purchases to keep mills running and optimizing our product mix to capture premium prices. We are also pushing down processing and fiber costs, expecting a 4% reduction in total cash costs year-over-year.
Q: How do you see the manufacturing cost portion of the waterfall changing in Q3 versus Q2?
A: Wayne Wasechek, CFO: We believe we absorbed most of the higher costs related to the Waldo modernization project in Q2. These costs should reverse in the back half of the year, leading to improved fixed cost absorption and better manufacturing costs in Q3 and Q4.
Q: Can you elaborate on the potential size and timeline for the lithium opportunity?
A: Eric Cremers, President and CEO: It's early to provide specific guidance, but we see lithium as an attractive near-term opportunity, potentially coming to fruition in the next couple of years.
Q: What are you seeing in terms of European lumber imports, and how does this affect your outlook?
A: Eric Cremers, President and CEO: U.S. offshore imports are down 14% year-to-date, mostly from Europe. Weak European markets and the end of the spruce bark beetle benefit are reducing imports. We expect this trend to continue as European markets recover and less lumber is exported to the U.S.
Q: How are you thinking about Northern sawlog pricing for Q3 versus Q2?
A: Wayne Wasechek, CFO: We expect Northern sawlog prices to be down around 5% in Q3 due to lower indexed sawlog prices, offset by strong cedar pricing and tight supply in Idaho.
Q: When can we expect to see more meaningful solar option contracts converting to leases?
A: Eric Cremers, President and CEO: We anticipate potential for one or two projects to be executed next year. The timing is challenging due to regulatory backlogs, but we are optimistic about seeing more activity in the near future.
Q: Can you provide more confidence on the realization of solar project revenues?
A: Eric Cremers, President and CEO: Developers are incentivized to accelerate their projects. As we get closer to the end of option terms, we will have more visibility. We are optimistic about some projects closing next year, but it's still early to provide detailed guidance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
