PCH - NASDAQ

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 PotlatchDeltic Fourth Quarter 2023 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.

Good morning and welcome to PotlatchDeltic's fourth quarter 2023 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-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com. I'll turn the call over to Eric for some comments, and then I will review our fourth quarter results and our 2024 outlook.

Well, thank you, Wayne. Good morning, everyone. We reported total adjusted EBITDA of $200 million for 2023 after the market closed yesterday. That is our fifth highest level of annual EBITDA on record since electing REIT status in 2006. We accomplished this despite a relatively weak lumber pricing environment, which reflects our strength as a company created through our past accretive acquisitions and ability to identify and monetize rural acres that have a significant premium to timberland values. Our Timberlands segment generated adjusted EBITDA of $151 million in 2023. We harvested 7.7 million tons, which is a record annual harvest volume. This volume also reflects our first full-year of operations with our CatchMark Timberlands that we acquired in September 2022. Speaking of CatchMark, one of our operational highlights was the completion of the process of insourcing the management of CatchMark's timberlands earlier in 2023, enabling us to realize the final piece in our $21 million of annual CAD synergies from the merger. Our Wood Products segment contributed $20 million of adjusted EBITDA in 2023. We shipped just over 1.1 billion board feet of lumber, which established a new record for the company in annual shipment volume. Our Wood Products team had another strong year in terms of safety performance and successfully completed its capital project plan for the year. Speaking of our capital plan, we continue to remain on track with our $131 million project to modernize and expand our Waldo, Arkansas sawmill, site preparation and civil work is well underway with the first phase of equipment installation scheduled to commence later in Q1. The project will increase the mill's annual capacity by 85 million board feet and significantly reduced cash processing costs. The existing mill will continue to operate during the project with approximately three weeks of downtime expected in the mid part of the year to tie in new equipment, followed by the anticipated completion of the project well before the end of 2024. Our Real Estate segment had a strong year, contributing adjusted EBITDA of $68 million. On the rural side of the business, we sold 18,000 acres at nearly $3,100 an acre. Our real estate team had a strong finish to 2023 by taking advantage of our in-depth stratification of CatchMark's Timberlands earlier in the year. For 2023, nearly half of our rural business performance was attributable to the acquired CatchMark portfolio, which is located in excellent real estate markets. Our real estate development business sold 128 residential lots in the Chenal Valley master planned community at an average price of $104,000 per lot in 2023. We also closed on multiple commercial sales, resulting in over $7 million in revenue at an average price of nearly $575,000 per acre. We had good absorption on our residential lot offerings for much of the year, but we have started to see modest signs of slowing in the take-up of our lot offerings by regional builders in Chenal Valley in the fourth quarter. Our team also made good progress on natural climate solutions opportunities this year. We are working through the final stages of the certification process on our nearly 50,000 acre Southern timberland carbon credit project. We expect to begin pre-marketing efforts in the coming months with placement and sale of the credits in the marketplace in the second half of the year. Regarding solar, developers have shown a strong interest in solar opportunities, and we have continued to add to our inventory of solar options under contract. We signed up an additional solar option in Q4 and maintain a robust pipeline of potential additional solar deals. As a reminder, we have nearly $200 million on a net present value basis, worth of solar land sale and lease options under contract, representing less than 1% of our timberland acreage ownership. We are focused on assessing additional natural climate solutions opportunities and are optimistic about the growth potential in this area. Although it may take some time for these efforts to bear fruit, we believe that they will lead to an increase in demand for our rural land and drive up timberland values. Moving to capital allocation. We returned $169 million of cash to shareholders in 2023. That amount included $25 million of share repurchases at an average price of $45 per share, which is well below our estimated net asset value. We have an additional $125 million remaining on our existing share repurchase authorization. We follow a disciplined capital allocation strategy and continually evaluate all of our capital allocation opportunities to grow shareholder value over time. Over the course of the year, we have remained very patient and very disciplined surrounding M&A activity, only pursuing opportunities that meet our stringent criteria and that we believe would increase shareholder value. To that end, we just acquired 16,000 acres in Arkansas for $31 million or about $1,900 per acre through a privately negotiated one-on-one transaction. These high-quality timberlands are well stocked with an average age of approximately 25 years, acquired timberland portfolio also has strong rural real estate potential, including solar land sale or lease opportunities. Our disciplined, opportunistic and nimble approach with capital allocation also applies to identifying opportunities to capitalize on higher timberland valuations. As a result, we have entered into an agreement with Forest Investment Associates to sell approximately 34,000 acres of plantation timberlands located in Arkansas and Alabama with an average age of less than four years for approximately $58 million or $1,700 an acre. This transaction is at a significant premium to our underlying timberland value and is nondilutive given the young nature of these trees. This transaction is subject to customary closing conditions and is expected to close in the second quarter of 2024. At the end of the year, we had $230 million of cash on the balance sheet and total liquidity of $529 million. In December, we refinanced our $40 million debt maturity at well below market rates utilizing our existing forward starting interest rate swaps and maintained our weighted average cost of debt at 2.3%, the lowest of the timber REITs. Our strong balance sheet and significant liquidity provides us with flexibility and a solid platform to continue growing shareholder value. Shifting to the housing market, demand for new single-family residential construction continues to remain resilient, as single-family starts eclipsed over 1 million starts for the second consecutive month, while the multifamily sector has contracted, driven by new supply coming into the market and the ongoing elevated interest rate environment. A higher proportion of new single-family residential construction is an important lumber demand driver as single-family starts typically consume 3x the amount of wood versus multi-family. Single-family starts have been fueled by momentum in consumer confidence, a solid labor market and recently declining interest rates. These factors, coupled with a historically low level of existing home inventory for sale in the U.S. as prospective homebuyers looking to purchase a new home versus existing home. That said, housing affordability continues to remain a headwind for the housing market, while 30-year fixed mortgage rates have fallen over 100 basis points after hitting a two-decade high in October, breathing some more life back into the housing market, further declines in interest rates are needed to spur incremental demand. Thankfully, many economists are predicting that the FED will trigger multiple rate cuts in 2024, which would help alleviate affordability challenges. Our longer-term outlook on housing fundamentals remains positive. We believe an underlying shortage of housing stock due largely to the combination of underbuilding after the great financial crisis and favorable demographics in the form of millennials will provide positive tailwinds to the housing market. We continue to expect that U.S. housing starts will return to levels above the long-term average of one million units per year once homes become more affordable. Turning to the Repair and Remodel segment. Demand in this market has remained steady, backed by strong consumer balance sheets and existing homeowners staying in their homes and fixing up versus moving up to a new home under the backdrop of a higher interest rate environment. Anecdotally, we also continue to experience strong home center takeaway with our activity up 12% year-over-year. Looking at the longer-term horizon, repair and remodel market fundamentals continue to remain favorable. Our optimism is supported by an aging housing stock, the remote work evolution and high home equity levels. In summary, the company performed well in a challenging year and made substantial progress on its strategic goals while continuing to remain disciplined on deploying capital. We delivered solid financial results in spite of an economic environment with elevated inflation and high interest rates, which impacted lumber demand and prices. PotlatchDeltic continues to be very well positioned with an investment-grade balance sheet and a portfolio of high-quality assets. We will continue to be disciplined stewards of our capital and remain committed to prioritizing investments in high-return capital projects, acquisition opportunities and returning capital to our shareholders through our quarterly dividend and share repurchase program. I will turn it over to Wayne to discuss our fourth quarter results and our 2024 outlook.

Thank you, Eric. Starting with Page 4 of the slides. Adjusted EBITDA was $41 million in the fourth quarter compared to $56 million in the third quarter. The quarter-over-quarter decline in EBITDA was primarily due to lower lumber prices, lower index sawlog prices and seasonally lower harvest volumes in Idaho. These declines were offset in part by strong rural real estate sales. I will now review each of our operating segments and provide more color on our fourth quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment's adjusted EBITDA decreased from $42 million in the third quarter to $33 million in the fourth quarter. Operationally, our Timberlands team harvested 2 million tons establishing a record for our fourth quarter harvest volume. Sawlog harvest in Idaho was 328 million tons in the fourth quarter. This is down seasonally from 377,000 tons that we harvested in the third quarter. Our Idaho sawlog prices were 15% lower on a per ton basis in the fourth quarter compared to the third quarter. The decline in sawlog prices primarily reflects lower prices for index sawlogs. In the South, we harvested 1.7 million tons in the fourth quarter. Favorable weather conditions and good execution by a Southern Timberlands team were key to achieving our harvest level. Our Southern sawlog prices were 2% higher in the fourth quarter compared to the third quarter. The increase was primarily driven by a higher mix of larger diameter sawlogs and slightly higher hardwood sawlog pricing. The Wood Products segment, which is covered on Slides 8 and 9 had negative adjusted EBITDA of $6 million. Compared to the third quarter, lumber prices were lower and the charge to write-down lumber inventories to net realizable value was $4 million higher. Our average lumber price realization decreased $66 per thousand board feet or 14% in the quarter. This price decrease is comparable to the random lengths framing lumber composite on a percentage basis. Our average lumber price realizations per thousand board feet were $427 in October, $401 in November and $417 in December. Lumber shipments increased 9 million board feet from 276 million board feet in the third quarter to 285 million board feet in the fourth quarter. Shifting to real estate on Slides 10 and 11. The segment's adjusted EBITDA was $22 million in the fourth quarter, compared to $14 million in the third quarter. EBITDA generated by rural sales increased sequentially due to the sale of more acres at a lower average price in the fourth quarter. Our rural real estate performance this quarter is a testament to the robust real estate markets where the CatchMark properties are located and that were stratified earlier in 2023. EBITDA generated by our Chenal Valley master plan community declined slightly in the fourth quarter. We closed the sale of 30 residential lots in the fourth quarter at a higher average price compared to 32 lots in the third quarter. Also, in the fourth quarter, we generated nearly $1 million in commercial revenue, which was comparable to the third quarter. Turning to capital structure, which is summarized on Slide 12. Our total liquidity was $529 million. This amount includes $230 million of cash on our balance sheet as well as availability on our undrawn revolver. We refinanced our $40 million of debt that matured in December at an interest rate of approximately 2.5% after patronage credits from lenders. To achieve the below market rate, we utilized a portion of our outstanding forward starting interest rate swaps, which lowers our annual interest cost by approximately $500,000. We still have $200 million notional of forward swaps to deploy which will help us keep our future borrowing costs low. As we previously highlighted in the third quarter call, we repurchased $12 million of our shares in the fourth quarter at an average price of $45 per share. For the full-year, we repurchased 556,000 shares at an average price of $45 per share or $25 million in the aggregate. This leaves us with $125 million remaining on our $200 million share repurchase authorization. Capital expenditures were $79 million in the fourth quarter, which includes $59 million for our Waldo, Arkansas modernization project. These total expenditures also include real estate development expenditures, which are included in cash from operations in our cash flow statement. I will now provide some high-level outlook comments. The details are presented on Slide 13. We plan to harvest approximately 7.6 million tons in our Timberlands segment in 2024 with approximately 80% of the volume in the South. Harvest volumes in the North are planned to be comparable in the first quarter relative to the fourth quarter of 2023. We expect Northern sawlog prices to decline about 5% in the first quarter compared to the fourth quarter. In the South, we plan to harvest approximately 1.5 million tons in the first quarter. We expect our Southern sawlog prices to decrease modestly, primarily due to seasonally fewer hardwood sawlogs in the mix. We plan to ship 1.1 billion board feet of lumber in 2024. This level of expected shipments includes the impact of downtime at our Waldo, Arkansas sawmill for the modernization and expansion project. In the first quarter, we plan to ship 260 million to 270 million board feet of lumber, which incorporates the effect of seasonally lower cut rates in our northern sawmills. Our average lumber price thus far in the first quarter is just slightly higher than our fourth quarter average lumber price. This is based on approximately 100 million board feet of lumber. As a reminder, a $10 per 1,000 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 51,000 acres of rural land, which includes approximately 34,000 Southern acres to Forest Investment Associates, as Eric previously discussed. Also, we expect to sell 130 Chenal Valley residential lots in 2024. Additional real estate details are provided on the slide. We estimate that interest expense will be approximately $1 million in the first quarter and approximately $9 million per quarter for the second, third and fourth quarters of 2024. Interest expense is lower in the first quarter than the other quarters because that is when we receive our annual patronage payment from the Farm Credit banks. Also, these amounts are net of estimated interest income, which we expect to be lower in 2024 based on our estimated average cash balance over the course of the year. Turning to capital expenditures. We are planning to spend $100 million to $110 million in 2024, excluding Timberland acquisitions. That estimate includes approximately $44 million for the final installments on the Waldo, Arkansas sawmill modernization and expansion project. Also, as Eric mentioned, we already successfully completed an attractive bolt-on Timberland acquisition in Arkansas for $31 million this year. We use cash on hand to close this transaction. Overall, we expect our total adjusted EBITDA will be moderately lower in the first quarter relative to the fourth quarter. This is based on the overall expectation of slightly higher average lumber sawlog prices moderated by fewer rural real estate sales. We continue to remain bullish on industry fundamentals that drive demand in our business. Our integrated operating model and leverage to lumber prices are aligned with those fundamentals, and we are well positioned to continue growing shareholder value over the long-term. That concludes our prepared remarks. Rob, I would now like to open the call to Q&A.

[Operator Instructions]. Your first question comes from the line of George Staphos from Bank of America. Your line is open.

Hi, everyone. Good morning. Thanks for the details. I guess first question I had is as we look towards resources and the somewhat, I guess reduction in harvest levels, 1Q versus 4Q. Is that purely seasonality in tough comps? Or is there anything else that we should be mindful of relative to all the other detail that you've shared with us and then I just want to make sure I understood -- from the slide deck, I think you have sawlog pricing down both in the North and the South in 1Q from 4Q. If that is a consideration with harvest lower, should we expect that Timberlands also is looking at lower EBITDA sequentially from 4Q?

Yes, this is Wayne. Yes, we are -- it is seasonal on the volume side, both in the North and the South. Keep in mind in the north, we have spring breakup, which definitely drops the harvest volume in the first quarter, and that also impact the second quarter, but Q4 to Q1, that's the main driver. And then also the same thing in the South. There's just a seasonal differences there as well. I think we're looking to harvest volumes that are consistent with seasonal norms on the volume side. On the pricing side, yes, when you look to the north, you've got a couple of factors there. One, index sawlog pricing is down. You got to keep in mind that you have a one-month lag there. So we're picking up pricing from December through February. So that's impacting the North plus combined with we have seasonally heavier logs. So that's also bringing down the average price for the north. In the South, we have -- it's mostly a mix issue, less hardwood sawlogs in the mix. It's really driving that decrease. Comparably, I would say prices are generally flat.

Okay, I appreciate that, Wayne. So it wouldn't be unreasonable to expect. We know real estate will be lower. We know Timberlands will be lower. Wood products at current levels of pricing recognizing the no guarantees. And obviously, hopefully, you won't have an inventory charge this quarter. Are you breakeven or better from what you can see, given where prices are right now given where production will be? Or might that still be at a bit of a loss in the first quarter from what you can see right now?

No, George, this is Eric. Our expectation is that our mills. In fact, every one of them is profitable out in Q1.

Okay, thanks for that, Eric. And then last question I had for you. Certainly, seasonality, lower pricing, there were a lot of things that were headwinds, a lot of the wood products companies were facing in the fourth quarter. Your results weren't that different than what we've seen elsewhere so far. Nonetheless, it was a bit of a bracket number in the quarter. Are there any other things aside from the current project in Waldo that you're considering in terms of improving your cost performance and your normalized earnings outlook no matter the environment in terms of demand and pricing? And if so, what sorts of things might we be seeing from Potlatch on that front in the next year or two? Thank you.

Yes. I think -- so George, this is Eric. I'll speak first and then Wayne can chime in after me. But I think if you look across the business units, so you start with timberlands, we are expecting lower log and haul costs for the year. We have seen rates moderate, particularly in our Northern region, up in Idaho. So that will help provide a little bit of tailwind. In Wood products, we think that the outlook for pricing is favorable. First, given the supply and demand dynamic where you're seeing mill closures, we've seen almost, gosh, 2.3 billion board feet, leave the industry in the past 13, 14 months. A lot of closures up in BC, the Pacific Northwest and also down in the south. And we think the demand backdrop is improving as well. We talked about the shift towards single-family -- we also see, I wouldn't say growth in repair and remodel, but I see stability in repair remodel, and I see less European imports this year. And if we can see interest rates come down in the back half of the year, I think again, that supply, demand backdrop is going to be favorable. And on the real estate side, yes, Q1 is going to be a little bit weak. Real estate sales are always lumpy. Q2 is going to be huge with our FIA sale and just to comment on that real fast. We're selling those acres that we think somewhere between the 3.5% and 4% IRR to the buyer and we're redeploying that capital into some of it anyway into the Ridgewood acquisition that's got an 8% IRR. So that's going to favorably impact the P&L as well. So some minor puts and takes along the way, but I think the big picture in my mind is that the backdrop for our business, which is really lumber demand is favorable.

So on that front, just to finish up, you don't see a need for sort of any structural or more project-specific cost outs within wood was really where I was going with that question given what you can see given capacity coming out, the backdrop and so on, that's really where I was going with that question. Thank you.

Yes. Yes. So we've really got -- it's not just our Waldo project. We've also got a new log crane going in at our Warren sawmill. We're putting in a new sawmill trim sort line at our Warren mill. Those projects are 15% to 20% kind of IRR projects, but they're going to take a year or two to get completed. So we're constantly looking for projects. Frankly, capital projects in our mills offers us some of the highest returns for our capital allocation. So we're constantly looking at things, and we do have a few projects underway, but they're going to take some time.

Thank you very much.

Your next question comes from the line of Anthony Pettinari from Citigroup. Your line is open.

Good morning.

Good morning.

Hey, when you look at the log prices in 4Q and your expectations for 1Q, I'm just wondering if you're seeing in the Southern region, any differential trends between Arkansas and then sort of the Georgia, South Carolina, Alabama footprint from CatchMark. And then I guess maybe a related question. Can you just remind us in terms of hardwood lumber or -- sorry, hardwood logs, like what percentage of the harvest that would be? Or it seems like that impacted prices or mix. Can you just kind of maybe dimensionalize that a little bit?

Yes. I think from a regional standpoint on the timberland side, we have -- the markets are tend to be more tensioned in the Georgia, South Carolina markets. And with that, we saw earlier in the year, prices dropped a little more there earlier in the year with mills taking economic downtime, delivery quotas, but we've seen that stabilize in all of our markets throughout the year and continuing to improve. So purely on a volume standpoint, we're able to move volume. I think on a pricing standpoint, that's been relatively flat as we've progressed through the year and as we head into Q1. Now with that, as demand improves, we would see, I think, pricing improve in those more tensioned markets in the Southeast and where we've historically seen them. They're not as attention for us in in a lot of the wood baskets in Arkansas and Alabama, Mississippi, so pricing may take a little more time to move there. But when we do see demand pick up, I think that's where we'll see bigger price increases in that region.

Got it.

And then yes, on the mix side. Sorry, go ahead or wood mix? Yes, the hardwood mix. Yes. For Yes. On the hardwood mix that's -- I mean it's probably in the neighborhood. It's only gone up a couple of percentage points, maybe 5% to 10% here in the quarter.

Got it. And then just shifting gears. You talked about, I think, monetization of the credit project, I think, in the second half of the year. Just wondering if you could talk about sort of the activities that need to be completed in order to make that happen? And are you working with third parties or marketers, registries, just sort of anything you can kind of share on the kind of time line and the steps?

Yes. So we're deep into the process now, Anthony. The first step really is to bring in an order that will do the math and prove out to the investing public, if you will, that the credits are for real. And that's a rather lengthy process. And as you can imagine, in this kind of net 0 environment that we're in the demand for these auditors is sky high. And it's not just for timberland projects. It runs a gamut of how you get carbon out of the atmosphere. So these folks, these consulting firms are in very high demand. But if you want to have quality credits, you got to have them monitored by an independent third-party that's got a good reputation. And so that's the process that we're going through. We expect to have that process done by, I would say, perhaps early in the third quarter. And shortly after we get them verified, we're going to put them out to bid. And we've lined up Vera, which is one of the two large firms that sell carbon credits around the world, great reputation and they're well entrenched in the European market, which is where we think our credits are going to have the most value. And so we expect to monetize those credits shortly after they get the audit comes through. And so that's probably going to be in the third quarter as well.

Okay. That's super helpful. I'll turn it over.

Okay.

Your next question comes from the line of Ketan Mamtora from BMO Capital Markets. Your line is open.

Thank you. First question, can you talk a little bit about some of the capacity curtailments that we've seen in the U.S. South on the [indiscernible] side, are you surprised that we are seeing capacity curtailments in the U.S. South and related to that, any impact on your wood basket from the recent Arkansas shutdown announcement?

No. That's -- I wouldn't say I'm modestly surprised about the curtailments in the South. I mean everybody talks about cheap fibers in the South. That's a great place to make lumber much better than up in BC and whatnot, Pacific Northwest. But when you get into some of these specific wood baskets, like I think West Fraser, for example, they closed a mill down in Florida. That was a really tight wood basket, and that's a relatively small mill. And same thing when you look at I think Boise Cascade, closed the mill in Alabama, West Fraser close, another one in Huttig, Arkansas. Those are smaller mills with tougher cost structures I'm guessing that capital investment may not have happened over the years because the owners recognize that long term, the mills couldn't be competitive. So yes, I'm not surprised, I guess, at the end of the day that some mills have closed in the South. To answer the second part of your question, did the West Fraser Mill and Huttig impact us? No, not at all. One of our competitors has got a large block of timberland near that mill, and they were the primary supplier to Huttig. So no impact to us.

Understood. Now that's helpful. And then can you talk a little bit about sort of the M&A pipeline on the timberland side, obviously, you did kind of a small bolt-on. But in general, kind of how does the pipeline look right now?

Yes. I'd tell you the M&A market is really tight. I'd say typically $3 billion to $4 billion of timberland trades hands each year, and I think something like last year, maybe $1.5 billion traded hands. And I think sellers, they're basically holding off waiting for maybe housing and lumber prices to improve, perhaps interest rates to come down or, frankly, maybe more importantly, for carbon deals become more mainstream. And carbon is having a bigger and bigger deal. I think that's 1 of the takeaways for this call. When you look at the transaction that we had with FIA, it was with the -- ultimately, it was a European investor, not FIA, it's going to own those trees. We sold trees that were, I think, 3.8 years old for $1,700 an acre. What was it 5 years ago, you'd buy average age timberland in the South for $1,700 an acre. Carbon is having a bigger and bigger deal. And especially if you look at the large sums of capital that have been raised to pursue timberland for a carbon outcome. I could reference a bunch. Oak Hill raised $1.8 billion. They bought 1.7 million acres from forest land. Manulife said it was raising $500 million for timber carbon offsets. JPMorgan acquired Campbell Global, a TMO and then subsequently bought 250,000 acres for $500 million in the South, Goldman Sachs and Apple just raised $200 million for a carbon offset fund. So I think people are holding off bringing their timberland to market waiting for this capital to get raised and then waiting for it to desperately look for a home because that ultimately is going to push up timberland values.

Got it. That's very helpful. I'll done it over. Good luck.

Thanks.

Your next question comes from the line of Michael Roxland from Truist Securities. Your line is open.

Thank you, Eric and Wayne for taking my questions. My first question, just can you help me just understand what's happening with respect to margins in wood products? Just following up on what George was asking earlier. Because when I look back historically, when there were periods of time when you had lower prices, lower volumes, you still manage to generate mid-single digit, high-single digit EBITDA margins. So I'm just wondering what -- is there something going on from a cost vantage point that's negatively impacting your performance in wood products?

Well, yes, certainly, Michael. There is -- in the inflationary environment we've seen over the past year or two costs of running sawmills have -- its moved up meaningfully. And what you saw this past year and particularly in the fourth quarter is with the higher interest rates, demand has dropped. And it dropped to the point where capacity utilization in the industry is at the lowest it's been, I think, since going back to 2013 is what I read the other day. But whenever you get into a situation in a commodity industry where capacity utilization is the rock bottom levels, you're going to see prices collapse as everybody tries to keep their mills running full and subsequently prices come down. I mean I am happy that our lumber margins in Q4, while they're negative, I'm certainly not happy about that. If I strip out plywood, we were something like minus 1% in lumber and I think I've only seen one of our peers report so far, and we did, I would say, meaningfully better than our peers. So it's a tough environment right now, but I think the backdrop is for things to get much better.

Got it. So that's actually -- that's an interest comment you made when you strip out plywood, actually, lumber is only minus -- the margin was minus 1% for the quarter?

Correct.

Got it. Okay. Thank you for that. On Chenal, you mentioned also just seeing a slower take-up by the large builders in 4Q. What are you seeing now from them? Has that accelerated? I guess those rates have come down, some of the builders that have been reporting have been showing pretty good demand in 4Q and the relics have been pretty strong for '24. So I'm wondering if you've seen that reverse thus far in the quarter.

Yes, Michael, this is Wayne. Yes, we did have good absorption through most of the year. Q4, that's when we started to see modest signs of slowing there. I think as we have an outlook into 2024 right now, we're looking at about the same level of sales as we had in '23. So we're heading into the year with kind of the same view as coming out of Q4. Keep in mind, Chenal, this is one smaller market in Little Rock, Arkansas, it's not a robust real estate market for single-family residentials compared to other kind of broader metropolitan areas in the south. And additionally, I think also keep in mind that Chenal market are regional builders. They don't have the same balance sheet or tools available to offer incentives to homebuilders compared to large national builders. So these regional builders instead of maybe building 8x homes, they might have built 6x, 5x and then like large national homebuilders, and they're not going to build as many spec homes anticipating the sale upon completion. So I think that those kind of market dynamics play into it. So I think given that they're not the same balance sheets as large homebuilders that they're going to be a little cautious until rates start to move more.

Got it. Thank you, Wayne. And then just one last question. We'd love to get more of a strategic question. Over the last 18 months or so, we've seen a number of mill closures, line closures you have in Viva events contending with a lot of its own problems there, structuring and the impact on the demand for pulpwood. So I'm just -- when I think about pulpwood in general, with the mill closures, line closures and viva. I realize that's less valuable than sawtimber, but nevertheless helps with cash flow. How do you think about irritation in your harvest planning with pulpwood facing this straightly demand decline?

Yes. Certainly, that's an area we're focused on. I think with these announced closures, as Eric mentioned earlier, we haven't had a direct impact to us. And then you kind of break that down between volume and price I think from a volume perspective, we continue to move volume. We have strong relationships with our customers, especially our large customers. And then also with our size and scale, we can move volume to alternative customers. From a volume perspective, certainly, we can move it. I think from a pricing dynamic, yes, clearly less demand with mill closures, creates less demand, and that has an overall impact on the pricing environment. And that's what we've seen very kind of been flat there on the pulpwood side and heading into relatively flat still. So I think that's the near term. I think longer term, we're -- we are very active in the market about what are some longer-term opportunities -- right now, there's -- we're in discussions with a lot of different producers, biomass producers, from biopower to pellets to BioFuels, Bioplastics that would utilize pulpwood. And I think those will create opportunities. Now this investment will take a bit of time, but we do believe that this will bring more demand and attention to certain wood baskets in the South.

Got it. Thank you very much. And good luck in '24.

Thanks.

Your next question comes from the line of Matthew McKellar from RBC Capital Markets. Your line is open.

Hi, good morning. Thanks for taking my questions. Firstly, are you able to comment on what your first kind in development pipeline looks like beyond this first project or developing in the South. And maybe comment on how we should be thinking about the pace of project development from delivery looking out beyond '24?

Yes. So we do have this first project well underway. It's just under 50,000 acres. We're pretty excited about it because we've built up like three years of carbon credits and inventory. So the first sale is probably going to be close to 0.5 million credits. We are building our pipeline. We've got a number of acres that we think the highest value, the best value for those acres. It's going to be in a carbon outcome. We want to see how this first project plays out. And right now, I think we're eying maybe another 100,000 acres that could be well suited for a carbon outcome. But of course, it all depends on the carbon price and the outlook for the carbon price. So the higher we see those prices go, the more acres we're going to think about have a better outcome for carbon versus traditional timber. So we'll have to see how that develops.

Okay. Great. Thanks for that. And then just one more for me. What's your sense here today of where channel inventory levels sit for wood products as we wrap into the building season?

I think there are just rock bottom levels. They -- I think what's changed over the past couple of years is especially with the price run-ups that we saw back in '21 and '22, dealers just don't want to carry inventories. They want just-in-time deliveries, which is generally why Southern Pine carries a premium over SPF. And I think what's happened here recently is with the cold weather that's come across the U.S., a lot of job sites were shut down. There's no activity. So dealers went to even lower levels. So I think where we're at right now is just at rock bottom levels. So hopefully, with this warmer weather that's showing up, we'll see some buying activity here.

Thanks very much. I'll turn it back.

Thanks.

Thanks.

[Operator Instructions]. Your next question comes from the line of Kurt Yinger from D.A. Davidson. Your line is open.

Great. Thanks so much. Good morning, Eric and Wayne.

Good morning.

I know that the 34,000 acre disposition, you talked about the young age class profile. But just curious if you could provide any details on maybe harvest levels and any EBITDA contributions from that acreage over the past year or maybe what you're expecting in terms of a five year plan or anything like that?

Yes. So that say, which was 34,000 acres in total was split roughly 80% Arkansas, 20% Alabama. As I mentioned, the trees were less than four years old. I think 3.8 years old and they were in a traditional southern yellow pine plantation type forestry. They're going to have virtually -- have we kept those trees, they would have virtually no impact to our harvest profile for the next 22 years. There would have been some thinning along the way at aged 14 or 15, but given where pulpwood prices are, I don't think there's much margin to it. So virtually no impact for 22 years. And then if you look out to when those trees would reach maturity, the impact is about 300,000 to 400,000 tons per year for about six years. So no impact really for 22 years, and then it's 300,000 to 400,000 tons per year for about six years and then it drops to zero. So that was the trade-off here. Does that make sense?

Yes, that makes sense. Thanks for that. And then a second question, we talked about kind of the solar opportunities for a couple of quarters now. You had one decent sized sale around that. Just sort of curious how you think about that opportunity with some of these deals in the pipeline in terms of timing and whether you think 2024 could be the year where the rubber really hits the road and we see some more material impacts from that?

Yes, that's a great question, Kurt. We did get another solar deal just signed up here, as Wayne mentioned earlier. Our pipeline is big. The outlook for solar has never been greater. If you look at what NextEra Energy says, which is a huge solar developer or RWE, a big German solar developer, everybody is talking about solar tripling between now and the end of the decade. Now that being said, to put together a solar farm is a very complicated process. And that's why you -- when you go to enter into an agreement with one of these developers, the first step for them is getting land under option. They need to know that they've got a home for their farm and it needs to meet the certain attributes like close to high-power transmission lines and whatnot. But they've got to then go find the equipment. They got to find the panels, which and all that. Now you've got supply chain issues coming from China, you've got a negotiated offtake agreements that takes time from utilities. Just a lot of work goes into it. I don't expect 2024 is going to be the year for a lot of solar farms to have those options get exercised in our portfolio. I think 2025 is going to be a great year for us. But we'll see where things are at as we get to the end of the year, and we'll give guidance then. But I think our view is that those developers are going to pull the trigger starting in '25.

Got it. And is it fair to say that your preference would still be to primarily lease in those deals as opposed to sell? Or I guess, as you kind of look across the agreements and what that might entail. Which way would you lean or which way, I guess, would the economics point view?

Yes, we would definitely prefer to lease. We like the long-term income stream. We like the -- those things are index back to inflation, CPI, what kind of whatnot. But I will tell you that there are some of those developers that refuse to enter into leases, they have to buy. And certainly, given the price is $10,000 an acre, what have you, we're happy to be a seller if they refuse to lease. So either way, it's a great outcome for us, but our preference is to lease.

Got it. Okay. Make sense. Appreciate the color. Good luck here in Q1 guys.

Yes, thank you.

Your next question comes from the line of Mark Weintraub from Seaport Global. Your line is open.

So first on the solar since we just talking on that. A couple of follow-ups. So first, on the solar since we're just talking on that, you kind of -- you threw out find equipment, offtake. Is there a permitting process that needs to happen? And does that tend to happen first? And then I would imagine you do the offtake second and then find equipment third. Is that sort of the order things would normally take?

Yes. I can't answer that, Mark. We're not in the development business, but I think certainly getting a permit is part of the process.

So do you know if it's on any of the situations where you've got options in place where things might stand on the permitting side? Is that our first window?

Yes. I don't know where they're at with their permits. They tend to be a little quiet with that stuff. What I do know is that when they get a property under option, let's say, they get under option for four years, as they get closer and closer to the end of the four years. Now bear in mind that they've been making option payments all along the way, right? It's they're having to write a check every year to have the property under option, and what they don't want to have happen is they lose that option, because somebody else might pick it up. And in fact, at a higher price. In fact, that happened this past year. We have one expire and we went out and found another partner for the track, and they put the land under option at a meaningfully higher price. So I think what happens is the pressure builds as you get to the end of the option period, and that's when they want to get all their ducks lined up to pull the trigger. That's typically how it was. But we don't have great insight as to what their plans are.

Fair enough. And since we're kind of on the carbon type of topic here, do you guys have anything on the CCS side, which obviously both Weyerhaeuser and Rayonier have talked about a fair bit or because of location and such like is it likely a less bigger factor for you?

No. Well, it may be a little bit of a less bigger factor for us given where we're at in Arkansas as opposed to Weyerhaeuser has got ground down in Louisiana, Texas, whatnot. But we definitely have projects underway in CCS, but we're under an NDA, so we can't really talk about them. But there's certainly a lot of work going on in that area. And I would expect over the coming quarters, we'll have more to say as things come to fruition.

Okay. Super. And then on the Wood Products, you made the comment about being profitable in 1Q. Just wanted to clarify, was that EBITDA? Was that operating profit? And does that build in the expectation which you laid out why you'd have it, but that lumber prices would probably be going higher? Or is that where prices are today?

Yes. No, I would say it's an EBITDA kind of a number and yes, I think it's primarily driven by improved lumber prices.

Okay. And then -- and I guess kind of -- well, maybe one more on lumber, if I could. And then you talked about the significant reduction in cash costs related to Waldo. And I think you've talked about the specifics before, but can you remind us how much of that might show up this year? And then how much additional would be still in the half for next year?

Well, I would say our shipments are going to be down at Waldo this year. We just have way too much work going on. And I think it's something like 30 million feet we're going to lose at Waldo because of the project. So we're not going to see those benefits this year. It's going to be next year. And really, it's going to be Q2 and Q3 that take the hit on shipments. We'll start the year out, just to give you a sense of it, we're going to start the year out with 51 million feet we expect in Q1 drop into 41 million in Q2 and then 19 million feet in Q3 and then up to 54 million feet in Q4. But by the end of the year, we're only expect to be at about 80% of where the mill is going to get to eventually. And it's going to take us until probably Q3 of '25 to where we've got the mill running at 100% of capacity. And the bid group, who's our contractor for this project. They've done a number of mills, as you know, in the South. And they've got a lot of data on the ramp curve for mills with projects like this, brownfield expansions. And it's fairly well documented. And surprisingly, the range is pretty tight on like first quartile versus fourth quartile mill expansions like this. So we expect to be improving, but it's going to take a good year to get it fully ironed out.

Okay. And then lastly, maybe if you could just help us a little bit, so you sold some land at 1,700 explained why the price was low given the age class. You bought land at 1,900 with a more even type age class. And at the same time, you've been talking about how you've been buying back stock in part, it's a big discount to NAV, yet sort of those $1,700, $1,900 type numbers, don't necessarily correspond to kind of how most of us are thinking on NAV. So you sort of explained the $1,700. Maybe talk a little bit about the $1,900, and then maybe where you talked about three years ago, maybe $1,700 was representative of an average age class U.S. timberland holding. Do you have a perspective on where that would be today?

Well, I would tell you, I would not characterize the acquisition that we made, the 16,000 acres in Arkansas for $31 million or 1,900 acre. That was not an even age force. That was a mature force, average age 25. So we will be harvesting those trees over the next four to five years. That was a privately negotiated transaction, one-on-one and we think we're going to earn an 8% IRR on that project, which is unheard of in an M&A circles. And we got that return because it was a privately negotiated transaction, just like we did with Luter pretty much like we did with CatchMark, pretty much like we did with Deltic way back when. So Mark, I think to answer the second part of your question, where do I think timberland values are today? If we brought an even-aged track to the market, what do I think we could get. And I think it depends upon the individual area, but I'd say probably somewhere between $2,500 to $3,000 an acre, depending upon where it might sit somewhere in that

All right. Well, thank you for all the insights.

Yes, you're welcome.

At this time, I'm showing there are no more questions. I'll now turn the call back over to Wayne Wasechek.

Thank you for your questions and your interest in PotlatchDeltic. That concludes our call.