Good morning. My name is John, and I'll be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Third Quarter 2024 Conference Call. [Operator Instructions] 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 third 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 cautionary statements in our press release, on the presentation slides, and in our filings with the SEC regarding the risks associated with these forward-looking statements.

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 then review our third quarter results and our outlook..

first, the overall ongoing weakness in lumber markets where supply continued to outpace demand; and second, the start-up costs of our recently modernized Waldo sawmill, which adversely impacted the P&L by about $3 million.

Early in the third quarter, lumber markets hit cyclical lows, reaching their lowest point since the onset of the pandemic in early 2020.

However, by mid-quarter, lumber markets began a slow climb out of a very deep trough as supply and demand dynamics improved, spurred by an estimated 3 billion board feet of indefinite and permanent North American capacity curtailments since the start of the year.

Lumber markets have improved considerably since July with the Random Lengths Composite having improved from a low of $359 up to a recent $418 or increasing 16%. Now turning to our Waldo, Arkansas sawmill modernization and expansion project. We successfully completed construction in Q3 as scheduled and within budget.

Early in the quarter, the mill experienced a limited period of downtime to integrate the new equipment, reducing our lumber production by approximately 25 million board feet for the third quarter. Following completion, we immediately transitioned the mill into the planned ramp-up phase.

Based on other brownfield projects in the industry, we expect it will take six to 12 months to reach the mill's new capacity of 275 million board feet per year. As we advance through the ramp-up phase, I am very encouraged by the mill's performance, especially given that we are in the early stages of this phase.

As a reminder, we expect that the completed project will increase the mill's annual capacity by 85 million board feet, improve recovery by approximately 6%, and reduce cash processing costs by about 30%.

Once the ramp-up phase is completed, we expect the mill to generate approximately $25 million of incremental EBITDDA annually under a mid-sales cycle environment.

As we navigate the challenging lumber markets, we remain focused on the areas within our control, such as optimizing our product mix, efficiently running our mills, and effectively managing costs.

By maintaining this focus and continuing to increase production of Waldo, we expect improvement in unit manufacturing and log costs within our Wood Products division as we head into the fourth quarter. Now shifting to our Real Estate segment. This business generated $32 million in adjusted EBITDDA in the third quarter.

On the real estate side of the business, we sold [65] acres at over $3,700 an acre. We continue to benefit from a healthy demand for rural properties, which produce value-added transactions at significant premiums to underlying timberland values.

For the development side of our Real Estate business, we sold 53 residential lots at an average price of $205,000 per lot in our Chenal Valley master planned community in Little Rock. This average price per lot is a record and reflects a heavy mix of premium lots located on or near the community golf course.

Additionally, we are encouraged by the steady interest in our recent small to midsized lot offerings from regional builders in the Chenal area. Regarding our emerging national -- excuse me, natural climate solutions opportunities, we continue to build momentum in this space.

Beginning with solar, we look to capitalize on the growing demand for renewable energy by offering select tracks for solar development. Our pipeline of option contracts with solar developers continues to grow, with several new contracts added since the last quarter.

We now have solar option contracts for over 35,000 acres or over 1% of our timberland ownership with an estimated net present value of about $400 million. Our pace of execution of solar option agreements for 2024 has exceeded our previous estimate.

And we continue to have discussions with several high-quality counterparties to build upon our existing portfolio. Another natural climate solutions opportunity for us lies in southwestern Arkansas, where the Smackover Formation is partially located.

This region has gained attention recently for its lithium deposits, in fact, one of the largest known deposits in the world. This is an exciting prospect for us due to the growing demand for lithium for electric vehicle batteries and renewable energy storage.

We believe that our southwestern Arkansas land base is ideally located to participate in this opportunity. We are evaluating the potential magnitude of this emerging initiative and are in negotiations with key developers to lease subsurface rights within our ownership for lithium development.

Shifting to forest carbon credits, recent disruptions in voluntary carbon credit markets have been driven by the demand for greater transparency and governance of credits. Consequently, interest in proven high-quality credits continues to grow.

Carbon credit projects for forestry are complex, and we are carefully assessing potential project methodologies from the leading registries as they continue to evolve. After our analysis is complete, which is expected in the next few months, we will have a better sense of timing to bring a high-quality, high transparent carbon project to market.

We believe that carbon projects with these traits will attract the highest demand and consequently command premium pricing. In addition to the projects I just mentioned, we are also exploring other NCS opportunities ranging from carbon capture and storage to bioenergy and biofuels.

Although these initiatives are not as far along as our other NCS projects, we believe they have the potential for significant long-term value creation. We continue to believe that these natural climate solutions opportunities will ultimately boost demand for our rural land, likely driving timberland values higher. Switching to capital allocation.

We remain disciplined stewards of our shareholders' capital. Our priorities include returning capital to our shareholders, investing in high-return capital projects, and identifying strategic acquisition opportunities. We always prioritize long-term value creation when considering each alternative.

This quarter, share repurchases remained an attractive capital allocation option as we continue to trade below our estimated net asset value. In the third quarter, we repurchased $2 million worth of shares.

Year-to-date through the end of the third quarter, we have returned $27 million to shareholders through share repurchases, leaving us with $98 million remaining under our repurchase program. Turning our attention to the U.S. housing market.

Homebuyers have remained hesitant due to elevated interest rates, along with concerns about the overall economy slowing. Despite these headwinds, new home sales have been resilient as sales in September reached the highest level in 16 months.

Large homebuilders have continued to offer rate buydowns and other incentives to drive new construction demand. As a result, single-family starts have hovered near or above 1 million starts for the past year.

As for multifamily construction, activity has been hampered by a glut of units coming into the market, along with restrictive construction financing. On the broader economic front, cooling inflation data prompted the Federal Reserve to lower interest rates in September for the first time in four years.

As the Federal Reserve begins to ease its restrictive rate policy, we believe this will promote growth in single-family construction and help alleviate financing constraints in multifamily housing. Additionally, this should accelerate existing home sales from homeowners locked into low mortgage rates.

Long-term housing fundamentals remain strong, supported by an undersupply of homes, favorable demographics and increasing household formations. We believe that improved housing affordability from lower interest rates, coupled with these strong fundamentals, will create significant tailwinds for lumber market demand, fueling growth in our businesses.

Now regarding the Repair and Remodel segment, which, of course, is the largest demand driver for lumber, activity has been sluggish throughout the year, particularly in the do-it-yourself sector.

Recent challenges in this segment appear to stem from the pull forward of projects during the pandemic, higher financing costs for discretionary home projects, and low turnover of existing homes, which usually stimulates repair and remodel activity.

However, the fundamentals for repair and remodel remain positive with an aging housing stock averaging over 40 years and elevated home equity levels.

Additionally, with the Federal Reserve beginning its rate cutting cycle, we anticipate an increase in residential improvement and repair spending due to pent-up demand and the acceleration of new home construction and sales of existing homes.

Looking forward, we maintain a favorable outlook on demand fundamentals in housing, repair and remodel, and natural climate solutions opportunities, all of which support growth in our businesses. Additionally, we remain focused on maximizing operational and financial performance across all of our business segments.

With an investment-grade balance sheet, ample liquidity and a disciplined capital allocation strategy, we are well positioned to deliver long-term value for our shareholders. I will now turn it over to Wayne to discuss our third quarter results and our outlook..

Thank you, Eric. Starting with Page 4 of the slides. Total adjusted EBITDDA was $46 million for the third quarter compared to $103 million in the second quarter. The 34,000-acre sale to FIA for four-year-old average age Southern Timberland completed in the second quarter drove the quarter-over-quarter decline in EBITDDA.

We'll now review each of our operating segments and provide more color on our third quarter results. Information for our Timberlands segment is displayed on Slides 5 through 7. The segment contributed $36 million in EBITDDA to our third quarter results, which is slightly higher compared to the second quarter.

Our harvest volume in Idaho was 427,000 tons in the third quarter. This volume is seasonally higher than the 365,000 tons we harvested in the second quarter. Our Idaho sawlog prices were 3% lower on a per ton basis in the third quarter compared to the second quarter.

Higher cedar sawlog prices partially offset the negative effects of price resets on indexed sawlog volume. Index prices were at their lowest point this year during the third quarter. Turning to the South. We harvested 1.5 million tons in the third quarter, which is consistent with our harvest volume in the second quarter.

Our Southern pine sawlog prices were generally stable during the third quarter. Southern pine sawlog prices moderated slightly lower in the third quarter due to a seasonal increase in log supply and lumber demand dynamics. This decline was offset by a higher seasonal mix hardwood sawlog volumes and increased pricing.

Moving to Wood Products on Slides 8 and 9. Adjusted EBITDDA loss widened from $7 million in the second quarter to $10 million in the third quarter. The decline was driven by lower average lumber prices led by softness in Southern Yellow Pine.

Also, as we anticipated, unit manufacturing costs increased due to planned downtime and the restart of the Waldo, Arkansas sawmill for the expansion and modernization project. Our average lumber price realization decreased 5% from $423 per thousand board feet in the second quarter to $402 per thousand board feet in the third quarter.

By comparison, the Random Lengths Framing Lumber Composite price was approximately 1% lower in the third quarter compared to the second quarter. Note that our regional mix and product mix is not the same as the composite. There is also a timing difference between our sales and the composite.

Lumber shipments decreased by 19 million board feet from 286 million board feet in the second quarter, 267 million board feet in the third quarter. The decline in shipment volume was due to reduced production associated with the planned Waldo sawmill outage and subsequent ramp-up. Shifting to Real Estate on Slides 10 and 11.

The segment's adjusted EBITDDA was $32 million in the third quarter compared to $90 million in the second quarter. EBITDDA generated by rural sales was lower in the third quarter as the second quarter included the 34,000-acre Southern land transaction for $57 million.

We continue to see strong demand for rural land as reflected in our third quarter performance by selling over 6,500 acres for an average of $3,700 per acre.

EBITDDA from our Real Estate development business increased in the third quarter compared to the second quarter driven by higher residential lot sales at our Chenal Valley master-planned community. In the third quarter, we closed on the sale of 53 residential lots at a higher average price due to a greater mix of premium lots.

Unlike the second quarter, where we recorded $6 million in commercial revenue, there were no commercial land sales in the third quarter. Commercial land sales typically take longer to materialize due to the complexity of commercial real estate and third-party financing structures usually involved.

Turning to capital structure, which is summarized on Slide 12. Our total liquidity was $460 million. This amount includes $161 million of cash on our balance sheet as well as availability on our undrawn revolver. We repurchased 57,000 shares at $42 per share for a total of over $2 million in the third quarter.

We have $98 million remaining on our $200 million repurchase authorization. As you're aware, we have $176 million of debt maturing in the fourth quarter, which we intend to refinance.

We recently finalized discussions with our lenders and in conjunction with the refinance, we are utilizing $125 million of our existing notional forward-starting interest rate swaps to reduce our borrowing rate below current market rates? This strategy allows us to reduce our existing annual interest cost by about $150,000 and maintain our total weighted average cost of debt at approximately 2.3% despite the current higher interest rate environment.

Post refinance, we will still have $75 million of notional forward-starting interest rate swaps available for future debt refinancing, which will allow us to maintain a lower cost of borrowing. Capital expenditures were $35 million in the third quarter.

That amount includes real estate development expenditures, which are included in cash from operations in our cash flow statement. Our full year capital expenditures are projected to range from $100 million to $110 million, excluding any possible timberland acquisitions.

This estimate includes approximately $44 million for the final installments on the modernization and expansion project at the Waldo, Arkansas sawmill, with about $7 million remaining spent this year.

We expect that our annual CapEx will increase -- will significantly decrease and return to a more normalized level next year because we do not plan to undertake any major projects comparable with Waldo initiative next year. I will now provide some high-level outlook comments. The details are presented on Slide 13.

We expect to harvest 1.8 million to 1.9 million tons in our Timberlands segment in the fourth quarter, with approximately 80% of the volume in the South. Harvest volumes in the North are expected to decrease in the fourth quarter following seasonal peak harvest volumes in the third quarter.

We anticipate Northern sawlog prices will increase 2% to 3% in the fourth quarter, reflecting slightly higher index sawlog prices. For the South, we expect our Southern sawlog pricing to moderate slightly in the fourth quarter as we expect to have a lower seasonal mix of hardwood volumes.

We plan to ship between 275 million to 285 million board feet of lumber in the fourth quarter. This forecasted shipment volume reflects a higher production level compared to the third quarter due to the ongoing ramp-up at our Waldo, Arkansas sawmill.

Additionally, we anticipate lower unit manufacturing and log costs as a result of the expected increase in production. Our average lumber price thus far in the fourth quarter is $33 per thousand board feet or 8% higher compared to our third quarter average lumber price. This is based on approximately 100 million board feet of lumber.

As a reminder, a $10 per thousand board feet change in lumber price equals approximately $12 million of consolidated EBITDDA for us on an annual basis. Shifting to Real Estate. We expect to sell approximately 5,500 acres of rural land in the fourth quarter for over $2,900 per acre.

For real estate development, we expect to sell approximately 40 Chenal Valley residential lots in the fourth quarter. Additional real estate details are provided on the slide. Overall, we estimate our fourth quarter total adjusted EBITDDA to be relatively comparable to our third quarter results.

This forecast anticipates higher lumber prices and improved cost recovery in our Wood Products business, balanced by a seasonal decline in harvest volumes and a lower level of rural land and real estate development activity. That concludes our prepared remarks. John, I would now like to open the call to questions..

[Operator Instructions] Your first question comes from the line of Anthony Pettinari from Citi. Please go ahead..

Hi, good morning. I was wondering, kind of we've seen a recent uptick in lumber.

And do you see that as maybe more supply-driven as some of these curtailments impact the market? Or are you seeing pockets of improved demand? And then in terms of curtailments, is there kind of a new level or average cost support for maybe a high-cost producer, a Canadian producer? Any kind of like new post-pandemic level that you think these guys are generating cash at?.

Yes, Anthony, this is Eric. I do think the recent uptick in lumber prices is largely supply-driven. We've seen something like 4 billion to 5 billion of capacity come out of the market here this year and last year or even more. We also had those hurricanes come through the South that took out some production.

So I think people looked at it and said, the industry is losing money. This is obviously not sustainable. Lumber prices really can't go lower. They can only go higher. And so people stepped in to buy and you saw the duties go up from 8% to 14% in August. I think that probably helped support lumber prices as well.

And then finally, we saw the Fed finally pull the trigger and make some interest rate cuts.

And so while I don't know that there's been a real step change in demand just yet, I think people are looking at it saying, okay, the Fed has now embarked on this rate cutting cycle, and that's going to have effects across all the different demand segments for lumber, whether it's single-family or multifamily or large R&R.

So while right now, I think the immediate price response is largely supply-driven, I think people are looking at it saying, huh, demand ought to be forthcoming here in the not-too-distant future.

Yes, now regarding the -- your second question regarding, is there some new price floor? The one thing I will say is if you look up to British Columbia, I think the median mill up there today, breakeven is around $400. So that's the median mill. So half are making more money and -- half are making money and half are losing money.

But if you think about -- so that's a $400 number, which is, I think, about where SBF is trading today. If you think about what's going to happen when we get out to the fall of 2025, you're going to see that duty, it's going to kick up anywhere from, I don't know, 25% to 35%. All of a sudden, breakevens are going to move up, who knows, $100.

And I kind of think of BC as a marginal cost producer right now for North America, given the relatively high cost structure. So I think that floor, that it is moving higher, especially as we get out to next year.

Does that answer your question?.

Yes. No, that's super, super helpful. And then maybe just switching gears. If I look at your Southern sawlog price per ton, I mean, it's been pretty flattish since, I don't know, 2019 before the pandemic. But at the same time, I mean, general inflation in the economy is maybe up 20%, maybe 25%.

I'm just wondering if you could talk about the ability of Southern log prices to kind of at least match inflation.

Is there a level of starts or inventory drawdown that would, you think, could catalyze price improvement in the South? Or is that maybe not the right way to think about it? Or just not quarter-to-quarter, but just as we think about '25, '26, like what's your outlook? And how should we think about Southern sawlog prices?.

Yes, Anthony, this is Wayne. Ultimately, it really comes down to where lumber markets are headed. Certainly, we're more optimistic about 2025. And we think as those markets improve, log prices will follow. In the South, we would expect log markets to improve across the board.

I mean, it certainly depends from wood basket to wood basket and what those tension markets are like. But when we think about our business and looking at our different regions in the South, we would expect -- and we've seen this in the past, that as pricing goes up, there's more tension in the markets, more production on the lumber side.

I think our Southeast region, that's where we would see more price increase on the log side, accelerate versus not as much in our Gulf South because we've just historically seen that because of where tension markets are at. And we saw that dropoff happen a little more rapidly in the Southeast.

So we would expect it to ramp up prices improve more in the Southeast as markets become more tensioned. So that when we look forward, I think that's what we're expecting is with an optimistic outlook in 2025..

Okay, that's super helpful. I'll turn it over..

Your next question comes from the line of Ketan Mamtora from BMO. Please go ahead..

Thank you for taking my question. Hi, Wayne. A quick clarification on that Northern sawlog pricing, you said up, I think, 2% to 3%. But as I recall, there is also a negative density component in Q4 to the tune of about mid-single digits.

So your 2% to 3% net, is it net up or is it sort of before taking into account the density component?.

Ketan, it's on a net basis. So you are correct, there is a density factor and that's netted. So that 2% to 3% includes that seasonally heavier log. So we have -- we're thinking indexing and mixed sawlog prices will be up over the quarter, and that will be offset slightly by seasonal heavier logs that density factor..

Got it. Okay, that's helpful.

And then on NCS, I'm curious, Eric, how do you think about sort of the time line on some of these option contracts becoming kind of finalized? And when do you expect these to start to show up in P&L? And are you seeing any sort of change, given that we are in a wait-and-watch mode with the elections? Any change in sort of approach from some of your potential customers on solar?.

Yes. Ketan, I'm more bullish than ever on solar going forward, and it starts with everybody's trying to get to net zero around the world. And certainly, solar is a great way to generate energy if you're trying to get to net zero. So I think there's no stopping solar. We are seeing incredibly strong demand for solar options.

We're going to be taking a look at our land holdings again. I think we've talked about we thought our potential was 60,000 acres in total. We think that may be higher so we're going to undertake another study here.

When is it going to start hitting our P&L? It's not really going to happen next year because what happened is there's been a rush of options that got executed and well, really this past year and perhaps 2023. Most of those option agreements have got anywhere from 3- to 5-year periods on them.

And so when you think about something that got executed in '23 and it's got a 5-year life on the option, that means that the developers got until 2028 to pull the trigger and execute the option. Now they're not all out that far. Some can get executed in 2027, some can get executed in 2026. There's a chance one or two trickle in next year.

But really, it's going to start hitting the P&L in 2026. And I know that historically, the cancellation rate on these options or the execution of these options is in the, I don't know, 30% to 40% kind of range is kind of what the industry parlance is. But I think given where we're at today, that is a really low number compared to what I would expect.

I think it could be 75% likelihood of those options getting exercised just because the counterparties that we're dealing with are some of the largest companies in the world, coupled with this trend towards renewable energy, I just think there's no stopping it. We've had one cancellation here recently, actually hasn't even canceled yet.

I think we're in discussions. And ironically, the reason it may be canceled is because the developer wants to put more acreage onto the existing contract, not because they don't like the project that we're looking at. So yes, I'm really optimistic on solar.

It's not going to happen in a big way in '25 but it's really going to start hitting in '26 and then '27..

Understood, that's helpful. And then just one last one from me.

Can you talk about sort of what you are seeing so far as timberland deal activity is concerned, what the appetite's like right now?.

Well, yes, the timberland M&A market is really paused here. There's virtually no high-quality properties that are available. Several low-quality deals have kind of resulted in kind of busted deals, if you will. And I think market activity is sluggish here. We're in a kind of an uneconomic -- uncertain economic environment. You've got these higher rates.

You've got people potentially waiting for NCS opportunities, sellers waiting for NCS opportunities to materialize. Everybody knows lumber prices have been in the doldrums. So sellers are not really excited about bringing properties to market.

But I do think on the buy side, there's plenty of capital out there looking to buy timberland, whether it's a new investor that's come into the asset class, interested in nature and biodiversity or carbon, or it could be a new investor that's interested in timberland purely from a carbon credit standpoint.

So I think there's no shortage of demand for quality timberland. It's really, more than anything, reluctance of buyers to bring quality properties to market..

Understood. That's a helpful perspective. I'll turn it over. Good luck..

Thanks..

Your next question comes from the line of George Staphos with Bank of America. Please go ahead..

Hi Wayne. Hi, Eric. Good afternoon..

Good morning..

Thanks for the details.

Can you go through maybe with a bit more detail, to the extent possible, what you think your manufacturing costs within Wood Products might look like into fourth quarter and into 1Q with the Waldo ramp-up both in place but also now winding down and getting into more of an operational mode there? The question behind the question, given where prices are right now and with maybe some puts and takes on manufacturing, could we see maybe a breakeven in EBITDDA for the Wood Products segment in the fourth quarter?.

Well, I -- we're halfway through the fourth quarter at this point, George. And I would tell you our mills are going to be, I would guess, they're going to be profitable in the fourth quarter. I'm feeling really good about the turn that we've seen in prices. We had to eat some start-up costs at the Waldo mill in Q3. Thankfully, that is behind us.

So we will see a sizable drop in per thousand processing costs as we move out into Q4. And frankly, I think we're setting up for a good 2025. The market, our stock and our peers are selling off this morning because the tenure is trickling up again.

But I look collectively at what's going on with supply and demand, and I'm pretty bullish on next year and even more bullish on '26. But yes, getting back to your question, we will see a sizable drop in processing costs as we work our way through Q4 and then as we get into next year..

Eric, you've given us a lot of detail there already but is there a way to maybe size that? And if you want to punt on that, we totally understand the figure, maybe try one more time if there's a way to maybe dimensionalize that..

Dimensionalize?.

The drop in processing costs sequentially or over the next couple of quarters?.

Yes. I mean, I will just -- I'll tell you that all -- across our entire lumber segment, processing costs are going to drop. Now this is -- remember, this is a rough Q3 for Waldo so processing costs there were very high. But it's going to drop from $185 a thousand down to $151 a thousand..

Okay, appreciate that. And then a question for you on salvage activity.

What is that going to mean in terms of results, both in terms of tonnage and P&L over the next quarter or 2? How should we phase that in and how long will salvage activity take into 2025?.

Yes. For us, directly, it's really going to have a minimal impact. Like we've said in the prepared remarks, we've already commenced salvage operations. I think based on downed timber, we estimate that activity to take maybe six months or so. But overall, we think that will be directly a minimal impact to us.

Now look, we don't have direct line of sight into how much salvage activity is out there across the region. But intuitively, we would anticipate that there would be more volume of pulpwood coming on the market, so that could have some downward pressure on pulp prices in the very near term.

Now what I would say though is on the flip side, you only have so much log and haul capacity. So if there's a lot of capacity shifting to pulp, then you may not be getting as much sawlog capacity. And with that, we think that may also push sawlog pricing up slightly just kind of that shift, but we'll see what happens..

George, when you step back and you think about it, we're talking about 100,000 tons here across our 7-point, whatever, 6 million-ton harvest profile per year. And 50% of that 100,000 tons is going to happen in Q4 and then 50,000 tons is going to happen in Q1.

So in the grand scheme of things, it's virtually no impact, financial impact, not that important..

I appreciate that. Last question for me and I'll turn it over. Are you seeing any kind of change in supply trade flow on lumber markets into the U.S. from Europe elsewhere? How are you seeing that impact the market at this juncture? You've already talked about Canada, obviously, over time, maybe seeing some trade flow slowing because of duties.

But what are you seeing out of Europe?.

Yes. So I can only tell you, George, what I hear anecdotally, which I look at the numbers and imports from Europe are down about 10% this year. It's logical that imports would slow this year. We've come off those really high prices where we were at in early, what, '23 when imports surged.

So prices have really come way off that the beetle kill timber that was over in Central Europe, most of that salvage activity is now behind us. Europe is starting to cut rates. Construction activity is still slow there from what I hear but it's kind of poised to get better. So it's not surprising to me that the Europeans have backed away from the U.S.

market. And I think European imports are down like 10% year-over-year. Now I will say going forward, I think the Europeans were smart. They got a toehold in the U.S. market. And if we see prices revert back to really high numbers again, they're going to be able to flip the switch and start exporting more back into the U.S.

So they will be a governor going forward on pricing. But for now, I think they backed away and I think prices have -- or import levels have moderated. And I think they're going to stay that way for some time..

Thank you, Eric. Thanks..

Thanks..

Your next question comes from the line of Matthew McKellar with RBC Capital Markets. Please go ahead..

Hi, good morning. Just one question for me. You've talked about having some other high-return projects in your Wood Products portfolio, and it certainly seems like we're seeing a bit more support from lumber prices. I think Wayne talked about not pursuing anything on the same scale as Waldo next year.

But are you able to share any preliminary thoughts on how you'll approach capital spending in '25 and maybe talk about what your priorities for capital spending will be?.

Yes, Matthew. Yes, we're always looking at ways to improve our P&L with the idea that we want a strong return on our invested capital. And you can do that either through large projects like what we did at Waldo, and there may be other potential projects like that, that we have in our mill network.

Or it can be through replacing discrete pieces of equipment that we have in our mill network that are more efficient. And we haven't gone through our budgeting process yet for '25. So I'm reluctant to really comment on what we have planned for next year. But we've got a couple of things that we're looking at, but it's too early to talk about them..

Okay, fair enough. The rest of the time has been asked. Thanks. I'll turn it back..

Thanks..

Your next question comes from the line of Mark Weintraub from Seaport Research Partners. Please go ahead..

Thank you. First, apologize a bit of an accounting type question. Just DD&A, obviously, you had the changes at Waldo and the accelerated depreciation going away.

As we think about depreciation in the Wood Products segment and maybe for the company as a whole or DD&A, is the third quarter rate the one to use going forward or does that pop up a little bit as Waldo kicks into full operation?.

Yes, Mark, this is Wayne. I think you're referring to, yes, we had a little bit lower DD&A this quarter and that's a function of -- it is a function of the Waldo sawmill. We had -- back in 2022 when we announced the project, we had started accelerating depreciation on the existing assets that we were replacing, and that was about $3 million a quarter.

Now that's fully depreciated. And then we'll be -- we've started -- as we put the new assets in service, we started that depreciation. So I would say kind of on a yearly basis, our depreciation will be down about $5 million annually, just with that kind of shift from that acceleration to what we've put on the balance sheet..

Okay, that's helpful. Thank you. And so I mean you're also indicating you're kind of looking for a flattish EBITDDA overall 4Q versus 3Q. And given the guidance you've given us on Timberlands and Real Estate, that does suggest a pretty big pickup in Wood Products.

And so I'm just curious what type of -- you mentioned you're up $30, I think it was at $33 quarter-to-date. Maybe I'll ask two related questions.

One, if lumber prices were to stay where they are today, roughly how high would your 4Q lumber prices be relative to 3Q? And is that basically what you're embedding in your guidance?.

Yes. I think, Mark, we -- lumber prices have had a nice run here. We think there's a chance they'd pull back a little bit as we get out into December. Companies especially private ones, will tend to pull down inventories at the end of the year for tax reasons.

So there could be a minor pullback in December, but full quarter over full quarter, Q4 versus Q3, I think our lumber prices, we expect will be at 5% quarter-over-quarter..

4Q over 3Q?.

Excuse me, yes, 4Q over 3Q..

So that would be about $20, which is lower than what you are now?.

Yes, right..

Okay. I'll circle back. It seems like that's -- you must have your costs coming down an awful lot to then get to flat 4Q over 3Q EBITDDA. But let me circle back.

Maybe my math is wrong?.

Yes, and that could be a conservative number, too. We've been surprised by the strength in lumber prices. And I talked to the sales department yesterday before this call. And what they're saying is that they're selling stuff above where the Random Lengths print is at right now. So there -- it could be better than just a 5% run in Q4 versus Q3..

Okay, very good. And then in terms of NCS, so obviously, you indicated very excited about solar but mostly show up in '26 and '27.

Is there anything really in NCS at all showing up in EBITDDA in '24? And is there anything you're really expecting in '25, recognizing that the big kickup is probably solar into gear in '26?.

Well, don't forget, Mark, we're getting option payments as we speak. Once we enter an option agreement with the solar developer, they start paying us for that acreage to be under option. So we're making a couple of million dollars a year off that.

We are selling carbon offsets from a carbon project that we put in place down in Arkansas back in, oh my gosh, 2006, something like that. We started selling credits in 2014, I believe it was. These are not significant numbers but I think we've sold something like $3 million of carbon offsets from that project going back to 2014.

So yes, we're getting dribs and drabs of money in NCS today. It's not meaningful amounts of money like we expect it will be. If we enter into a lithium agreement here, we expect to get some payments, option payments along the way. And then when those projects are up and running, which will be really a few years, the money will really start to flow.

So it's small potatoes today but the potential is there for these income streams to be really quite big..

Understood. And you mentioned carbon credits, you expect to maybe have some more clarity in the next few months.

Is that true for lithium as well or can you give us sort of a time line? Or is that not yet really evident?.

Yes, that's a tougher one. We're really highly dependent on the Arkansas, I think, it's Oil and Gas Commission that sets some royalty rate for what lithium brine goes for. There's been a lot of meetings down in Arkansas. The developers have proposed, I think, it's 2% royalty.

The landowners, the one that own the mineral rights like us have proposed a 12% royalty. And so this commission is deliberating trying to figure out what the right number should be. So I think there's a little bit of a wait and see here because the range of outcomes are just enormous. But I'm very excited about this opportunity for us going forward.

But again, it's going to take a few years before the money really starts to flow..

Understood. And then lastly, you mentioned kind of CapEx would go back to more normal.

What would you consider more normal to be? And then relatedly, other capital allocation priorities, if lumber does sort of kick into better gear and you're generating more earnings? I'm assuming share repurchase would be high on the list if the stock is anywhere where it's at, but maybe color and thoughts you might provide along those lines?.

Yes. On CapEx, Mark, I mean, we -- our range for this year is $100 million to $110 million. That includes almost $45 million for Waldo. And like we said, we're not taking -- undertaking a project of that nature in the foreseeable future. So yes.

Like Eric said, we're not going to -- we're still going through budgeting process and ultimately, a discussion with the Board on what our capital projects and plan is for next year. So we're really not going to provide any more detailed guidance on that.

As far as capital allocation priorities, yes, certainly, as we've shown, our repurchase of stock is still an attractive option for us. We demonstrated that the last several quarters. It's always a dynamic exercise depending on what opportunities sit in front of us from acquisitions to share repurchases.

We've also -- we mentioned we won't be delevering. With the attractive interest rates, we're able to lock up on our debt refinance. We're refinancing debt. So that really just ultimately comes down to share repurchases, attractive acquisition opportunities. But it really depends on what presents itself as we head into each quarter..

I appreciate it. Thanks guys..

Your next question comes from the line of Michael Roxland from Truist Securities. Please go ahead..

Hi, guys. This is Nico Piccini on for Mike Roxland. Thanks for taking my questions. I guess you mentioned being encouraged by steady interest from these regional builders at Chenal. Just curious on what the split in Chenal is between the smaller regionals and the large nationals.

And then likewise, what are you hearing from your builder customers, maybe those buyers regarding sentiment, general sentiment among homebuilders, given we've heard some kind of mixed 3Q earnings from them and then also that mortgage rates have trended higher since really the end of September and despite the rate cut announcement?.

Yes. Nico, looking at the builder profile in Chenal, it's much different than from a national builder. These are all regional builders. There are no national builders in Chenal.

So when we think about these regional builders, they're not kind of well-capitalized or highly capitalized and the ability to offer incentives and other rate buydowns for the ultimate buyers.

But as we've -- based on our Q3 results and the outlook at least we've given for Q4, I mean, we're -- we've been very optimistic about how the year will ultimately end. We saw take-up across all our product offerings from the more affordable offering to the premium offering.

And we think that was certainly stimulated by what the Fed did there in September. And then as we look to Q4, we also saw a better take-up than we expected again across even our more affordable product offering and where we thought, maybe that is where more of the rate-sensitive buyers are. But nonetheless, we were encouraged by what we saw.

Now that's really our insight isn't through the end of the year. We'll see as we head into next year kind of what the sentiment is, but kind of in the shorter-term outlook, that's certainly what we're seeing. And what actions the regional builders have taken..

Understood. Thank you. I'll turn it over..

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

Thank you. Thank you for everyone for joining this morning and your continued interest in PotlatchDeltic..

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation..