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Edited Transcript of PCH earnings conference call or presentation 5-Feb-19 5:00pm GMT

Q4 2018 PotlatchDeltic Corp Earnings Call

Spokane Mar 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Potlatchdeltic Corp earnings conference call or presentation Tuesday, February 5, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric J. Cremers

PotlatchDeltic Corporation - President, COO & Director

* Jerald W. Richards

PotlatchDeltic Corporation - VP & CFO

* Michael J. Covey

PotlatchDeltic Corporation - Chairman & CEO

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Conference Call Participants

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* Clyde Alvin Dillon

Vertical Research Partners, LLC - Partner

* Collin Philip Mings

Raymond James & Associates, Inc., Research Division - Analyst

* John Plimpton Babcock

BofA Merrill Lynch, Research Division - Associate

* Ketan Mamtora

BMO Capital Markets Equity Research - Analyst

* Paul C. Quinn

RBC Capital Markets, LLC, Research Division - Analyst

* Steven Pierre Chercover

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, my name is Lyndsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Fourth Quarter 2018 Conference Call. (Operator Instructions)

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may begin.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [2]

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Thank you, Lyndsey, and good morning to everyone on the call. Welcome to PotlatchDeltic's investor call and webcast covering our fourth quarter 2018 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating 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 concerning the risk 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 now turn the call over to Mike for some comments, and then I will cover our fourth quarter results and our outlook.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [3]

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Thank you, Jerry, and good morning. As the timber REIT with the most leverage to lumber prices we certainly felt the impact of the 30% to 50% decline in lumber prices since the June 2018 peak. Fourth quarter results in our Wood Products and Idaho Resource businesses fell sequentially. However, the overall business segment diversity and our wide geographic footprint were helpful in Q4, and we expect that they will provide stable and predictable results in 2019. Our Real Estate segment executed some key HBU and commercial transactions in Arkansas and the Southern Resource business is seeing improved log prices across the South, due in part to an unusually wet winter. As we look to 2019, we remain optimistic that lumber prices will continue a slow, steady increase as the building season begins in earnest later in Q1. Lumber customers tell us that their inventories are low and they remain cautious about buying. We expect housing starts will be modestly higher in 2019, while repair and remodel markets remain strong as measured by our business with the big-box stores. While we've seen a recent rally in pulpwood prices in the south, we expect those to moderate as winter weather ends. We do not anticipate a meaningful increase in Southern Yellow Pine sawlog prices, although there are isolated markets in each state where we operate that are tightening somewhat, principally due to new mill startups. We expect to close on the previously announced sale of our El Dorado, Arkansas, MDF business to Roseburg Forest Products later this month. After paying taxes and assigning $21 million -- $29 million of revenue bonds, net proceeds are estimated to be approximately $43 million. We started 2019 with $77 million in cash. One of our key initiatives in 2018 was reducing debt, our pension liability and interest expense. The last leg of those initiatives was completed last week with the refinancing of $150 million of debt that was set to mature in November of this year. This refinancing reduces our annual interest expense run rate by over $5 million, and Jerry will provide more details on this initiative in his comments. After effectively raising the dividend again in December 2018 to an annual payout of $108 million or $1.60 per share, we are comfortable with our dividend payout ratio. Total cash returned to shareholders in 2018 was $147 million, including the cash portion of the special distribution paid in connection with converting Deltic to a REIT. With our cash balance expected to be in excess of $100 million after closing the MDF sale, we have ample flexibility to grow the company. Given that accretive timberland acquisitions remain difficult to find, we will continue to be patient and we will only pursue strategic or bolt-on acquisitions that add value, not just acres. We did not execute any share repurchases in the fourth quarter because of the pending MDF sale that was announced December 21, 2018, resulted in us being in a blackout window for the whole quarter. Our trading window reopens February 7. Our stock continues to trade at a significant discount to our net asset value.

We merged with Deltic just 11 months ago and we've made significant strides to integrate the 2 companies thanks to the hard work and dedication of many key employees. With our integration work nearly complete, we have exceeded our financial targets and the transaction was clearly cat accretive in year 1. With the disposition of the MDF mill, the remaining portfolio of timberland, mills and real estate is an excellent

(technical difficulty)

We expect 2019 to be another strong year.

I'll now turn it over to Jerry to discuss the quarter and our outlook, and then we'll take questions.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [4]

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Thanks, Mike. I will start with Page 4 of the slides. Adjusted EBITDDA was $36.4 million in the fourth quarter compared to $101.8 million in the third quarter. The sequential decline in EBITDDA reflects the drop in lumber prices in the second half of 2018 and lower harvest volume. Unseasonably wet weather also affected our Southern Resource and our real estate businesses. To put the weather in perspective, rainfall in Little Rock, Arkansas, was over 50% higher than average in the fourth quarter.

I'll now review each of our operating segments and provide more color on the fourth quarter results. Information for our Resource segment is displayed on slides 5 through 7. The segment's adjusted EBITDDA was $29.8 million in the fourth quarter compared to $58.7 million in the third quarter. We harvested 388,000 tons of sawlogs in the North in the fourth quarter. This is down seasonally from the 500,000 tons that were harvested in the third quarter. Northern sawlog prices were 32% lower on a per ton basis in the fourth quarter compared to the third quarter. The full effect of the second half drop in lumber prices on our results was not reflected until the fourth quarter due to the lag associated with our index sawlog volume.

Turning to the South, we harvested 912,000 tons in the quarter. This was down 66,000 tons compared to the third quarter. Unseasonably wet weather continued to hamper operations in the fourth quarter. Our Southern sawlog prices were 8% lower this quarter, primarily due to a seasonal decline in hardwood sawlog harvest activity. Southern pine sawlog prices were up slightly quarter-over-quarter due to a shortage caused by the wet weather. Log and haul costs were $2.4 million lower in the fourth quarter compared to the third quarter. This was mostly due to the net decrease in harvest volumes.

I will now shift to Wood Products, which is covered on slides 8 and 9. The segment's adjusted EBITDDA was $3.6 million compared to $46.5 million in the third quarter. Our average lumber prices decreased 24% from $486 per thousand board feet in the third quarter to $367 per thousand board feet in the fourth quarter. Lumber shipments decreased 20 million board feet to 265 million board feet in the fourth quarter. We shipped just over 1 billion board feet of lumber for the year.

I'll now cover our real estate segment on slides 10, 11. Real estate's adjusted EBITDDA increased $5.2 million in the fourth quarter. Commercial land sales in Chenal contributed $4.5 million of the increase in the quarter. Chenal lot sales were lower than planned as unseasonably wet weather delayed log completion.

Shifting to financial items, which are summarized on Slide 12, we ended the quarter with $76.6 million of cash. We distributed $44.4 million of cash to shareholders as part of the $222 million special distribution on November 15. The remainder of the distribution was in the form of 4.8 million shares of stock. The special distribution completed the conversion of Deltic's timber operations to REIT status. We also raised a regular dividend payout 7.7%, beginning with the regular quarterly dividend paid in December. A regular dividend payout has increased over 75% on an annual basis going from $61 million just prior to announcing the Deltic merger in 2017 to $108 million. Our dividend payout ratio was 80% in 2018. Excluding Deltic merger cost and accelerated cash contributions to our pension plan, the payout ratio was 54%. As Mike mentioned, we completed the refinance of our $150 million senior notes last week. This debt had a 7.5% coupon and was scheduled to mature in November of this year. The new term loan, it matures in January of 2029 and has a fixed rate of 4.56%. This reduces our interest expense $4.4 million on an annual basis. We expect the first annual Farm Credit patronage payment related to this debt to reduce interest expense a further $1 million beginning in the first quarter of 2020. Mike also mentioned that sale of the Deltic MDF mill is scheduled to close later this month. The buyer has agreed to assume $29 million of industrial revenue bonds related to the mill. We expect a net approximately $43 million of cash after paying taxes on the transaction. Capital expenditures were $18.3 million in the fourth quarter and $52.3 million for the full year, excluding acquisitions. Note that these amounts include real estate development expenditures, which flow through cash from operations in our cash flow statement. We expect that capital expenditures will be in the range of $65 million to $70 million for 2019. We're planning to spend just under $40 million of capital in our Wood Products business this year. The increase relative to the $27 million that we spent on Wood Products in 2018 is primarily related to high return projects in our sawmills, including 2 kiln projects.

I will now provide some high-level outlook comments. Note that the legacy Deltic operations will be included for the full year as opposed to 10 months in 2018. The details are presented on Slide 13. We're planning to harvest just over 6 million tons in our Resource segment this year with approximately 70% of the volume in the South. Harvest volumes in the South are expected to be seasonally lower in the first quarter compared to the fourth quarter. In addition, there will be fewer hardwood sawlogs in the mix, which will weigh on our average Southern sawlog price in the first quarter relative to the fourth quarter. Our average lumber price thus far in the first quarter is almost the same as the average price we realized in the fourth quarter. The trend is positive as our current spot lumber prices are approximately 7% higher. Though it's early in the year, we expect lumber prices to move even higher as we get into the spring and summer building months. As a reminder, a $10 per thousand board foot change in price represents about $12 million in EBITDDA on an annual basis. Our indexed northern sawlog prices are not expected to benefit from the recent improvement in lumber prices in the first quarter, given that it can take up to 6 weeks to reset index log prices. Northern sawlog prices will be negatively affected by denser logs. We expect to ship 1.1 billion board feet of lumber this year. We are also planning to sell approximately 20,000 rural acres and 150 residential lots in 2019. We completed our initial stratification analysis of the legacy Deltic timberlands and have identified approximately 57,000 acres of rural property sales opportunities. Our 10-K will be filed later this month and will include an update of the rural acres that we have identified for future sales.

I also wanted to highlight that our interest expense will be lower than normal in the first quarter because that is when we receive our annual patronage payment from the Farm Credit banks. We estimate that interest expense will be $5 million in the first quarter and just under $9 million per quarter for the rest of 2019. 2018 has been a very busy year. The increased size of our company provided the platform to generate just under $300 million of adjusted EBITDDA. While we expect adjusted EBITDDA to be lower in 2019, we have a strong balance sheet that provides the flexibility to grow shareholder value. We're excited about PotlatchDeltic's prospects.

So that concludes our prepared remarks. Lyndsey, I'd now like to open the call to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of John Babcock with Bank of America Merrill Lynch.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [2]

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Just want to start out, I was wondering if you could talk a little bit about the health of the lumber market. Obviously, we've heard a fair bit of downtime announcements in the West. Wondering how conditions are out there? And also if you could talk about the U.S. South, just the market as a whole.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [3]

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I'll let Eric cover that area.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [4]

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Yes, we saw a precipitous decline in lumber prices in the second half of last year as you're well aware. Our lumber prices, if you look at them on a monthly basis, they actually bottomed back in November of last year. They've been climbing steadily higher ever since, on average about $10 per month. So our outlook is for about roughly 5% higher prices in Q1 compared to Q4, and we expect further gains on the order of 15% or so as you get out to Q2. Market demand is still plenty healthy. There is new construction taking place. Repair, remodel markets are just fine. Commercial, industrial is just fine. So final takeaway is there -- it's an issue of getting dealers to pull the trigger and buy more lumber to fill up their inventories. So generally, we're optimistic on the outlook for lumber.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [5]

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And how would you describe inventory levels right now relative to kind of a normal 1Q?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [6]

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I would say they're very lean. The way our sales group describes it to us is we've actually got our customers calling us up saying, "Hey, I placed an order for lumber the other day, I need to know where it's at because I've got a job site that's looking for it." So inventories are very lean in the system. A lot of those dealers got burned with really high-priced inventories last year. And so they're coming into this year with a mindset of keeping inventories fairly low.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [7]

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That's great. And then also, as we -- obviously, with the upcoming divesture of the MDF business, could you give some sense as to the impact on EBITDDA from that?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [8]

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Yes, well, what I would say is our MDF business, it -- on a percent of sales basis, it was actually less profitable than what it was compared to our lumber business. And you can go back and look at what the EBITDDA that was generated back when Deltic owned it, it was on the order of $10 million or so per year. So that gives you a sense for what the impact is going to be.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [9]

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Okay, that's great. And then just kind of going back to the CapEx comment there. It is up a little bit from last year. Could you just talk about some of the projects that you're looking out for this upcoming year?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [10]

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Yes, we've got a number of projects. This is a good time to be investing in lumber mills, particularly in the South. So we've got 6 big projects underway for the year all with IRRs. The lowest one is 17%, that's for 2 continuous kilns at our Warren sawmill, all the way up to a 44% return project for a new green stacker at our Waldo sawmill. And all these projects are in an effort to lower cost, improve production, improve product quality, that sort of thing. And they're pretty well-defined projects with recognizable benefits. So this will be an outsized year for us in CapEx in our Wood Products business.

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Operator [11]

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Our next question comes from the line of Collin Mings with Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [12]

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First, just in the prepared remarks, you touched on why you weren't be able to repurchase any shares during 4Q. Just as the repurchase window opens here later this week, can you just expand on how you're thinking about your cash balance and leverage metrics? And where share repurchase kind of fit into that just given the cash generation in 2019 is not likely to be what it was in 2018 for the company, just given where we are in terms of product pricing?

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [13]

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Collin, this is Jerry. So in terms of metrics and flexibility, as Mike mentioned in his comments, with the MDF sale cash will be probably over $100 million. So balance sheet is in great shape, credit metrics are in great shape. So there's all kinds of flexibility and all of the capital allocation levers are open to us. When we think about share repurchases, certainly we continue to trade at a pretty significant discount to NAV, and that's certainly one of the tools in the toolkit that we'll continue to consider with our board.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [14]

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Okay. Switching gears to the real estate front just in the prepared remarks, again, referenced, I want to say, 57,000 acres that were identified as part of kind of the review associated with the Deltic transaction. Just any sense of how we should think about the time line to monetize that? Or any sort of fluctuations over the next couple of years bringing that -- some of that timberland -- or those -- or rather some of that land to market?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [15]

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No, I don't know about providing a specific time line, Collin. What I would tell you is that we are excited about having discovered those 57,000 acres. We knew during due diligence there would be a meaningful opportunity with Deltic real estate, as it had not been a focus of Deltic premerger. In 2018, our real estate team did 13 real estate transactions off of Deltic ground for a total of about almost $8 million. We're seeing plenty of demand for different tracks, and they range from very small to very large and so we expect that business to be a bit lumpy going forward given the nature of that business. So it's hard to see how that's going to play out on a per acre, per year kind of basis, but I would tell you that we're genuinely excited about the opportunity.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [16]

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Okay. And then just going back to kind of the log price environment, just recognizing a lot of the -- appreciate the detail on the northern logs being indexed to -- or a lot of them being indexed to what's happening in lumber pricing. But can you just update us on what's happening as far as the cedar log markets, I know that had been a kind of a source of strength for you guys over the last couple of years, maybe just update us specifically what you're seeing there?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [17]

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Yes, like Northern mix sawlog prices, we're seeing a decline in cedar prices. There were a couple of cedar mills over on the west side that closed down back in 2017, Mary's River Mills. That pushed that production, we think, over to the inland region. So in the 2018 kind of time frame, we saw unprecedented demand and pricing for cedar sawlogs in the region. Consequently, those mills filled up their log decks with really high-priced cedar, $1,500, $1,600, $1,000 kind of logs. And they're sitting with pretty high inventories today. So we have seen cedar rollover due to those high log decks. And they've rolled over commensurate with what other northern mixed sawlogs have done.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [18]

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Okay, very helpful. Just one last one for me and I'll turn it over. Just with the upcoming WTO, hearing it's just regarding the softwood lumber dispute, just any kind of updated thoughts on kind of VAT dispute and kind of trade relations at this juncture?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [19]

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Well, Collin, Mike here. The NAFTA and WTO hearing processes, which are continuing concurrently are part of a long process to try to bring closure to this long-running trade dispute. We expect that process to take 1 to 2 years at least. In the meantime, there is really no meaningful change in posture between the 2 countries. Canada continues to have roughly a 30% market share here, exporting about 50% of their production to the United States. And the tariff situation that's in place continues to function, I think the U.S. Lumber Coalition of which we're a part of continues to think that a long-term solution is based on a quota, and I think the 2 sides remain quite a bit of problem.

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Operator [20]

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Our next question comes from Ketan Mamtora with BMO Capital Markets.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [21]

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First question, are you guys seeing any signs of the lumber projects in the South being sauntered back, maybe slowed with the sharp pullback that we've seen in lumber prices in the back half of last year and with housing activity not being as robust, are you seeing any signs of that at all?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [22]

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No. There has really been, to our knowledge, dealing with the vendors that supply us sawmill machinery of which we're a customer on a number of the large projects there, like I mentioned. We've heard of nobody canceling orders or delaying projects, and I think the headlines on housing and so on, I think tend to sometimes overlook the -- how robust the repair and remodel market is, which still accounts for 40% of lumber consumption and that market's good and growing. And housing starts, we think we're going to be quite stable at approximately 1.3 million units. The single-family share continues to grow, which uses more wood than the multifamily share. And while all this has happened under a price environment that's been very weak, I still think that companies that are investing in long -- making long-term investments in the business are committed to that. And we've seen no projects canceled.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [23]

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Yes, and Ketan, don't forget you've still got $40 logs in the South.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [24]

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Yes, that's true. And then turning to Deltic acquisition, obviously you all made really good progress on the synergies. Can you highlight or talk about kind of incremental opportunities there, additional levers that you all can pull looking into '19 and over the next 2 or 3 years?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [25]

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Yes, so Ketan, we've made really, really good progress getting after those synergies in the merger. We identified roughly $50 million of cad synergies during due diligence. And we executed on those and got those implemented by Q3 last year. We challenged our teams to come up with incremental synergies as we did our budgeting for 2019. And we believe there is another $4 million to $5 million of cost savings opportunities that are out there for us. There is more log and haul optimization work that we can do. We're just now going to start selling FSC premium pulpwood down in Arkansas. We certified 2 of our 3 districts FSC wood down there, so that's worth a little bit of a premium to us. There are going to be silviculture cost savings opportunities in 2019 that we couldn't get in 2018 because it was -- the year was already underway when we closed our merger. Our added scale is going to allow us to bring down cost for seedlings and site prep and whatnot. And then finally, there is still more merchandising, log merchandising work that we can do. Deltic, in our view, didn't have their logs sales fully optimized. In some cases, we're selling chip-n-saw logs for pulpwood. We're going to sort out that chip-n-saw and get that premium. So we think there's another $4 million to $5 million of synergies to go yet.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [26]

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Got it. That's very helpful. And then staying with Deltic, what kind of production levels or operating dates you all are seeing at the sawmills that you all acquired? I'm trying to get a sense of what the ramp up looks like because I know production was going to go up. So I'm just curious where you guys stand with that.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [27]

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So where do we stand in growing their production? Is that your question?

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [28]

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Yes.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [29]

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Yes, so we grew both the Ola and Waldo sawmill production volumes last year. And we're going to continue to grow them again in 2019. We're going to finish doing some work, there's capital projects both at Waldo and at Ola that improved not only production volumes, but also product grade.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [30]

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Just added color, both mills are operating at a full capacity, running 2 shifts a day year round, plus overtime at both locations. So we've got excellent margins at both facilities and with added kiln capacity and improvements we'll continue to make as much lumber as we can.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [31]

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That's very helpful. And final question before I turn over. Have you all any update on the Sun Paper project in Arkansas? Any update you all have heard today?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [32]

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No, there has been no update that we can provide.

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Operator [33]

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Our next question comes from Chip Dillon with Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [34]

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Yes, could you just talk a little bit about your capital spending beyond this year and what a more normal level would be?

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [35]

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Yes, so Chip, this is Jerry. So Eric talked, we are stepping up CapEx in Wood Products in 2019, a more normal level at probably more in that, call it, the mid-$40 million range, so $45 million or so. And that would include...

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [36]

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Got you. And then turning back to CapEx, you did identify the mills with the Chileans, and I apologize, I just -- are those where you're putting the kilns in, are those legacy Deltic mills? And are these similar projects to the ones you did in your own mills say 4 to 5 years ago?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [37]

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Well, the projects that we have underway in 2019 are actually for our own mills. We're are going to put in 2 continuous kilns at our Warren sawmill that we think are going to lower labor cost, increase production, provide maintenance savings and increase grade yield. And then we're in the process of trying to get a kiln permitted out at our St. Maries sawmill and we are in discussions with the EPA about that permit for that kiln. Those kilns both at St. Maries and at Warren will allow us to expand production volumes.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [38]

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And about how much roughly?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [39]

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Well, at St. Maries it depends on what you're talking about the baseline, but I'd say roughly 20 million feet at St. Maries and probably 20 million feet at Warren.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [40]

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Okay. And then one last question, what is sort of the state of the timberland market? I mean it seems like things in a lot of different areas kind of froze up a little bit late last year. And there is a big -- a lot of uncertainty between what the right pricing should be, what the right cap rates are, what the financing costs are. And of course, you just gave us a great example of saving a lot on interest, which is terrific. What would you say the situation is out there? And do you think that opportunities are going to show up in 2019?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [41]

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Chip, it's Mike. If you strip away the 2 big transactions in 2018, which were the PotlatchDeltic merger and the Cato sale from Calpers, I think about 2 million acres traded hands last year in rough numbers. I think, increasingly, we're seeing the land stratified between kind of Class A, Class B and Class C kinds of property based on the quality of the markets, the growth rates of the plantations depending on where they're at and so forth. And so we've seen high-quality timberland continues to trade for approximately $2,000 an acre or more and the lower quality stuff tends to be around $1,000 an acre and everything in between. We had a really interesting transaction just in our backyard in Idaho just in the last month. Molpus Woodlands Group, one of the large TIMOs, sold about 32,000 acres to the State of Idaho, who owns a lot of timberland in Idaho as a public entity. And although the headline prices reported about $1300 an acre, what wasn't disclosed was that the Molpus reserved the rights to harvest timber on that land, which were worth approximately another $600 an acre. So all in, Molpus sold that property for approximately $1,900 an acre as near as we can tell, which we think is a pretty good benchmark for our Idaho property. So I think for -- to kind of put a summary on it, I think there's still a number of investors out there who are looking for a quality timberland, not only the TIMOs but the new Twin Creeks partnership that Weyerhaeuser sold and Plum Creek had put together as well as companies like ours that we continue to look for creative bolt-on acquisitions, and we think that we'll be successful in finding a couple this year.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [42]

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And just to add to what Mike was saying -- Chip, just to add to what Mike was saying on IDL transaction that Molpus sold ground in Idaho up for, IDL referenced a 3.5% discount rate for their acquisitions.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [43]

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That's helpful. And just one more real fast, with the Deltic deal, what percentage of your harvest -- whether you want to look at revenues or EBITDDA, however you roughly think about it, are now tied to Idaho, and therefore indexed to lumber? And then if you could tell us how much again sort of integration levels should we think about on a net basis in terms of how much you harvest and how much you need to feed your Wood Products system, especially with the MDF mill gone?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [44]

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Well, your first question, how much of our harvest is going to be Idaho indexed to sawlogs versus the South? What I'd tell you is that we're going to harvest about 6 million tons, 6 million to 6.1 million in 2019, and of that 1.8 million tons is going to be Idaho. So what is that, roughly, 1/3, maybe a little bit less, 30%, 28% somewhere in there.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [45]

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And maybe to add to that, Chip, and then 70% of that Idaho sawlog volume is index. So overall -- based on overall harvest, it's probably around 20%.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [46]

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Okay. That's helpful. And then in terms of the integration?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [47]

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The integration in terms of internal usage versus external?

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [48]

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Yes.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [49]

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It varies a lot by region. So in the South, we harvest now sawlogs 2.1 million to 2.2 million tons per year more or less and our mills consume about 2.5 million tons per year. But not all of our internal production goes to our own mills. It's roughly, I don't know, 40% internal and 60% external, something like that. And it varies from mill to mill and it varies year to year.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [50]

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We continue to be a net log buyer in the South.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [51]

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We're definitely a net log buyer in the South by a couple of hundred thousand tons.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [52]

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And in the North?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [53]

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Well, in the North, it's going to vary a lot. In Minnesota, it's probably 90% external, 10% internal logs. At our Gwinn, Michigan mill, it's -- we have no timberland there, so that's 100% external. And our St. Maries mill, it might be 60% internal and 40% external.

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Operator [54]

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Our next question comes from Steven Chercover with Davidson.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [55]

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So my first one, the sale of the MDF plant seems like a terrific transaction for you guys. And I'm just wondering, are you able to do a 1031-like kind exchange if there were sawmill assets available in the region? Or is it just available for land?

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [56]

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Yes, Steve, short answer is it's just available for land, so that is not an option.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [57]

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Okay. But given how lumber markets have come back to earth, and I think Ketan asked questions along these lines. Have anyone in the South or anywhere else decided that maybe they want to delay their plans or even exit the business, are there any opportunities in lumber that would be attractive to you besides your own debottlenecking?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [58]

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We haven't -- certainly in the South, as Eric mentioned, with logs at approximately $40 a ton, there's still attractive margins across the U.S. South. We have seen nobody really scale back development plans. There is a sawmill or 2 here and there that ended up being sold. But we're not aware of anything. The margin pressure really has come in the Northwest where log prices have been relatively high, lumber prices have collapsed but, again, we're not aware of anybody cutting back or planning to sell facilities.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [59]

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Okay. And it's kind of late in the session so, some of my questions are answered. But with respect to your payout ratio, I think you said you are closer to 54% after the one-timers associated with Deltic are excluded. Is that right?

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [60]

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That is correct, Steve. So just to walk through that, the payout ratio with kind of all the cash items in was 80%, but when I exclude the $20 million of merger costs related to Deltic, and we also did -- we accelerated $44 million of pension contributions. Once you pull those kind of abnormal things out, that's how you get to the 54%.

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Steven Pierre Chercover, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [61]

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So it looks even with lower lumber pricing that you guys have probably got the best dividend coverage of the timber REITs. And can you maybe just remind us how you establish your payout, what are the guidelines or mileposts?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [62]

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Well, we do think we have a really solid payout ratio using last year's metrics adjusted, as Jerry said, was just over 50%. Now we've raised the dividend twice in the last 2 years, effectively 7.7% in December because we kept -- the share count went up, but we kept the payout ratios the same. So we had an effective 7.7% dividend increase last year. And when we announced the merger with Deltic in October of 2017, we raised the dividend about 7% at that time. So we've had a couple of pretty nice increases. We continue to think that there is other ways to return capital to shareholders and one of those, obviously, is a repurchase program. And we talked about the fact we were blocked out, which was unfortunate because we felt our shares traded at a pretty deep discount in the last couple of months.

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Operator [63]

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Our next question comes from the line of Paul Quinn with RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [64]

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You described lumbar inventories in the channel as pretty low and we've seen a noticeable pickup in price in the last 2 weeks or so. How far do you think it's going to go?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [65]

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Are you talking about lumber pricing, Paul?

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Yes.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [67]

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Yes, I -- as I mentioned earlier, I think our outlook for Q1 pricing is kind of in the 5% range over Q4, which is not too dissimilar from what FEA or what RISI is thinking, same kind of zip code. And then we think we've got about a 15% lift in Q2 over Q1, again due to those really low inventories that are in the system. And we're -- we've plotted out our price projection by month for the year, and we're tracking very closely to what we expected. So we're optimistic about what the spring building season is going to bring.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [68]

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Okay. That's helpful, especially the Q2 guide. Maybe you can give us some color on just the log price adjustment for the Idaho timber sales.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [69]

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I'm not sure I understood your question, Paul. The adjustment for the weight issue?

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [70]

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No, it's not for the weight. I finally understood the weight after a number of years of modeling it out. It's more on lumber price adjustment. So as lumber prices move up, how does that affect log prices? What's the lag? Should we think of that as a 6-week lag, and...

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [71]

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Yes, that's the right way to think of it. It's a 6-week lag. So we had a roughly 32% drop Q4 versus Q3. 5% or 6% of that was probably due to the weight issue, the remainder was due to the lumber issue. Q1 is going to see another decline due to the lag in lumber price issue and another 5% or so for the weight issue. So we could see Q1 Northern sawlog prices off somewhere between 5% and 10%.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [72]

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Okay. And then if we -- yes, sorry.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [73]

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Sorry, I was -- then we'll see a nice pick up in Q2 as lumber prices are turning around.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [74]

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Right. Okay. And then in terms of plywood market, has there been any change at all in that market over the last year?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [75]

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I would say it's gotten a little weaker like just about every market did towards the end of last year. You think about our industrial markets for plywood, these are boat manufacturing, RV manufacturing, furniture frame, those are big discretionary purchases. As interest rates went up, as housing softened, demand for boats, RVs, furniture, all kind of went down together. So the business got soft Q4 and here into Q1.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [76]

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Okay. And then just lastly, just in real estate. I see that 150 lot guidance for sales in 2019. That's up significantly from '18, what's driving that?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [77]

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Well, the real issue there is we got hit with some real unfortunate weather in Q4 in Arkansas. Jerry referenced it in his remarks. And we could not get our lots built in time to get them sold. Chenal Valley is very heavy to lot sales in Q3 and Q4, that's a normal timing of the cycle down there. And since we couldn't get our lots produced for sale in Q4, we missed the window. So the real opportunity is going to be for us to execute on getting those lots developed earlier in the year in 2019 to get them sold in 2019. That's the real driver.

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Operator [78]

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At this time, I am showing there are no more questions. I'll now turn it back over to Jerry Richards.

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Jerald W. Richards, PotlatchDeltic Corporation - VP & CFO [79]

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Thank you, Lyndsey. And we certainly appreciate everyone's interest in PotlatchDeltic and for participating on our call. I'll be available the rest of the day to answer follow-up questions. And that concludes our Q4 2018 earnings call.

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Operator [80]

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This concludes today's conference call. You may now disconnect.