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Edited Transcript of PCH earnings conference call or presentation 4-May-18 4:00pm GMT

Q1 2018 PotlatchDeltic Corp Earnings Call

Spokane Sep 11, 2018 (Thomson StreetEvents) -- Edited Transcript of Potlatchdeltic Corp earnings conference call or presentation Friday, May 4, 2018 at 4:00:00pm 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, Principal Accounting Officer & 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

* Gail S. Susan Glazerman

Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products

* 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

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Presentation

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Operator [1]

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Good morning. My name is Ian, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic First 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 proceed.

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

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Thank you, Ian, and good morning. Welcome to PotlatchDeltic's investor call and webcast covering our first 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 risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchdeltic.com.

I'll now turn the call over to Mike for some comments, and then, I'll cover our first quarter results and outlook.

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

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Thanks, Jerry, and good morning. First quarter results exceeded our expectations, and we are optimistic about the balance of 2018 for many reasons. Lumber prices in the first quarter were up 11% over the fourth quarter and resumed their climb in April. The random length composite index hit another all-time high this morning. So with April behind us and with strong sales already booked well into May, we are on track to have a very strong second quarter in our Wood Products business.

It appears that the transportation shortage largely linked to truck and rail issues in Canada is not going to be short-lived, which means supply will continue to be restricted. Wood Products and log transportation challenges exist in our business but did not cause a material disruption in shipments or costs quarter-over-quarter.

With the merger of Deltic complete on February 20, we now have over 1 billion board feet of annual lumber capacity. Both former Deltic sawmills are now operating on 2 shifts consistent with the operating posture in our sawmills.

We completed a new continuous dry kiln at the Waldo Arkansas sawmill in April as scheduled. Both are key steps as we increased the production run rate at the former Deltic sawmills by almost 100 million board feet per year.

We now own almost 2 million acres of timberlands, including over 1 million acres in the South. Our Southern sawlog volumes increased 45% in the quarter. The increase is primarily due to adding the former Deltic timberland and achieving the harvest run rate included in our synergies target in the first quarter. Due to the superior stocking and proximity to mill locations, logging and hauling cost on former Deltic ownership are lower than legacy Potlatch, leading to declines in logging and hauling cost per ton quarter-over-quarter.

The strong lumber market year-to-date also translates into higher northern sawlog prices since over 2/3 of our Idaho sawlog harvest is indexed to lumber prices. We are able to harvest more than planned in Idaho in the first quarter due to a February cold snap that delayed spring breakup. We began delivering logs again to customers last week.

Our Real Estate segment had another solid quarter, closing 52 rural land transactions and 12 residential lot sales, the latter, all located in Chenal Valley, near Little Rock. In April, we also closed a $7 million sale of land near the Boundary Waters Canoe Area in Minnesota. This represents about a fifth of a larger multiyear option involving the conservation fund and state and federal agencies that use conservation funding to purchase in-holdings within the Boundary Waters Canoe Area. Total sales could add up to 40,000 acres over a 5-year period if all the purchase options are exercised.

Regarding the integration of Deltic, I'm very pleased with the progress that we've made in just 2 months. We have captured $30 million run rate of synergies and expect that number to reach at least $40 million on a run rate basis by year-end. We are well on our way of achieving our goal to increase annual cash available for distribution by $50 million by the end of 2019.

As mentioned, mill production levels have increased and harvesting has ramped up. In addition, Deltic is treated as a REIT effective with the merger close, and most of the corporate overhead synergies have been realized. In some cases, headcount rationalization will not be complete until year-end when accounting, payroll and other systems are consolidated. Overall, our employees have done an excellent job, and we are off to a great start.

By the end of the fourth quarter, we will complete the earnings and profit or E&P purge associated with converting Deltic to a REIT. Recall that amount is estimated to be approximately $250 million and will be paid 20% in cash and the remainder in stock.

After issuing 22 million shares to complete the merger, we are returning $25 million of cash to shareholders per quarter in dividends. Our dividend payout ratio is expected to be a bit over 50% of cash available for distribution for the year, excluding cost to achieve synergies. The board will revisit our dividend later in the year as we obtain more insight on markets, progress on our synergy targets and after we complete the special distribution.

We remain the timber REIT with the most leverage to lumber prices and are positioned well to benefit from the improving U.S. housing market. I'm excited about PotlatchDeltic's prospects, and 2018 is shaping up to be another very good year.

I'll now turn it back to Jerry to discuss the quarter before we take questions.

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

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Thanks, Mike. Effective with this quarter, our discussion and analysis of operating performance will be based on adjusted EBITDDA. This includes the earnings press release that was posted yesterday, the slides accompanying this call and our segment disclosures and discussion in our periodic SEC filings. There's also a minor change to adjusted EBITDDA reported in prior periods, due to the required adoption of an accounting rule this quarter that requires a portion of pension and other postretirement costs to be presented as nonoperating cost. Finally, before I cover the results, we are providing EBITDDA and CAD guidance, while there a lot of moving pieces with the merger, and to help with model calibration.

I'll start with Page 4 of the slides. Adjusted EBITDDA was $64.7 million in the first quarter, which is $14.2 million or almost 30% higher than the fourth quarter. Deltic is included in the results beginning February 21, 2018, the day after the merger was finalized. Former Deltic operations contributed $8.2 million to adjusted EBITDDA in the first quarter.

I'll now review each of our operating segments and highlight the factors that contribute to the strong first quarter performance. Information for our Resource segment is displayed on Slides 5 through 7.

The segment's adjusted EBITDDA was $37.7 million in the first quarter, which is $2.2 million higher than fourth quarter adjusted EBITDDA of $35.5 million. We harvested 449,000 tons of sawlogs in the North in the first quarter. While down slightly from the fourth quarter due to seasonality, we exceeded our plan for the quarter.

Northern sawlog prices declined 1% on a per ton basis in the first quarter. The normal seasonal negative effect of heavier logs due to higher moisture content was mostly offset by higher prices on a dimensional or MBF basis.

Turning to the South, we harvested 666,000 tons in the quarter, which was up 15% over the 581,000 tons we harvested in the fourth quarter. The total included 339,000 tons of sawlogs in the first quarter, representing a 45% increase in the Southern sawlog harvest quarter-over-quarter. While we expected harvest levels to increase due to adding the former Deltic timberlands, the volumes delivered exceeded our plan for the quarter. A meaningful portion of the former Deltic timberlands are operable in wet weather, which our team utilized to manage through an extraordinarily wet quarter in Arkansas.

Sawlog prices in the South declined 16% due primarily to a seasonally less favorable mix of hardwood logs. The price of pine sawlogs remained flat quarter-over-quarter.

Silviculture costs were $1.5 million lower in the first quarter compared to the fourth quarter. We accelerated fertilization in the South in the fourth quarter of 2017 and cost declined seasonally in the North.

I will now shift to Wood Products, which is covered on Slides 8 and 9. This segment's adjusted EBITDDA was $29 million, which is up $7.2 million compared to the fourth quarter. The former Deltic operations contributed $5.6 million in the quarter. Lumber shipments increased 20 million board feet to 204 million board feet in the first quarter. The 2 former Deltic sawmills shipped approximately 30 million board feet after the merger, more than offsetting a normal seasonal decline in legacy Potlatch lumber shipments. Average lumber prices for legacy Potlatch sawmills increased 5% in the first quarter compared to the fourth quarter.

As a reminder, our legacy mills are heavily weighted to late-stage studs and wide dimensional number in Warren, Arkansas. Cost of sales for the legacy Potlatch lumber mills decreased about $1 million. This is due to the seasonally lower shipment volumes and was partially offset by higher log cost, primarily in our St. Maries Idaho sawmill.

Adjusted EBITDDA related to our 2 panel mills increased $2.8 million due to higher industrial grid plywood shipment and prices as well as the addition of Deltic's MDF mill. The MDF plant is benefiting from the replacement of the press change and a press belt that Deltic completed in 2017 and ran at 89% utilization in the quarter. Improvement in the MDF mill's contribution was not included in our $50 million synergies target.

I will now cover our Real Estate segment on Slides 10 and 11. Real Estate's adjusted EBITDDA increased $4.6 million in the first quarter. The 6,100 acres of rural land sold in the first quarter was more than double the number of acres sold in the fourth quarter and did not include any Deltic land. We believe there are solid rural Real Estate opportunities on former Deltic timberlands and a stratification process will be completed this year. Sale of Deltic rural Real Estate is not included in our $50 million synergies target.

In the Chenal Valley development business, we sold 12 lots at an average price of $99,000 per lot in the quarter. Lot sales are heavily weighted to the second half of the year once development of the next cycle of lots is completed. We also saw solid interest in available commercial acres, though lease transactions are lumpy as a reminder.

Turning to synergies and operational efficiencies on Slide 12. Excellent progress against our targets has occurred in the brief time since the merger closed. We were at a run rate of $30 million at the end of March and remain confident that we will achieve a run rate of at least $50 million in 2019. Our Southern Resource employees did an excellent job lining up contractors and customers. This allowed us to hit the current year target harvest run rate in the first quarter. The prerequisites necessary to achieve the lumber production increase are now in place. The new continuous kiln at the Waldo, Arkansas sawmill was completed on time and under budget in April, and both former Deltic sawmills are now operating on 2 shifts.

Regarding the REIT tax savings, earnings from Deltic's timber operations are tax-free beginning the date the merger closed. The only remaining step is the purge of Deltic's undistributed C-corp earnings in a special distribution comprised of stock and cash that is planned to occur in the fourth quarter of 2018.

Approximately 3/4 of the SG&A expense reduction has been achieved on a run rate basis. Work is well underway to integrate systems and processes to achieve the remainder of the target.

Shifting to liquidity highlights presented on Slide 13. We ended the quarter with cash of $102 million. We also closed on a new $380 million revolving credit facility in February, of which, $379 million is available. The facility has a $420 million accordion.

In the first quarter, we repaid $20 million of debt. This includes $14 million of legacy Potlatch debt that matured and $6 million of Deltic's debt.

Regarding Deltic debt, which is represented by the yellow bars on the slide, we retained $129 million that had favorable interest rates and refinanced $100 million.

We also paid $19 million of merger-related costs in the quarter. The dividend payout increased $10 million to a new run rate of $25 million per quarter at the end of March, due to issuing 22 million shares to consummate the Deltic merger.

Moody's upgraded our credit rating to Baa3 investment-grade in April. Their press release cited strong timber asset coverage, strong liquidity, modest leverage, high liquidity and conservative financial policies as reasons for the upgrade.

Capital expenditures were $7.1 million in the first quarter. We expect that capital expenditures will be $57 million for the year. About half of the spend is planned in our Wood Products business with projects at all 8 of our mills. We also plan to spend $9 million in Real Estate primarily to develop residential lots in Chenal Valley and $18 million in Resource.

Now I'd like to comment on our outlook, which is summarized on Slide 14. We plan to harvest 5.5 million to 5.9 million tons for the full year, with about 2/3 of the total harvest volume in the South. Sawlogs are expected to be approximately 90% of the harvest in the North and 50% of the harvest in the South, including stumpage.

We anticipate harvesting between 1.4 million and 1.5 million tons in the second quarter. We expect Northern sawlog prices to increase in the second quarter to reflect higher lumber prices on indexed volume and seasonally lighter logs. We estimate that Southern sawlog prices will be flat compared to the first quarter and that Southern pulpwood prices will be down slightly due to oversupplied markets. We expect resource-adjusted EBITDDA to be up slightly compared to the first quarter as Northern harvest volumes will be at seasonal low point due to spring breakup.

As Mike mentioned, we just resumed hauling logs in Idaho last week. For the year, we estimate that Resource adjusted EBITDDA will be $160 million to $180 million.

Turning to Wood Products. We believe lumber shipments will be just under 275 million board feet in the second quarter. For the year, we anticipate lumber shipments to be just over 1 billion board feet. We're estimating that our average lumber price in the second quarter will be about 5% higher than the first quarter. We expect Wood Products adjusted EBITDDA to be $45 million to $50 million in the second quarter and $130 million to $150 million for the full year.

Shifting to Real Estate. We closed on the sale of approximately 8,000 acres of nonstrategic timberlands to a conservation entity for $900 per acre already in the second quarter. Including that transaction, we plan to sell a bit over 10,000 rural acres in the second quarter. We expect to sell 20,000 to 25,000 rural acres for the year.

We anticipate selling 10 to 12 residential lots in the Chenal master-planned community in the second quarter at an average price of $75,000. For the year, we expect to sell 155 to 160 lots.

We estimate that Real Estate's adjusted EBITDDA will be about $10 million in the second quarter and $35 million to $45 million for the full year. Corporate adjusted EBITDDA is expected to run about $10 million per quarter for the remainder of the year. We expect interest expense to be $10 million per quarter for the second through fourth quarters of 2018.

We estimate a consolidated tax rate of 20% to 25% in the second quarter 2018 and 20% for the full year. The percentage has increased to reflect higher Wood Products earnings in our forecast.

This year is off to a great start. We expect second quarter 2018 adjusted EBITDDA to be meaningfully higher than first quarter 2018 as primarily due to inclusion of the former Deltic operations for a full quarter, progress on our synergies and operational improvements target as well as higher lumber prices.

That concludes our prepared remarks. Ian, I would 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 from 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, with regards to the Deltic merger here. So far, as you review it, both in Wood Products and Resources, what's gone well relative to your expectations? And is there anything that, so far you think could have gone a bit better, I mean, realizing you've only had it for a couple of months now?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [3]

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Yes. It's Eric Cremers. Yes. As Mike and Jerry indicated in their comments, we've been very pleased with how the Deltic merger has progressed. If you go back to the slide that we laid out, the $50 million of incremental CAD that we're going to get from the business, the 2 biggest operational pieces were increasing the harvest and expanding lumber production. And both of those 2 are spot on track to deliver the expected volumes that we laid out when we announced the merger. I'll tell you, the areas that we're most happy about is that there's another bucket of synergies that we really didn't identify. They're -- individually, they're too small, but collectively, they add up to roughly $7 million to $8 million that we've identified so far. And I can just give you a couple of examples in that regard. Historically, Deltic has had this vertically integrated mindset. So essentially, the timberlands would haul all their sawlogs to their own sawmills, and then the sawmill would turn around and sell a large portion of its residuals to its MDF plant. We've implemented more of a margin-focused mindset, which is getting the right log to the right mill. And we've been able to identify substantial gains in multiple areas. So for example, we're now shipping 120,000 tons of sawlogs to our Warren sawmill, saving roughly $4 a ton or $0.5 million per year just on that measure alone. Another example is on the residual side. The Deltic Waldo sawmill historically sold a large part of their shavings to their MDF mill, again, part of vertical integration. But we're actively participating in external markets, and we've been able to identify a situation where the Waldo mill can now sell shavings externally to a new customer, netting us an incremental $150,000 in profit. The other big area of opportunity that we're seeing outside of that big $50 million that we identified when we announced the merger is regarding maximizing selling prices. So for example, the Ola sawmill, which produces a lot of timbers, roughly half its volume is timbers, ship most of that timber volume to Mexico by rail. Well, with our expanded network of customers around the U.S., we've now opened up that customer base to the Ola mills timbers business. And effectively, those customers are paying about $40 a thousand more than what Deltic was charging its Mexican customer. So that's an incremental $1.2 million of earnings. So I mean, those are just a few examples of the incremental margin that we're capturing, these incremental synergies that we did not see when we laid out to consummate the merger. We knew they were there but just couldn't quantify them because they were too small to get our arms around. So we're incredibly pleased with how the merger is going. And quite candidly, I don't think we've had any disappointments since we've consummated this merger. We've been very happy with the people, with the assets. We're very pleased.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [4]

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And the next question was just on the Pacific Northwest. Well, actually, I guess, that's really not the Pacific Northwest for you guys per se, but was wondering, I mean, we've seen prices really skyrocket out there, and I was wondering how much carryover there has been, if any, into your regions in Idaho?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [5]

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Are you speaking of log prices, John?

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [6]

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Yes. Yes, log prices. Sorry about that.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [7]

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Well, as you know, I think as we talked about in the script, we indexed the price of logs in Idaho to the price of lumber for roughly 2/3 of the volume. So kind of operates independently of whatever is happening with Douglas Fir and hemlock log prices on the West Coast, where they have access to an export market, which is typically out of reach for us, so. But as strong as log prices have been on the West Coast, we've seen the same thing in Idaho. They're just -- as you can see on the slides, log prices are really strong with the strong lumber market behind us. And cedar prices, which represent about 10% of our mix, are also quite high.

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John Plimpton Babcock, BofA Merrill Lynch, Research Division - Associate [8]

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Okay. And then, you talked very briefly about freight. I was wondering if you could kind of share a little bit more detail as far as what you're seeing there in the U.S. South and North and the different regions you operate in. And also, if you could provide some sense as far as what percent increase you're seeing?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [9]

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So on the Wood Products side, trucking is really more, in our minds, more of an availability issue rather than a cost inflation issue as we are generally able to pass along trucking inflation to our customers to maintain our FOB mill realizations. So we're opportunistically managing around these freight issues. So historically, to go back to Deltic. Deltic has railed only 25% to 30% of its production. Potlatch historically has railed about 20% of its production. So we're in the process of moving Deltic away from trucking towards rail, which should help to alleviate some of these pressures. We've also taken a step to sign up a contract or we've now got a dedicated contractor for 4 trucks down in Arkansas. And those 4 trucks, they're going to charge us a little bit more than what the market rate might be, but it's a small dedicated fleet of those trucks servicing us. And turnaround times are going to be much faster than otherwise. So we're utilizing that to help alleviate some of these cost pressures. In general, I'd say costs are going up in trucking, about 10% per year. But like I said at the start, we're really passing those costs along to our customers.

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Operator [10]

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And your next question is from the line of Gail Glazerman from Roe Equity Research.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products [11]

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Taking a step back, can you just give a little bit more perspective in what you think drove the lumber pricing strength in the first quarter? And specifically, maybe, how much the supply shortages and British -- the freight logistic issues in British Columbia may have played into that?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [12]

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Sure. go ahead.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [13]

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Yes, Gail. So lumber prices ran pretty hard in the first quarter. It kind of goes back to lots of different factors. We've talked about these factors on previous calls. We got really firm demand across new housing starts, repair and remodel, commercial and industrial. Field inventories are relatively low. So as demand increases, pricing responds very quickly. This duty issue has now been resolved at 21%. Still got firm Chinese demand and takeaway. You've now got capacity utilization, and the industry has inched up to 90% per RISI, and RISI anticipates us going to 91% next year. So in spite of all the chatter about all these new mills and all this new capacity coming online, demand frankly is outpacing that incremental supply. I'm sure that going into the fall last year, you'll recall all the fires that were out there and the mills in the West and in Canada were having difficulty procuring logs. I'm sure that was part of it. We started at a relatively high base but the transportation woes just added to it. Now where we sit today, we think there's roughly 600 million feet of lumber that are stuck, so to speak, up in Canada waiting for these transportation issues to get resolved. And 600 million feet may sound like a lot of lumber, but when you talk about a market that's growing 2-plus-billion board feet a year in incremental demand -- and by the way, some of that 600 million feet is going to be headed to China and not the United States. And the fact that these transportation issues aren't going to be resolved quickly, as Mike spoke about, we don't feel like there's a wall of wood ready to hit the U.S. market. But you asked a question, how much of the price run was due to those transportation issues. And if we had to guess, we'd say maybe half of that 11% increase in random lengths was due to transportation issues up in Canada.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products [14]

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That's great. Can you talk a little bit about the -- just underlying timberland markets? Obviously, sale activity has been pretty limited this year, and I'm just wondering, do you have any visibility into what the pipeline might be moving through the rest of the year?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [15]

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Well, the pipeline in the areas that we paid most attention to in the central U.S. South, which is really the only active area, is pretty quiet, other than the couple of the big sales that have been on the market for some time. Those are the several hundred thousand acre transactions that have been in the works for a while. But beyond that, Gail, it's been quite quiet. And we're not currently aware of anything coming to market in the pipeline that we have visibility to at this point.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products [16]

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Okay. And things outside your area, have you paid any attention at all to see if there is just a lack of buyer interest? Or if it's more on just the sell side that people just model?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [17]

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I don't think it's a lack of buyer interest. I think the transactions are being stratified more and more into 3 classes of properties kind of A, B and C. And I think -- RISI and the others have even labeled it that way with A class property still carrying a really strong valuation. And obviously, the C class properties, probably, with a more difficult supply agreements or lower quality timberland or poor stocking are carrying lower valuations. But I don't think there's been any fall off on interest at all. It's just that for whatever reason, TIMOs and others just haven't brought as much property to market as what we've seen in the past. And perhaps, people are waiting for a turn up in Southern sawlog prices to do that. Our thesis continues to be they're going to be lower for longer. So I'm not sure that waiting strategy is going to make any difference.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products [18]

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Okay. And then, just a couple of quick ones. Given that 5% lumber price assumption that you're using for the second quarter, can you give any sense between that and the kind of seasonal weight water issues, what that might translate into for Northern log pricing?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [19]

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Are you talking about in Q2, Gail? Or you're talking about...

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [20]

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Q2.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products [21]

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Yes. In Q2, what that would translate into of movement in Northern log prices, just if you assume that 5% move in lumber prices and whatever the normal seasonality might be.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [22]

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Yes. So Gail, we're -- we are -- the density issue flips over and it goes the other way in Q2 versus Q1. It has roughly an 8% impact. Logs are 8% lighter in Q2 versus Q1. Combined with the higher lumber prices that we're seeing as well as improved cedar surprising that we see, I would expect Northern sawlogs could be as much as 15% higher in Q2 versus Q1.

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Gail S. Susan Glazerman, Roe Equity Research, LLC - Senior Analyst of Paper, Packaging and Forest Products [23]

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Okay. That's helpful. And then, also, can you give just any sort of sense of basis of rentals for 2Q as well as for the year? What you're expecting?

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Jerald W. Richards, PotlatchDeltic Corporation - VP, Principal Accounting Officer & CFO [24]

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Yes. I think that one, Gail, I'll recommend, let's take that one offline. I think, that's getting in the details. So if we can.

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Operator [25]

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Our next question is from the line of Ketan Mamtora from BMO Capital Markets.

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

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Just first question is -- and I'm kind of thinking about sort of legacy Deltic's kind of lumber production target. So that 360 million board feet, still kind of a good target, and I know it's rolled into kind of that 1 billion for the year. But is that kind of a -- still a good target?

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

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Yes, Ketan. It is a good number. Deltic's production for the full year, we're estimating to be around 370 million board feet. And of that, roughly 305 million to 310 million feet will hit Potlatch since we closed the merger in late February.

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

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Got it. And I don't want to get too far ahead, but kind of as we think beyond that 370 million number, is there kind of any projects that you all have in mind that could take it up even without kind of disclosing what those projects could be at this point? But is there kind of room to do that?

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

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Now are you talking about at the Deltic mills? Or the Potlatch mills? Or...

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [30]

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At the Deltic mills.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [31]

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Yes. No -- absolutely. We're pushing those mills. We're going to push them just as hard as we have been pushing our own mills. Go look at our track record, every year we eke out more and more lumber. We'll do the same thing at their mills. There are projects underway, and we would expect another, I don't know, 4% to 5%. It's early, but 4% to 5% in 2019 versus 2018 is our current plan.

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Ketan Mamtora, BMO Capital Markets Equity Research - Analyst [32]

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Got it. That's very helpful. And then, coming back to kind of the synergies, anything kind of from a silviculture standpoint? Or maybe their approach to thinning, which is kind of different from the way you do? Or if there is opportunity along those lines?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [33]

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Yes. There is absolutely opportunities there, whether it's in thinning or using advanced genetics or fertilization. There are opportunities there for us to improve the productivity of the Deltic for us.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [34]

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Most of that will start to take place in 2019 and beyond. There's really limited opportunity to do that this year, just given the timing of the merger close and the seasonality of some of those activities.

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Operator [35]

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And our next question is from the line of Collin Mings from Raymond James.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [36]

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I guess, just to start from me. Just, can you just maybe talk a little bit more about the guidance revision relative to what you kind of put out there in February for the combined company? Obviously, continued strength in lumber pricing. Is that really the only driver of the increased guidance on kind of lumber pricing to date? Or is there some other moving pieces that we should be aware of that really drove the raise?

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Jerald W. Richards, PotlatchDeltic Corporation - VP, Principal Accounting Officer & CFO [37]

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As you know, Collin, I mean, that guidance has actually increased fairly significantly. And the main thing is an update of lumber pricing, where we had extremely strong lumber prices in Q1, and then have gone the next leg up. As Mike commented in his part of the script, extraordinarily strong. So that's a big part of the increase. And then, there's obviously some other moving parts as well.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [38]

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Yes. One thing to think about, Collin, those improved lumber prices, they will roll through to our resource business in the North, due to the index lumber arrangement.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [39]

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Right. Right. I guess, maybe, come at it at a slightly different way, does the guidance increase just kind of reflect the lumber pricing strength that we've seen February through current? Or is there some kind of embedded -- I guess, maybe has the outlook for the balance of the year improved or improving notably relative to kind of where you said in February?

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Jerald W. Richards, PotlatchDeltic Corporation - VP, Principal Accounting Officer & CFO [40]

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Yes. Short answer, Collin, is it really reflects strength to this date, to this point in time. But obviously, the back half of the year has increased just because it would have to fall off significantly from where it's at now. And we don't think that's going to be the case.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [41]

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Got you. So I mean, I don't know if you guys care to quantify a little bit, but just if we were to think about it for kind of a full year, year-over-year basis, kind of how are you thinking about that in terms of the guidance?

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

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Are you talking about in terms of lumber, Collin? Or you -- or what?

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [43]

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Yes. Yes. Yes, I'm sorry.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [44]

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Well, it's embedded in our guidance, Collin.

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Jerald W. Richards, PotlatchDeltic Corporation - VP, Principal Accounting Officer & CFO [45]

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Right. Maybe because again, that's really starting to get in the detailed modeling, Collin, so maybe let's take that one offline and talk through that.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [46]

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Okay. Fair enough. Moving on to the -- just from a balance sheet perspective. Obviously, you finished 1Q here with $100 million of cash. Recognizing you have the $50 million kind of marked for the special dividend, just maybe update us on how you're thinking about prioritizing capital, especially given the merger is now kind of in the rearview mirror and just the Wood Products business, obviously, continues to throw off some pretty nice cash flow.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [47]

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Well, kind of in priority, the dividend payment is now approximately $25 million a quarter, and we're currently paying out probably just slightly more than 50% of cash available for distribution. So we're in really good shape there. As you mentioned, we've earmarked the special distribution of $50 million in cash. We also have got a keen eye on kind of yield markets, and where we're at there, and we'll consider paying down some of the debt that we have. We've got the maturity in 2019, as you know, and some other tranches of debt that we could choose to prepay if it made sense. So I think those are the key priorities. Acquisitions, bolt-ons are always of interest to us. The market has been quiet, but sometimes, those things surface quickly. We've got lots of dry powder to be able to do that in market areas that makes sense. We've earmarked $57 million for capital this year, which we think is rightsized for the business and allows us to continue to accomplish the improvements that Eric mentioned. So I don't think you'll see any surprises in what we do. The share repurchase authorization expires or did expire -- I think, did expire, and we have not renewed that with the board at this point.

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Collin Philip Mings, Raymond James & Associates, Inc., Research Division - Analyst [48]

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Okay. And then, just last one for me, going back. And Mike, you just kind of touched on this, but Jerry, obviously, $190 million of debt coming due in '19. We've talked about before $150 million of that at 7.5%. Just as you kind of sit here right now, how are you thinking about approaching kind of that 2019 maturities?

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Jerald W. Richards, PotlatchDeltic Corporation - VP, Principal Accounting Officer & CFO [49]

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Yes. As I sit here at the current present time, again a 7.5% debt has the make-whole that we've talked about in the past, which really doesn't make sense economically to prepay that or pay it off early. So current plan would be to refinance that at or near to maturity. And using today's current rates, how much interest expense would we save? That amount would be roughly $4 million a year on a run rate basis.

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Operator [50]

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And our next question is from the line of Chip Dillon from Vertical Research.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [51]

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Could you talk a little bit about the Real Estate business? It's obviously a much bigger situation with all the Arkansas land not far or even in Little Rock. And I know that you're looking for, I guess, $35 million to $45 million in EBITDDA from that business this year. But as you look at -- if we assume that housing and the economy in general continue to chug along in a positive pace, how should we see, over the next 2 to 4 years, that number look? In other words, how does the pipeline kind of work through the income and cash flow statements?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [52]

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Well, Chip, this is Eric. As you know, our Real Estate business, when you look at it, there's 2 different components. There's the stable, what we call same-store sales piece, which are the smaller 40-, 80-acre kind of tracts that we sell typically in Minnesota. That business is very stable for us at 15,000 to 20,000 acres per year. We've now picked up the Deltic business. The Deltic business has got those residential lot sales in Chenal Valley. It's got commercial acre sales in Chenal Valley, and we're going to add to it rural recreational sales outside of Little Rock area. We also have got lumpy conservation sales, which tend to happen from time to time. We announced the transaction here this morning. We call it Plan B. On the one hand, it's a onetime transaction. On the other hand, it's spread out over 5 years, with roughly incremental revenue each of the next 5 years, so that's going to be relatively stable as well. So I think to get back to your question, the volatility that we're going to see in our Real Estate business going forward, it's probably going to be due to commercial acres sales in Chenal Valley, which tend to be really hard to predict. They can be pretty lumpy. And it's going to be larger conservation sales that happen from time to time, and that's probably the best way to describe it.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [53]

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And I would imagine that $250,000 per acre on the commercial side can be -- there can be a lot of variability around that?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [54]

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Absolutely. I mean, it's -- we're in discussions with somebody right now that's over $400,000 an acre.

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [55]

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Yes. Yes. And then, second question is, with your larger footprint, it seems like we are hearing, and you've all mentioned this, about a lot of potential and actual planned sawmill projects. I know another REIT management talk about 4 billion board feet over several year period that they measured or cited someone measuring that. As you think about these, what's been announced, how should that impact your -- the draw from your lands? And maybe talk a little bit about what your long-term sort of harvest goal would be -- you used to talk about, say the 4.5 billion ton -- 4.5 million tons, on the legacy Potlatch. What does that look like going forward? And has that changed with all these recent announcements for sawmills?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [56]

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There's a lot of questions there, Chip. But to start out with the impact on us and our wood basket, that Conifex mill is still trying to get up and running in Arkansas. There's also talk of the Sun Paper pulp mill going up in Arkansas. Both of those 2 factors, when they happen, we'll have a -- should have a meaningful impact on log prices in the Arkansas area. And you're also seeing incremental volumes come out of warehouse or mills and our own mills and Interfor's mills. So there's a lot of projects underway to help stimulate demand. I'm sorry, what was the second part of your question?

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Clyde Alvin Dillon, Vertical Research Partners, LLC - Partner [57]

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Yes. Just in general, what do you think the impact will be, overall, to Potlatch of all the sawmill activity that you've seen announced, not just in the Arkansas area, but just across your entire land base?

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [58]

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Yes. I would say, Chip, we run our timberland on a sustainable basis, so we will tend to give a range on what our harvest is going to be from year-to-year. But it's -- we're going to be within that range. We've said, for this year, it's 5.5 million to 5.9 million tons. I would expect us to stay at that level over the next several years, assuming we don't make a meaningful acquisition or divestiture. So I think that's our volume is going to stay in that kind of range. I do think there's an opportunity for Southern Yellow Pine sawlogs to move higher sometime over the next 2 to 3 years. If you look at what was being harvested pre-Great Recession, in the South, it was around 78 million tons of sawlogs per year. This is per University of Georgia data. It dropped to 50 million tons a year in the Great Recession. It's now found its way up to 60 million tons. So we've come up 10 million tons per year since the Great Recession. And there is roughly 15 to 20 large sawmill expansion projects taking place in the U.S. South, which roughly total somewhere between 15 million and 20 million tons per year. So if you assume those projects happen and that incremental demand is realized, you're talking about demand going back up to the 75 million to 80 million tons per year where we were at pre-Great Recession. The market will be much more in balance then. And I think, sometime between now and 3 years out, you're going to start to see a price response. And already, you're starting -- Weyerhaeuser made a few comments about wood -- about log prices moving in their wood baskets. The most recent Timber Mart-South data showed that 7 out of 10 states' sawlog prices improved quarter-over-quarter. So there is an opportunity here for Southern Yellow Pine's sawlog pricing to start moving higher.

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Operator [59]

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(Operator Instructions) Our next question is from the line of Paul Quinn from RBC Capital Markets.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [60]

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Mike, you described the M&A pipeline as quiet right now, and yet, we've -- it seems like that's the majority of the opinion that I've heard. But then, one of your smaller REIT peers this morning said the M&A opportunities were quite high, and the pipeline that they were looking at was quite robust. What's the major source of disconnect there?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [61]

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I have no idea. I didn't hear their call, so I really can't opine about that. I think my comments were primarily focused around Arkansas, Mississippi, perhaps parts of Alabama, which is really where we focus. And I could only suspect that the other timber REIT is looking at market areas beyond that. But in our areas, it's pretty quiet.

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Paul C. Quinn, RBC Capital Markets, LLC, Research Division - Analyst [62]

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Okay. And then, maybe, just a focus on the areas outside of Arkansas because I'm pretty familiar with the Wood Products capacity additions there. What have you seeing in Alabama and Mississippi right now?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [63]

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Well, the 2 mills have hit the ground and up and running, 2 brand new Comact sawmills -- I mean, Comact equipment in the Biewer mill in Newton, Mississippi, and Two Rivers mill in Demopolis, Alabama. Both of those hit the ground with incredibly quick start-ups, and I think are both operating at or near capacity. So those are outstanding. GP just announced a new mill in Talladega. That's Alabama. I don't know the completion date, but I imagine it's within 18 months or so. So that kind of Central to Western Alabama area, and Central to Northern Mississippi is really strong. A plywood plant in Louisville, Mississippi, that's now got its legs under it, with a really strong plywood market. So that area's probably going to see improvement sooner than Arkansas.

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

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Okay. And then, just one of the factors cited across the board in terms of from the home builders all the way to the Wood Products producers is labor. What are you guys seeing in terms of labor availability and inflation on that front?

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [65]

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The best example we have is really the Ola sawmill in Arkansas, which was not operating on 2 shifts, and we were able to bring it up on 2 shifts in pretty short order after the merger. And I think have found good quality people. Our turnover rate is not abnormally high across our whole system. And we always like to have more skilled people, electricians and millwrights and so on available. But I don't think -- we can't point to labor as a constraint in our business. Maybe Eric has a different view, he's closer to it.

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Eric J. Cremers, PotlatchDeltic Corporation - President, COO & Director [66]

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No. What I'd say, Paul, is that we estimate turnover at our Warren mill, with the hourly to be, roughly, 10% a year. It's in the low to mid-single digits at our other mills. In most of the towns that we operate in, we are the employer of choice, and we pay well above minimum wage. So outside of, as Mike said, skilled trades, electricians and machinists, we're not having issues.

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Operator [67]

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And I'm showing at this time, we have no further audio questions. Presenters, I turn it back to you.

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Michael J. Covey, PotlatchDeltic Corporation - Chairman & CEO [68]

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All right. Thank you, Ian. And appreciate everybody's interest in PotlatchDeltic. I'll be available to take questions, those detailed modeling questions and other things. I'll be heading back to my desk shortly.

Thanks again, and we'll be in touch.

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Operator [69]

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Ladies and gentlemen, this does conclude the PotlatchDeltic First Quarter 2018 Conference Call. We thank you for your participation. You may now disconnect.