PotlatchDeltic's (PCH) CEO Mike Covey on Q1 2018 Results - Earnings Call Transcript

PotlatchDeltic Corporation (NASDAQ:PCH) Q1 2018 Earnings Conference Call May 4, 2018 12:00 PM ET

Executives

Jerry Richards - Vice President and Chief Financial Officer

Mike Covey - Chairman and Chief Executive Officer

Eric Cremers - President and Chief Operating Officer

Analysts

John Babcock - Bank of America Merrill Lynch

Gail Glazerman - ROE Equity Research

Ketan Mamtora - BMO Capital Markets

Collin Mings - Raymond James

Chip Dillon - Vertical Research

Paul Quinn - RBC Capital Markets

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions] Thank you.

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

Jerry Richards

Thank you, Ian, and good morning. Welcome to the 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 Web site at www.potlatchdeltic.com.

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

Mike Covey

Thanks, Jerry and good morning. First question results exceeded our expectations and we’re 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 Lengths Composite index hit another all-time high this morning. So, with April behind us and with strong sales already booked well in May we're 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 cost quarter over quarter.

With the merger of Deltic complete on February 20th we now have over 1 billion board feet of annual lumber capacity, both former Deltic sawmills are now operating in two 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 volume 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 costs on former Deltic ownership are lower than legacy Potlatch, leading to declines in logging and hauling costs per ton quarter over quarter.

The strong lumber market year-to-date also translates into higher northern sawlog prices since over two thirds of our Idaho sawlog harvest is index to lumber prices. We are able to harvest more than plant in Ohio in the first quarter due to a February cold snap that delayed spring break up. We begin delivering the logs again to customers last week.

Our real estate segment had another solid quarter closing 52 rural land transactions in 12 residential lot sales, the latter all located in Chenal Valley near Little Rock. In April we also close $7 million sale of land near the boundary Waters Canoe area in Minnesota. This represents about 1/5 of the larger multiyear option involving the conservation fund and state and federal agencies that use conservation funding to purchase inholdings within the boundary Waters Canoe area.

Total sales could add up to 40,000 acres over a five-year period when all the purchase options are exercised. Regarding the integration of Deltic. I'm very pleased with the progress that we've made in just two 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 is ramped up in addition, Deltic as a REIT affected with the merger closed 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 excellent job and we’re up 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 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 after we complete the special distribution.

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

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

Jerry Richards

Thanks Mike, affected with this quarter. Our discussion and analysis of operating performance will be based on adjusted EBITDA 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. Results are minor change to adjusted EBITDA reported in prior periods due to the required adoption of an accounting rule this quarter that requires a portion of pension and other postretirement cost to be presented as nonoperating costs.

Finally, before I cover the results we are providing EBITDA on CAD guidance. While there are a lot of moving pieces, with merger and that help with model calibration. I will start with page 4 of the slides. Adjusted EBITDA 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 EBITDA in the first quarter.

I’ll now review each of our operating segments and highlight the factors that contributed a strong first quarter performance. Information for resource segment is displayed on Slide 5 through 7. The segment’s adjusted EBITDA was $37.7 million in 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 MDF 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 2017 and costs declined seasonally in the north.

I will now shift to wood products, which is covered on Slides 8 and 9. The segment’s adjusted EBITDA 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 two 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 lumber 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 costs primarily in our St. Mary's Idaho sawmill.

Adjusted EBITDA related to our two panel mills increased $2.8 million due to higher industrial grade private 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 mills 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're solid rural of real estate opportunities on former Deltic timber lands 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 were heavily weighted to the second half of the year once development of the next cycle of loss is completed. We also saw solid interest in available commercial acres. The 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 of the wall the Arkansas sawmill was completed on time and under budget in April and both former Deltic sawmills are now operating on two shifts.

Regarding the REIT tax savings earnings from Deltic timber operations are tax-free beginning the date the merger closed. The only remaining staff is the first of Deltic's undistributed C Corp earnings and special distributions comprise of stock and cash that is planned occur in the fourth quarter 2018. Approximately three quarters 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, according. 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 retained $129 million that have favorable interest rates and refinance the $100 million.

We also paid $19 million in 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 that 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 eight 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 would like to comment on our outlook, which is summarized on Slide 14.

We plan to harvest, 5.5 to 5.9 million tons for the full year with about two thirds 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 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 index volume and seasonally wider 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 up be slightly compared to the first quarter as northern harvest volumes and we had seasonal low points due to spring break. As Mike mentioned we just resumed hauling logs in Idaho last week. For the year we estimate that resource adjusted EBITDDA will be a $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 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 a $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 logs to 160 logs. 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 of 2018 and 20% for the full year. The percentage has increased to reflect hardwood 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 of 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.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] Our first question comes from the line of John Babcock from Bank of America Merrill Lynch.

John Babcock

I 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 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?

Eric Cremers

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 two biggest operational pieces were increasing the harvest and expanding lumber production and both of those two are spot on, track, to deliver the expected volumes that we laid out, when we announced the merger.

I’d say the areas that we’re most happy about is that there’s another bucket of synergies that we really didn't identify individually they are too small, but collectively they add up to roughly $7 million to $8 million that we identified so far. And I can just give you a couple of examples in that regard. You know, 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 been able to identify substantial gains in multiple areas. So, for example, we are now shifting 120,000 tons of sawlogs for Warren sawmill saving roughly 4 dollars 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 the savings to their MDF mill again part of vertical integration but were actively participating in external markets we been able to identify situation where Waldo mill can also savings externally to new customer netting us an incremental $150,000 in profit.

The other big area of opportunity that we are seeing outside of that, that $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 of its volumes timbers shipped most of that timbers volume to Mexico by rail. Well with our expanded network of customers around the US 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 this 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 are 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 are incredibly pleased with how the merger is going in and quite candidly, I don't think we had any disappointment since we consummated this merger, we been very happy with the people, with the assets we are very pleased.

John Babcock

Thanks for detail there. Next question was just on the Pacific northwest, I guess really not the substantially well as for you guys per se, but I was wondering we’ve seen prices really sky rocket out there and I was wondering how much carry over there has been into your regions in Idaho.

Mike Covey

Are your speaking of log prices John?

John Babcock

Yes, log prices.

Mike Covey

Well as you know I think as we talked about in the script, we indexed the price of logs in Idaho the price of lumber for roughly two third of the volumes, so kind of operates independently of whatever's happening with Douglas for and how log prices on the West Coast where they have access to an export market, which is typically out of reach for us. But as strong as log prices have been in the West Coast we have seen the same thing in right, 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.

John Babcock

Thank you and you talked very briefly about freight, I was wondering if you could share a little bit more detail as far as what you're seeing there in your South and North and the different regions you in operate in and also you know if you could provide some sense of as what percent increase you’re seeing.

Jerry Richards

On the wood product 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 no realizations. So, we’re opportunistically managing around these freight issues.

So historically to go back to Deltic, Deltic is railed only 25% to 30% of its production. Potlatch historically has railed about 40% of its production so we’re in the process of moving Deltic away from trucking towards rail, which should help alleviate some of these pressures. We've also taken a step to sign up a contract that we’ve now got a dedicated contractor for four trucks down in Arkansas and those four trucks, they are 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 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.

Operator

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

Gail Glazerman

Can you just give a little bit more perspective on what you think drove the lumber pricing strength in the first quarter and specifically maybe how much the supply shortage in British -- the freight logistic issues in British Columbia may have played into that?

Jerry Richards

Gail, so lumber prices ramped pretty hard in first quarter, 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-remodel, commercial-industrial, field inventories are relatively low, so as demand increases the pricing responds very quickly.

This duty issue has now been resolved, 21%, still got firm Chinese demand and takeaway, you have now got capacity utilization in the industry has inched up to 90% per reesee and reesee anticipates 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 the fires that were out there in the mills in the Western Canada were having difficulty procuring logs. I am 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 market that’s growing 2 plus billion board feet a year and incremental demand and by away some of that 600 million feet is going to 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 really ready to hit the U.S. market, but you asked the question how much of the price burn 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.

Gail Glazerman

Can you talk a little bit about the just underlying timberland markets obviously sale activity has been pretty limited this year and I am just wondering do you have any visibility into what the pipeline might be moving through the rest of the year?

Mike Covey

Well the pipeline in the areas that we pay the most attention to in the central US South which is really the only active area is pretty quite other than the couple of the big sales 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 its been quite and we were not currently aware of anything coming to market in the pipeline that we have visibility to at this point.

Gail Glazerman

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 just as all side, the people just.

Mike Covey

I don’t think it is lack of buyer, I think the transactions are being stratified more and more into three classes of property kind of A, B and C I think we seen others even labeled it that way with, A class properties still carrying a really strong valuation and obviously C class properties probably with a more difficult supply agreements or lower quality Timberland reports stocking, carrying lower valuations but I don’t think there has been any falloff on interest at all, it's just that for whatever reason [indiscernible] and others just have broad as much property to market as what we seen in the past, perhaps people are waiting for a turn up in southern sawlog prices to do that, our thesis continues to be they are going to be lower for longer, so not sure that waiting strategies is going to make any difference.

Gail Glazerman

Okay and then just 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 seasonal water issues what that might translate into for northern log pricing.

Jerry Richards

Are you talking about in Q2 gale or you talking?

Gail Glazerman

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

Jerry Richards

So, Gale, the density issue flips over and it goes the other way in Q2 versus Q1, has roughly an 8% impact along as our 8% lighter in Q2 versus Q1, combined with the higher lumber prices that were seeing as well as improved Cedar pricing that we see, I would expect northern sawlogs could be as much as 15% higher in Q2 versus Q1.

Gail Glazerman

Okay that’s helpful and then also can you give us just any sort of the sense basis of land sales for Q2 as well as for the year, what you’re expecting.

Jerry Richards

I think Gale, let's take that one offline, I think let's get into the details if we can.

Operator

Our next question Ketan Mamtora from BMO Capital Markets.

Ketan Mamtora

Just first question is -- and I'm kind of thinking about sort of legacy Deltic kind of lumber production target. So that 360 million board feet is 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 still a good target?

Jerry Richards

It is a good number, Deltic's production for the full year we are estimated to be around 370 million board feet. I know that roughly 305 million to 310 million [seeds] will hit to Potlatch since we close the merger late February.

Ketan Mamtora

Got it. And I don't want to get to fall ahead, but kind of as we think beyond that 370 million number, is there kind of any projects that you 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?

Jerry Richards

Are you talking about the Deltic mills or the Potlatch mills?

Ketan Mamtora

At the Deltic mills?

Jerry Richards

Yes -- no, absolutely, we’re pushing those mills. We’re going to push in just as hard as we’ve been pushing our own mills. If you look at our track record every year we eek 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.

Ketan Mamtora

Got it. That's very helpful. And then coming back to kind of dissynergies, 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's opportunity along those lines?

Jerry Richards

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

Mike Covey

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.

Operator

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

Collin Mings

I guess, just to start from me, 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 are there some other moving pieces that we should be aware of that really drove the raise?

Jerry Richards

As you know Collin I mean that guidance has actually increased fairly significantly and the main thing is an update of lumber pricing 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, and extraordinarily strong, so that’s a big part of the increase, and then there’s obviously some other moving parts as well.

Mike Covey

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

Collin Mings

I guess maybe I could come slightly different way is that 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 improved notably relative to kind of where you said in February?

Mike Covey

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, we don't think that's going to be the case.

Collin Mings

Got you. So, I mean, I don't know if you guys care to quantify a little bit, but just if you 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?

Mike Covey

Are you talking about in terms of lumber Collin or you’re what...?

Collin Mings

Yes, yes -- I am sorry.

Jerry Richards

It’s embedded in our guidance Collin.

Mike Covey

Maybe so -- and that’s really starting to get in detail modeling Collin for me, maybe we’ll stick out in offline and talk through that.

Collin Mings

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 a $50 million kind of mark for the special dividend, just maybe update us on how you're thinking about prioritizing capital, especially given the merger now kind of in the rearview mirror and the Wood Products business obviously continues to throw off some pretty nice cash flow.

Mike Covey

Well kind of in priority the dividend payment is now approximately $25 million for currently paying out probably slightly more than 50% of cash available for distribution. So, we’re in really good shape there, as you mentioned we already 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 will consider paying down some of the debt that we have, we got the maturity in 2019 as you know and some other tranches of debt that we could chose to prepay to make sense, so those are the key priorities to acquisitions, bolt-ons are always of interest. The market is being quiet but some time those things surface quickly, we got a lot of dry powder to be able to do that in market areas that make sense, we earmarked $57 million for capital this year which we think is right sized for the business and allows us to continue to accomplish improvements that Eric mentioned, so I don’t think you will see 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.

Collin Mings

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

Jerry Richards

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

Operator

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

Chip Dillon

Yes, good morning and good afternoon. 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 to 45 million in EBITDA 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 two to four years that number look and how does the pipeline kind of work through the incoming cash flow statements.

Eric Cremers

Well this is Eric, as you know our real estate business when you look at it there is two different components there is stable we call same-store sales piece which are the smaller [40880] acre contracts 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 little recreational sales outside the Little Rock area.

We also have got lumpy conservation sales, which tend to happen from time to time, we announced transaction here this morning, we call it Plan B. On the one hand, it's a one-time transaction. On the other hand, its spread out over five years with roughly incremental revenue each in the next five 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 is probably going to be due to commercial acre sales in Chenal Valley, which tend to be really hard to predict, they could be pretty lumpy. And it’s going to be larger conservation sales that happen from time to time, and that is probably the best way to describe it.

Chip Dillon

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

Mike Covey

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

Chip Dillon

And then the second question is with your larger footprint it seems like we’re hearing and you all mentioned this about a lot of potential and an actual plan sawmill project. I know another REIT manager that talked about 4 billion board feet been over several year period that they’ve 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 -- I know you used to talk about say 4 million to 4.5 million tons on the legacy Potlatch, what does that look like going forward, and has that changed with all these recent announcements with sawmills?

Jerry Richards

There’s a lot of questions, there, Chip, but I want to start out with the impact on us and our wood basket, that Conifex is still trying to get up and running in Arkansas, there’s also talk of the saw paper pulp mill going up in Arkansas, both of those two factors when they happen should have a meaningful impact on log prices in Arkansas area and you're also seeing incremental volumes come out of warehouse or mills and our own mills and Interfor mills so it's -- there's a lot of projects underway to help stimulate demand.

I am sorry what was the second part of your question?

Chip Dillon

Just in general what you think the impact would 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?

Jerry Richards

What I would say Chip is that 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 divesture, 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 two to three 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 are roughly 15 to 20 large saw mill expansion projects taking place in the US South, which roughly totaled somewhere between 15 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 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 three years out you’re going to start to see a price response and already you're starting your warehouse made a few comments about log prices moving in their wood baskets. The most recent Timber Mart-South data show that seven out of 10 states Sawlog prices improved quarter over quarter, so there an opportunity here for southern sawlog pricing start moving higher.

Operator

[Operator Instructions]. Our next question is from line of Paul Quinn from RBC Capital Markets.

Paul Quinn

Mike, you described the M&A pipeline is quiet right now, and yet, it seems like that's the majority of opinion that I've heard. But then, one of your smaller REIT peers this morning said that 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?

Mike Covey

I have no idea, I didn’t hear their call, so I really can’t talk about that, I think my comments are primarily focused around Mississippi perhaps parts of Alabama which is really where we focus and I could only suspect that the other timber is looking in market areas and beyond that but in our areas is pretty quiet.

Paul Quinn

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

Mike Covey

Well the two mills have hit the ground and up and running two brand-new Comox sawmills -- I mean, Comox equipment in the in mill in new Mississippi and Two Rivers mill in Alabama. those are those that hit the ground with incredibly quick start ups and I think they 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 day but I imagine within 18 months or so that kind of central to Western Alabama area in central to northern Mississippi is really strong in and plywood plant in Louisville, Mississippi that’s now got its legs under with a really strong plywood markets, so that area is probably going to see improvements sooner than Arkansas.

Paul Quinn

Okay. And then just one of the factors that set it across the board in terms of from the whole millers 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?

Mike Covey

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

Eric Cremers

What I’d say Paul is that we estimate turnover Warren mill to be hourly to be roughly 10% a year, it’s in the low to mid-single digits, that are other mills, most of the times we operate in we are the employer of choice and we pay above minimum wage, so outside of as Mike said skill trades, electricians and machinists we are not having issues.

Operator

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

Jerry Richards

Alright, thank you Ian. And appreciate everybody’s interest in PotlatchDeltic. I'll be available to take questions -- those detailed modelling questions and other things, and I'll be heading back to my desk shortly. Thanks again, and we’ll be in touch.

Operator

Ladies and gentlemen, this does conclude the PotlatchDeltic first quarter 2018 conference call. We thank you for your participation. You may not disconnect.