Q3 2019 Earnings Call
I'll be your conference operator today.
At this time I would like to welcome everyone to the Potlatch Deltic third quarter 2019 conference call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If he would like to withdraw your question press the pound King.
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.
Thank you Lindsay and good morning.
On the Potlatch, Deltics investor call and webcast covering our third quarter 2019 earnings.
With me in the room, or Mike Kobi, Chairman, and Chief Executive Officer, and their Creamers, 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 FCC concerning the risks associated with these forward looking statements.
Oh. Please note that a reconciliation of non-GAAP measures can be found on our website at www Dot potlatch Deltic dotcom.
I'll now turn the call over to Mike for some comments and then I will cover our third quarter results and our outlook.
Fixture and good morning.
We generated adjusted EBITDA of $55 million in the third quarter.
This is almost 50% lower than our adjusted EBITDA in the third quarter of 22 and reflects week lumber prices that have persisted longer than any of us expected.
Having said that wood products results improved modestly this for the segment's quarterly lumber production shipping.
Lumber production and shipping records, we remain optimistic about the outlook for this business.
Wood products remains on track to complete its elevated capital project plan as well.
We recently completed replacement of five back strike Jones with two new continuous dry kilns or Warren, Arkansas Mill and finished installation of a new kilner seat marries Idaho Solomon.
Notable projects for the rest of the year include a green stocker and expanded real spur, but our Waldo Arkansas.
As a reminder, we plan to spend just under $40 million of capital in this segment in 29 team.
Bribery benefits of these projects or expanded capacity and improved grade realization.
In Timberlands, we mentioned on prior calls this year, we shifted some over Idaho volume to the second half of the year because customers in the region entered the spring break up period was higher than normal log inventories.
Blogger deliveries are on track through October and we expect to meet our Idaho harvest volumes for the full year.
By contrast, we now expect our southern harvest volumes to fall short this year.
Rainfall was double normal levels in Arkansas operating areas in the first half of the year, which restricted the supply of Sawlogs constrained our ability to harvest, particularly in the southeastern corner of Arkansas, where we have low lying land close to the Mississippi Delta.
The resulting bill log shortages caused pine sawlog prices increased to 10 year highs.
As operating conditions improved in the third quarter. There was an overwhelming supply response by non industrial land owners to take advantage of the attractive prices.
This resulted in an acute shortage of login contractors and ultimately led to high mill log inventories.
We've now seen pine Sawlog prices declined back to normal and we have limited opportunities to catch up on our planned harvest for the year given the mill log decks are now full.
We believe that this situation is unique to this year and with the unprecedented rainfall in Arkansas.
Spectra harvest levels to return to normal.
To normal higher levels 2020.
On a positive note.
Higher than expected southern Sawlog prices. This year have offset the effect of lower harvest volumes or southern timberlands EBITDA.
Real estate performance has been strong this year into segment is on pace to exceed its planned adjusted EBITDA.
Accidently $20 million.
Segment has done a particularly good job identifying and executing on rural land sales sourced from legacy Deltic timberlands.
Looking forward, we continue to be encouraged by us housing market fundamentals and we expect lumber prices to improve as we approach the 2020 spring building season.
A meaningful increase the new orders reported by Homebuilders earlier. This year is translating into higher single family housing starts.
September was the second month in a row, where single family starts were above 900000 units.
As important as single family unit uses approximately three times lumber as a multi unit.
Further evidenced that us housing starts are improving.
Include new building permits about 10% above the current level of starts homebuilder sentiment has increased for.
Increased four months in a row is at the highest level since early 2018, and large homebuilders have reported strong new orders for the third quarter.
The current level of us housing starts heavily.
Recovered to a level that has been typical normal recessions we.
We expect that the underbuilt situation will be exacerbated as millennials, who are the largest demographic cohort are just starting to enter the prime home buying years.
Turning to lumber supply there have been several capacity curtailment were closure announcements, which are estimated to be over 2 billion board feet in aggregate.
It has been our view that the full effect of these decisions on lumber shipments would not be felt until the fourth quarter of 2019, because it would take to time for the affected mills.
To work through their log inventories.
Palettes, Deltic is well positioned to benefit from recoveries lumber prices.
Our balance sheet remains strong and provides the flexibility to grow shareholder value.
We returned $106 million to shareholders in the first nine months of 2018.
We did not purchased any shares in the third quarter.
Well, we still traded at discount to net asset value our stock price is 17% above the average price at which we repurchase shares in the first half of the year.
I'll now turn it back to Jerry to discuss discuss the quarter and our outlook, we'll take questions.
Thanks, Mike starting with page for the slides total adjusted EBITDA was $55 million in the third quarter compared to $49 million in the second quarter.
The sequential increase in EBITDA was due primarily to seasonally higher harvest volumes and higher lumber shipments, partially offset by the fact that real estate sold fewer acres of rural land in the third quarter.
I'll now review each of our operating segments and provide more color on third quarter results.
Information for Timberland segment is displayed on slide five through seven.
Segments, adjusted EBITDA was $43 million and the third quarter compared to $26.1 million in the second quarter.
The harvest at 529000 tons of Sawlogs in the north in the third quarter.
This is up seasonally from the 325000 tons that we harvested in the second quarter.
Northern Sawlog prices were 7% higher on a per ton basis in the third quarter compared to the second quarter.
Price increase reflects a lag effect of slightly higher lumber prices on index volume and the seasonal decrease in the density of logs.
In the south the 1 million tons harvested in the quarter was lower than we planned.
Higher than normal mill log inventories in the third quarter that Mike touched on constrained our ability to catch up on our first half harvest shortfall.
Our pine Sawlog prices increased as much as 14% at their peak as extraordinarily wet weather constrain the supply of logs.
Yes elevated price is carried into the third quarter and have resulted in a positive 5 million dollar effect on adjusted EBITDA for the first nine months of the year.
Southern Pine Sawlog prices have dropped back to longer term averages entering the fourth quarter.
Turning to what products on slides eight nine adjusted EBITDA was $5.9 million in the third quarter.
This is an improvement of $7.9 million relative to the second quarter.
Lower log in manufacturing costs on a per unit basis more than offset the effect of weaker lumber prices, which resulted in improved margins.
As Mike mentioned, our wood products segment set lumber production is shipping records in the third quarter.
We are on track to ship approximately 1.1 billion board feet of lumber for the full year.
Turning to real estate on slides 10, and 11, the segment's adjusted EBITDA was $14.7 million in the third quarter compared to $31.3 million in the second quarter.
As a reminder, we closed two large rural sales last quarter, including the sale of former Deltic timberlands for $11000 per acre.
The segment close to 3 million dollar sale of commercial property and should all valley in the current quarter.
Shifting to financial items, which are summarized on slide 12, we ended the quarter with $95 million of cash.
We plan to refinance the 40 million dollar term loan scheduled to mature in the fourth quarter.
The new loan will mature in November 2029, and we have effectively locked the rate.
Interest savings will be modest relative to the variable rate on the existing term loan.
Capital expenditures were $16.4 million in the third quarter.
Note that this amount includes $1.3 million of real estate development expenditures, which are included in cash from operations in our cash flow statement.
We continue to expect that total capital expenditures, including real estate development will be in the range of $65 million to $70 million for 2019.
I'll now provide some high level outlook comments. The details are presented on slide 13.
Harvest volumes in the north are expected to be seasonally lower in the fourth quarter compared to the third quarter.
We expect northern Sawlog prices to decreased modestly in the fourth quarter due primarily to seasonally heavier logs.
While harvest volumes in the south are anticipated to be higher in the fourth quarter than the third quarter. It will not be enough to make up the shortfall relative to our annual plan.
As a result, we believe that southern harvest volumes will fall about 450000 tons short a plan this year.
And returned to more normal higher levels in 2020.
We expect the shortfall to be comprised of about 70% Sawlogs and 30% pulpwood.
We expect southern Sawlog prices to be lower in the fourth quarter due to slightly lower pine sawlog prices and a seasonally lower mix of hardwood sawlogs.
We expect average fourth quarter lumber prices to be flat compared to the third quarter and to ship approximately 290 million board feet of lumber in the fourth quarter.
Shifting to real estate. The segment is expected to wrap up a strong year by selling approximately 3000 acres of rural land and 50 should all valley lots in the fourth quarter.
Overall, we estimate that fourth quarter total adjusted EBITDA will be lower than third quarter due to a seasonal decrease in harvest volumes and lower real estate sales activity.
That concludes our prepared remarks lenzi like now like to open the call the QNX.
As a reminder to ask a question you want me to press Star one on your telephone to withdraw your question press capacity. Please standby, while we compile the Q any roster.
Our first question comes from John Dotcom with Bank of America Merrill Lynch. Your line is now open.
Hey, good morning Dash afternoon, just wanted to start out how does the pullback in harvest volumes for the third quarter impact patches.
Plans kind of as you're looking out over the next couple of quarters and obviously also has some carryover from what happened in the first half here.
Well over the next couple of quarters, we have our planet's established already for for Q4.
Guidance is in the supplemental materials that.
We put out.
Next year as Mike mentioned in his comments are our harvest plan with our our current acreage is roughly 6 million tons per year, six 6.2 somewhere in that.
We have not developed our formal operating plan yet for next year. So I don't want to be committed to those numbers, but we expect to get back to that that operating plan next year.
Okay. Thank you.
And then.
Next.
I guess I was just wondering a little bit on kind of Sawlog prices, you talk a little bit of an uptake or in the quarter what drove that.
Also while it sounds like some.
New supply is kind of come into the market is there.
Any potential that you see for southern Sawlog prices to start ticking up or do you expect it had our remain in our around this kind of lower level for a period of time.
So in that Theres two different reasons to talk about here one is in north from one is when is the south.
Yes, clearly in the North we saw a 7% rise in our sawlog prices of Northern region. Some of that was due to the higher lumber prices a random lengths was up 4% quarter over quarter. So that played a role into our higher sawlog prices in the north.
And then we also have to wait factor.
Logs or dryer in Q3 than they are in Q2, and so on a per ton basis, even though the volumes the same on a per ton basis pricing will will.
Favorably so that contributed about 3% of the overall, 7% change in northern Sawlog prices.
Go into the south.
It's a little bit different in the south in Q3, we get we get more hardwood in Q3.
This year are mixed some hardwoods was 8%.
Compared to just 1% in Q2. This year, so that did provide positive uplift to to sawlog prices in the south and we also had that wet weather spillover effect prices really strong Q1, Q2, and they continued onward into Q3.
They have since rollover.
And gotten back down as Mike mentioned to more normal levels were now back down to 40 $344 ton for southern yellow pine.
That's helpful.
Yes that as I say.
Then kind. The next question is more on the lumber side of things.
So first of all just confirm was that 2 billion board feet number that you mentioned was that across North America or was that kind of region specific and then in the next question is really just at this point do you foresee further mill curtailments or do you think that the market is going into more supply and demand balance.
Well the 2 billion is really the number that's kind of happened so far and it's a lot of that is up in DC, but there is it's not just MBC Theres also mills on the west side that have closed down I think GP had a mill issue Swanson Stimson all three of those companies have reported mill closures or curtailments, you've also seen a pullback in the south GP just to now.
The mill over in South Carolina that they're going to idle.
The current effects mill is down I think Rex lumber is idling. So all told the numbers really probably higher than two it could be his eyes, three three and half a million board feet. It's just some of that is permanently close in some that is curtailed.
Okay, and then expectations for kind of further mail curtailments from here.
Yes, it's hard to say it all depends on pricing I think the worst mills in the industry have already washed out.
Prices move up I would expect less curtailment.
But if prices continue to languish I'm hearing rumors that mills in eastern Canada really suffering right now.
Who knows something good good happen there.
Really just depends on what happens to pricing going forward.
Okay, Great and then last question before I turn it over if you could just kind of comment on inventories.
Lumber inventories to the chain that's great. Thanks.
Yes, the lumber inventories you know, we don't track them ourselves, it's anecdotal what we hear from our customers. It's what we see in.
And it reports EFI Hanna.
Webinars I don't know a couple of weeks ago. They highlight the fact that lumber inventories are pretty low levels throughout the channel.
Customers seem to have found a way to tilt to live operating with low levels of inventory, particularly in this environment.
When they can placed a phone call and get when delivered on very short notice. So that may be more permanent operating posture of the industry's just they've learned to run with low inventories.
Our next question comes from Ketan, Mamtora with BMO capital markets.
Your line is now open.
Good afternoon, everyone.
First question.
Yeah.
Great that you're seeing in some thoughts.
Are you seeing.
Fine.
I'm going into the us from Europe .
No you know Keaton I've heard a lot about.
The beetle issue in Central Europe , and I think if you look at.
Imports into the US frankly from countries other than Canada, I think year to date of downlink four or 5%.
So it's not like we're seeing a flood of this would hit the U.S. shores.
I've heard anecdotally some of that may be showing up in the northeast, but it's certainly not showing up in the overall industry wide data.
But it is I think theres lot of evidence that would slow and other parts of the world.
Both.
Particularly in Asia, particularly China.
Got it okay.
Lumber.
Southern yellow pine grades have.
Artificial.
It is driving that.
So.
It's not been great, but it seems like the might have.
Pressure.
It's driving that.
I'm, sorry, you say wire, which yes.
Yeah winds are under a lot of pressure right now Keaton and its couple of different things one is that that rain in the southern region is kind of moved out.
So now the lower line elevation.
Stands are accessible those tend to be bigger trees, they tend to produce more wides.
So number one the overall mix from the South is kind of increased Wides, but then number two you are also at a time of year were seasonally treaters back off their purchases.
They won't come back into the market in a meaningful way until say first quarter of next year when they begin getting ready for the.
The deck building season, if you will so a lot of it is just it's just seasonal weakness.
That's helpful and then just turning.
Lumber markets.
Pressure as bad.
Okay just talk about.
Okay.
Seeing.
You know sort of implications for hog.
Then if you can just to remind me kind of.
Hi, having your mix.
Creates any opportunities for you guys.
Well, yes, so the hardwood hardwood lumber business has come on a lot or pressure and a lot of hardwood lumber was previously.
On a book to China's so those those tariffs have really done a number on hardwood lumber exports are overall hardwood mix is roughly I know this year's can be like 4% of our southern harvest volume that's lower than it might normally be normally would be in the who knows 8% to 10% kind of range.
So.
Certainly.
Less less demand is not good for for hardwood, but we think once the tariff issues resolved those exports will continue and prices will firm up.
Got it and then just last one from ISI.
You are seeing.
The activity in the in the timberland markets.
But keeping the.
It's been a quiet year by and large with not a lot of activity from.
From two Moser read through private landowners. This year, most things other than the Michigan transaction that weyerhaeuser executed to lime timber but.
It's been kind of small sales in the 20 to 50000 acre size range, there seems to be no.
Hi price change from what we can see.
Prices have held up relatively steady, but not a lot of volume.
Thank you very helpful. Good luck.
Thank you thanks.
Our next question comes from Collin Mings with Raymond James Your line is now open.
Thanks, Good morning, guys.
Morning.
First question for me just going back to what products in your outlook for that segment. Just maybe can you update us on where you are lumber realization is actually stand quarter to date relative to Threeq you, maybe just expand a little bit more on the factors, leading you to expect flat pricing I'm just trying to reconcile some of the positive commentary on kind of supply demand dynamics with the guy.
On slide here.
Yes, so where we're at quarter to date Collyn is were down slightly very modestly percentage or too.
Our product mix is more skewed to to factors that are not working right now things like timbers.
Seasonal weakness in timbers, we have economy grade is under a fair bit of pressure so were down slightly kind of quarter to date, our expectation is flat to maybe even up a couple of percent. It does feel to us like things are starting to from.
Just here in the last week or so talking to the sales force it feels like things are getting better.
So there's there's crosscurrents.
Taking place here, but.
But it feels to us like things bottom to maybe getting a little bit better.
Also call and I'd, just add that you know the headline information about lumber prices are largely.
Skew towards SPF, which are which have been quite strong and southern yellow pine has kind of not participated in that party very much while the other thing to add to that cone is that a lot of what you're hearing about as lumber futures, which there is a big big disconnect between futures, which are 40 to 50 bucks higher than more cash markets are today.
Now those futures around it would to be delivered at a point in time into the future whether its.
December January or February .
So somebody's got to happen either futures prices are going to have to come down or cash prices are going have to come up.
Okay that really building to kind of know Colin is that going forward, especially since the merger is we're more of a southern yellow pine company than we used to be yes. So.
It matters to us more than it used to.
Okay. That's all very helpful color there guys just sticking with wood products, just again, recognizing the aren't providing any formal guidance for 2020 at this juncture, but maybe just update us on how you're thinking about further non maintenance capital going into kind of your wood products segment just given.
Obviously, the reset in pricing relative relative to 18 months ago, and clearly you have done a lot over the last couple of years now lowering the cost structure, making our mills more efficient. So just trying to get to get a sense of how youre thinking about that going forward relative to the last couple of years.
Yes, the calling you mean you highlighted its early for US we're not done generating our plan yet for next year I can we do have a couple of meaningful projects in wood products were going to put in a new to barking operation at our oldest saw mill.
And we're also going to put in a new stacker and are seeing Mary sawmill.
Those those pieces of equipment or on order in there to be delivered.
First half of next year, So we're committed to those.
It's really premature for us to comment beyond those two because I just I just don't know.
And what they we are encouraged about coal and is.
The capital work that we've done this year, which a lot of its pointed at more production capacity with more dry kilns, we should see a meaningful uptick in ore production next year, probably in the range of 3% to 5%.
And we look for better lumber markets next year I think as we sit here today. So I think those will be positive trends for wood products business.
Helpful, There as well and maybe sticking with capital allocation.
And kind of following up on an earlier question just on the Timberland markets, just maybe just update us on the appetite here for bolt on acquisitions clearly to start the year.
Mike you are pretty adamant that the best opportunity out there was to repurchase shares just given the disconnect between where the stock price was.
Compared to year end, JV, but obviously didn't buying shares in Threeq you, just maybe talk a little bit more about the appetite there for for acquisitions just to get to the point that maybe it's been a quieter year on the.
Transaction market as a whole though.
We have seen a nice movement in our stock price I think up 17% since the first half of the year. When we purchased shares so are.
The attractiveness of buying timberlands has improved relative to what our stock price was in the first half of the year. So I think we're we've always been interested in small bolt on deals in there probably even more attractive now is the stock repurchase opportunity and we think about it opportunistically is not as attractive as it was.
We've returned a lot of capital to shareholders, the last 18 months or so and.
Both in the form of the dividend in the stock repurchase we contributed to our pension plan, we did a $44 million BNP purge to complete the merger.
So we still have some dry powder left in as we sit here today I think bolt on acquisitions would rise higher in the stack of priorities and where it's been the first half of the year.
And Colin just to highlight that we just recently consummated a transaction and one of our southern States was that it's not a big deals for $5 million, but its.
Land, it's in our operating area.
It was it was purchased with the discount rate of around 7.5%.
It came with it 10 31 tax benefits.
So we'll look for opportunities like that where we can earn outsized returns.
On on our M&A activity.
Very helpful color I'll turn it over thank you.
Our next question comes from Chip Dillon with vertical research. Your line is now open.
Hi, good morning, and afternoon. Thank you for all the details.
Yes.
My main question has to do with as you look out to 20, and 21, and we think about modeling their real estate segment.
Obviously this year you ended up with more sales than you had planned earlier in the year. How do you think next year will unfold and then secondly, if on a separate note. If you could update us on how we should think about.
The number of lots that you still have left and.
And how could we see those sales flow through and assume that we have a decent market for land next year in the year after.
Well take the first part ship and Eric can talk about the lot sales, but weve.
Since prior to the merger really since the merger we've kind of said, we're going to sell roughly 20000 acres your rural land.
That has an attractive premium to what its underlying timberland value is and that's obviously going to be lumpy. Some years are going to be slightly higher some will be a bit lower but I don't expect to the change in that.
Where we sit today one of the real kind of gems out of the merger with Deltic has been a larger rural land sale opportunity at higher prices in more acres that are suitable than what we expected when we did our our due diligence. So I think we're encouraged about that.
Eric speak to the loss sales international.
Yes, so so chip on regarding lot sales social as you may recall Master plan community with total.
Development side 4600 lots of the 40 603000 had been sold so we have about 1600 yet remaining.
And a typical year, we're going to sell about 150 lots engine off. So if you just do the simple math, it's about a 10 11 year kind of a runway.
I'm sure there's going to be periods of time, where we'll see that and we'll be periods of time when recessionary type of year will be on the low end of that but there there's strong demand for for licensing auction all our pricing is coming in ahead of what we had planned for the year.
And we're optimistic about about that that business. There's also a nice commercial.
Plot of land their internal value that is.
800 acres or so.
Sure exactly what the total is but we will continue to that's going to be very lumpy of course, but as the as we get more rooftops established in.
Additional valley residential or you're just going to put more demand on the retail and commercial space. So that will kind of go hand in hand, yes, I mean that commercial business chips. So similar to residential there was 800 commercial acres at the start and there's about 370 acres remaining.
That acreage, although it's lumpy it has really nice sticker price to it so that the $3 million that we generated in Q3 in commercial engine always for six acres. So that's $500000 per acre.
And I can assure you like Mike said, there's the more should all gets built out the more demand for that commercial land is going to its going to increase and we've got more more commercial deals that are in the pipeline, but it's a it's a very lumpy business.
And on that the 500000.
Type.
Pretty what kind of.
Who's buying that what is that for retail or shopping malls are for.
What kind of.
What's going in on those lands.
Yeah, that's kind of all the above its banks, it's restaurants. It. So there is a manufacturer.
The school, there's a church multifamily hotels and the it runs the gamut I mean this is the place to live in little Rock, Arkansas.
Gotcha Gotcha, Okay Thats Super helpful. And then then I'm just trying to separate no just a follow up a little bit about the.
The to your timber.
Sales effort.
Are there any.
Mills that have either been shutdown that you are concerned about coming back or new ones that are starting up that could impact you in the next year or two and then I guess is a side note. If you see another jump in prices. It lets say in southern Arkansas are you concerned about.
Another situation, where the private owners kind of.
Crowd you guys out.
So yeah. What happened then what happened in Q3 was a bit unusual mean prices really really did spike up into the low fiftys.
Thats stimulated a lot of of Gatewood Nonindustrial private land owner would do come to market, we were very surprised by that.
Frankly caught us a little off guard Q3 is normally a time of year, when we really get after hardwoods because that's when the place dries out.
But that contractor capacity was not available to us in Q3.
Because southern yellow pine prices were so high.
I really expect things to go back to normal I mean, we're already seeing prices back down to where they were.
Pre 2019 or southern yellow pine logs are in of kind of 40 $344 ton range.
And I don't expect this to happen again and regarding your regarding your earlier question. There a mill startups theres nothing that I see on the rising.
Thats going to dramatically changed equation con effects mill.
In El Dorado is down right now that could start back up again.
I think if it did start back up again, you wouldn't see big moving Sawlog prices.
Both there okay great.
Very we've got the most optimism chip is in Alabama, We've got a GP at Talladega started a new mill.
Westervelt companies go one under construction southern Alabama, so that that market is going to be a little tighter than the rest of the south sooner.
And that southern Alabama right.
Well the GP Talladega is more northeastern Alabama and the the.
Thomasville location for Westerville, just in the south west corner of Alabama.
Okay Gotcha. Thank you.
They are.
Question comes from Mark Weintraub with Seaport Global your line is now open.
Thank you first question was on the real estate business, where it looks like it's been quite strong.
Were you largely selling forward because of this strength, where you actually also getting better pricing than you would have anticipated.
No I don't I don't know that we were selling forward I mean these were teaser deals that just naturally came together in the third quarter.
One particular transaction was in was in Minnesota, where we had a large $4 million sale with mark with the mining company there.
And in that particular transaction. This mining company had had an option by that land from us since 2012.
And they have been paying us 250 $275000 per year to have that option to buy those 3000 acres.
And as their project has progressed, they're getting more and more optimistic.
About.
They're mining project coming to fruition and they needed to have the acres.
To trade to the state.
Conservation ground. So this is this was just a matter of it naturally came together and really was nothing regarding timing there's nothing unusual there.
Okay, maybe I misunderstood I thought that part.
You had noted in your.
The initial comments that.
Hey, courage sold was higher than you'd originally anticipate I thought that was in part because the market was strong.
Misinterpreting that.
No I think we were planning on selling these acres in Q4. It just came together in Q3 and.
The market for rural acres is definitely strong.
You got to stock market is high levels, you've got unemployment at low levels consumer confidence is generally pretty high.
The business in general is very strong.
But we did we did execute the transaction Q3, and we plan to be executed in Q4.
Okay. Thank you and.
And just coming back to the question on the the farmer would that came out in the third quarter.
The surprise for you that pricing had gone up so much.
For southern Sawlogs in that region or was that there was as much would as came to market that responded to the stronger pricing.
I think it was a little bit of both I mean, we actually the rain started in the first half of the year, but it continued on into Q3 tropical storm very blew through Arkansas and I think July .
So unprecedented rainfall led the unprecedented prices.
And it was just the perfect storm.
Higher log prices I think we were surprised by the amount of gate would that quickly came to market.
And that Gatewood was it was on ground that was at a higher elevation than what we were trying to harvest on our ground. So contractors could not go work on our property in that southwest southeast corner of Arkansas, because that lower elevation land was relatively speaking underwater, whereas the gatewood was at a higher elevation and contractors could go work.
Okay, and then lastly, I mean, one thing that.
Obviously is important as recognize you guys are a net buyer of sawlogs in the South now are our shift and where pricing is by region et cetera, I'm does that affect mix in ways that impact.
Your profitability or where it when we see or is it really just about where the spread between lumber and overall southern Sawlog pricing is that's going to drive your your profitability on a.
Given time period.
It's the latter.
The mix the mix feature.
Kind of ebbs and flows month to month through week to week, but.
The latter point that you made is the more important one and thats the spread between lumber and log prices, which still is attractive.
Super Thank you.
Okay.
Our next question comes from Paul Quinn with RBC capital markets your.
Your line is now open.
Yeah, Thanks very much.
Good afternoon, I guess are good morning is.
I guess start on wood product said, congratulations on the record lumber production.
What should we be modeling in here for 2020 is that is that kind of a $1.2 billion square foot number.
No. So Paul it's Erik Yes, I think Mike alluded to it earlier.
Got a good track record here every year, we get about 3% to 5% higher volumes out of our mills.
Although it's early and we're not giving guidance yet on next year I would suddenly say that.
I think are back to the envelope math suggests that another 4% increase in production is in the making.
Okay, and then in terms of the Capex that you put in.
Margin improvement what no.
What would be sort of a rule of thumb on on how much more margin you've got given that capex that you've done this year and intend to do next year.
Well that's it that's a really difficult question to answer.
And our capital plans for next year.
I would reiterate that all the projects that we've done in our mills large projects has got returns anywhere from Im looking at a piece of paper. The lowest one is 16% IR are the highest one is 48%. So these are all projects with quick three four year kind of paybacks attached to them.
Okay, then just shifting over to real estate, just and I guess Im just gloaming on prior question, but just how sustainable is is the current strengthened their real estate do you feel strongly that but the next number of years going forward.
Yes, I do.
It's it's it's hard to predict too far out given that everybody talks about a recession being right around the corner, but.
As Mike said, we still got 207000 acres.
Oral acreage that we intend to sell and we sell about 20000 acres a year. So thats a good tenure runway with those acres.
And then as I talked about in all we've got 15 years worth of.
Lots left at edge or 10 to 15 years worth of lots left it should all.
Our current pace and we've got plenty of commercial acres as well so.
I really don't see real estate slowing down anytime soon except if theres a recession.
All right until that best like I say.
Thank you.
Our next question comes from Cortina with FDA.
Your line is now open.
Yes, good morning, everyone.
Just on the wood products, how do you think about capacity creep first the need to really put capital to work to keep growing that capacity and then if we were to think about kind of a base annual capital need there how does that compare to where you expect to come in over 2019.
Well take the second the second question first which is capital plans. There's no doubt 2019 was an elevated capital spending plan for our company.
We just completed the merger with Deltic there were a number of pent up projects at those mills.
That caused us to elevate our capital plans in 2019, So I would expect capital plans to come down in 2020, although we haven't finished developing our plans yet I do think ultimately it's going to come down.
So your other question with regard capacity.
We run our mills as hard as we can as long as we have variable margin.
Thats way most people in the industry do it.
And as long as variable margin.
Makes sense, where you can find attractive projects with good returns to continue to expand capacity. So I think we are plans are to continue to push our mills as hard as we can assuming we can find attractive projects.
That does that answer your question on capacity, Yes, no absolutely that's really helpful. And then just lastly, obviously.
This year is going to be different from an EBITDA perspective, first 2018, but how do you guys think about maybe a per target leverage range or perhaps you approach it in a different way any any color there would be helpful.
You bet Kurt So this is Jerry Richards so in terms of target leverage what we talk about typically is EBITDA leverage somewhere around four times I would describe that as a conservative target and as we look at you know even with a lower 2019 EBITDA, we're still certainly within the bounds of kind of that target.
Great. Thank you very much I'll turn it over.
At this time I am showing there are no more questions I'll now turn the call back over to Jerry Richards.
Alright, Thank you Lynsey and certainly appreciate Everybodys interest in Potlatch Deltic and your participation in the call I'll be available for the detailed modeling questions. The rest of the day and hope everybody has a good day.
This concludes today's conference call you may now disconnect.