PotlatchDeltic - Earnings Call - Q2 2019
July 30, 2019
Transcript
Speaker 0
Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the PotlatchDeltic Second Quarter twenty nineteen 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.
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.
Speaker 1
Thank you, Michelle, and good morning. Welcome to PotlatchDeltic's investor call and webcast covering our second quarter twenty nineteen earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer and Eric Kramers, 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 will cover our second quarter results and our outlook.
Speaker 2
Thanks, Jerry, good morning, everyone. We generated adjusted EBITDA of $49,000,000 in the second quarter. This amount was almost 50% lower than the second quarter of twenty eighteen, reflective of a 35% decline in lumber prices in the last twelve months. Despite this, we still covered the dividend on our elevated pace of capital expenditures in our mills with cash generated by operations during the quarter. In Timberlands, our harvest volumes were 23% lower in the quarter compared to a year ago.
As discussed on last quarter's call, we shifted some of our Idaho volume to the second half of the year because customers in the region entered the spring breakup period with higher than normal log inventories. Also wet weather continued to constrain operations in the South in the second quarter. Our annual harvest plan remains intact with the shift of deliveries into the second half of the year. The wet weather premium on Southern pine sawlogs has lasted longer than we expected. Second quarter pine sawlog prices in Arkansas were up $2 per ton or 4% quarter over quarter and were up $5 per ton or nearly 12% compared to the same period one year ago.
As a reminder, because we consume slightly more logs in our three Southern Yellow Pine sawmills than we sell, the stronger log prices were offset by higher wood costs at our sawmills. Wood Products results did not meet our expectations. However, we remain optimistic about the outlook for this business. Progress continues on Wood Products' elevated capital project plan. We have three major projects underway or that have been recently completed, which resulted in planned downtime at two Southern Yellow Pine sawmills in the second quarter.
The projects include a new lumber autograder, a new green lumber stacker and a complete replacement of five batch dry kilns with two new continuous dry kilns. The benefits of these projects will be large will largely be an expansion of capacity and improved grade recovery. As a reminder, we plan to spend just under $40,000,000 of capital in this segment in 2019. Real estate had two large rural land sales transactions in the quarter. The first was 8,000 acres sold to a conservation organization that we discussed on last quarter's call and that represents the second takedown in a five year agreement.
The second was the sale of almost 1,800 acres of former Deltic Timberland in Arkansas for $11,000 an acre. Overall, we've sold 4,200 acres of former Deltic Timberland in the sixteen months since the merger has been completed, averaging approximately $7,000 per acre. We continue to be excited about rural land sales opportunities on the legacy timberlands in Arkansas. Looking forward, we are encouraged by macroeconomic indicators and the general improvement in housing fundamentals. Although housing has surprised us on the downside this year, new orders reported recently by homebuilders have increased meaningfully.
In addition, builder confidence remains strong, mortgage rates have returned to more affordable levels and housing vacancy rates are nearing all time lows. On the supply side, there have been a number of lumber capacity curtailment or closure announcements this year, representing about 2,000,000,000 board feet by some estimates. It's important to keep in mind that the full effect of these decisions on lumber shipments will not be felt until the fourth quarter of twenty nineteen. Potlatch Deltic is well positioned to benefit from a recovery in lumber prices. On another positive note, our business with the big box retailers such as Home Depot and Lowe's and Menards, which all support our repair and remodel segment has increased relative to last year.
Our balance sheet remains strong and provides the flexibility to grow shareholder value. We returned $79,000,000 to shareholders in the first half of twenty nineteen. This includes the dividend plus $25,000,000 to repurchase 686,000 shares of our stock at an average price of $37 per share. We have utilized one quarter of our current repurchase authorization. Our stock continues to trade at a significant discount to our net asset value in addition to yielding over 4%.
As a result, opportunistic share repurchases remain more attractive than acquiring Timberlands. I'll now turn it over to Jerry to discuss the quarter and our outlook and then we'll take questions.
Speaker 3
Thanks, Mike.
Speaker 1
Starting with Page four of the slides, total adjusted EBITDA was $49,000,000 in the second quarter compared to $28,300,000 in the first quarter. The sequential increase in EBITDA is due primarily to two large real estate sales that closed in the second quarter, partially offset by an inventory impairment charge and higher costs in Wood Products. I'll now review each of our operating segments and provide more color on the second quarter results. Information for our Timberlands segment is displayed on Slides five through seven. The segment's adjusted EBITDA was $26,100,000 in the second quarter, essentially flat with first quarter's $26,900,000 We harvested 325,000 tons of sawlogs in the North in the second quarter.
This is down seasonally from the 374,000 tons that we harvested in the first quarter. Northern sawlog prices were 8% higher on a per ton basis in the second quarter compared to the first quarter. The price increase reflects the lagged effect of slightly higher first quarter lumber prices and the seasonal decrease in the density of logs. Turning to the South, we harvested 814,000 tons in the quarter, which was down slightly from the 828,000 tons that we harvested in the first quarter. Wet weather hampered operations, resulting in harvest volumes falling over 100,000 tons short of our plan in the second quarter.
We expect to make up the shortfall in the second half of the year. Our Southern sawlog prices were 4% higher this quarter compared to the first quarter. This increase reflects the short term weather related premium due to a shortage of logs. We think that Southern pine sawlog prices will revert to normal trading levels in the second half of twenty nineteen once mills rebuild log inventories. The Wood Products segment, which is covered on Slides eight and nine, had negative adjusted EBITDA of $2,000,000 in the second quarter.
Compared to the first quarter, lumber prices were slightly lower, costs increased on a per unit basis and the charge to write lumber inventories down to net realizable value was $6,000,000 higher. Three of our sawmills took downtime during the quarter for planned maintenance and capital projects. Cash costs related to the maintenance and lost production both negatively affected per unit manufacturing costs. We do not expect a similar drag on the segment's results in the third or fourth quarters. Consistent with our Timberlands comments, we expect log costs for our Southern mills to moderate in the second half of the year.
While lumber shipments increased 34,000,000 board feet, this was less volume than we had planned to ship in the second quarter. Part of the shortfall was due to timing. We had an extra 7,000,000 board feet of lumber that had been shipped at the end of the second quarter, but will be recorded as third quarter shipments, which is when the lumber arrived at customer locations. We also had some out of log time in our Southern mills and lost production to some other unplanned downtime. We expect to make up the shipping shortfall and still plan to ship approximately 1,100,000,000 board feet of lumber for the year.
Turning to real estate on Slides ten and eleven. The segment's adjusted EBITDA was $31,300,000 in the second quarter. As Mike mentioned, we closed on two large rural sales in the quarter, including the sale of former Deltic timberlands for $11,000 per acre. Shifting to financial items, which are summarized on Slide 12, we ended the quarter with $98,000,000 of cash. We used $15,000,000 of cash to repurchase 407,000 of our shares in the quarter.
The average price was $37 per share. Our dividend remains well covered, excluding Deltic merger costs, taxes on the MDF sale and the voluntary pension contribution that we made in the third quarter of twenty eighteen, our payout ratio was about 70% on an LTM basis. Capital expenditures were $18,400,000 in the second quarter. Note that this amount includes $2,700,000 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 65,000,000 to $70,000,000 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 higher in the third quarter compared to the second quarter. We expect Northern sawlog prices to increase about 10% in the third quarter due both to slightly higher prices on index volume and seasonally lighter logs. Harvest volumes in the South are expected to increase significantly in the third quarter assuming drier conditions.
We expect Southern sawlog prices to be flat sequentially. We expect average third quarter lumber prices to also be flat compared to the second quarter and we expect to ship $280,000,000 to $295,000,000 board feet of lumber in the third quarter. Shifting to real estate, our expectations for the third quarter are presented on Slide 13. For the year, we now expect to sell approximately 23,000 acres of rural land at an average price of $2,000 per acre. Rural land basis is estimated to be 15% to 20% of sales for the year.
There are no changes to the development real estate expectations that we discussed on the fourth quarter twenty eighteen earnings call. Regarding income taxes, we estimate a consolidated rate of 5% to 10% for the full year. This is down from the 20% that we discussed on the fourth quarter earnings call due to lower Wood Products earnings. Overall, we expect third quarter adjusted EBITDA to be slightly higher than second quarter adjusted EBITDA. A seasonal increase in harvest volumes and higher lumber shipments are expected to offset the absence of the two large real estate transactions that we closed in the second quarter.
That concludes our prepared remarks. Michelle, I'd now like to open the call to Q and A.
Speaker 0
Your first question comes from Collin Mings from Raymond James. Your line is open.
Speaker 4
Thanks. Good morning, guys.
Speaker 1
Good morning.
Speaker 5
Question for me, just can
Speaker 4
you discuss the fire risk and potential impact on harvest activity in Idaho? It looks like you've banned campfires and some open burning on your land there recently.
Speaker 3
Yes, Colin, this is Eric. We have had a couple of small fires. I think so far this summer we've had a total of three, all very small number of acres burned up, to 10 more or less, small young plantation type trees. So really no value impact whatsoever. I would tell you that fire conditions in Idaho because we got some rainfall in June, we just described them as moderate.
But if you read the news there's drought like conditions over on the West Side where things are much drier and the fire risk is much greater. So I think generally we're in pretty good shape here, but there are other areas that are under a little more stress.
Speaker 4
Okay. That's helpful detail. And then just sticking with the timberlands and kind of trying to reconcile some of the comments in the prepared remarks. I think last quarter you were still optimistic the company could harvest call it 6,100,000 tons this year. Given just again in the prepared remarks you indicated that you expect to make up some of the 2Q volume in 3Q.
But just given weather and some other factors year to date, just where do you expect full year harvest volumes to shake out?
Speaker 3
Yes, We're still targeting that 6,000,000 to 6,100,000 ton range. There's no doubt that Q3 and Q4 are going to be a challenge for us, particularly in the South where we are running about 100,000 tons behind our plan. But we've got a good team down there and we've got plans in place and we expect to hit our harvest targets for the year.
Speaker 4
Okay. And then switching to Wood Products. Can you just maybe touch up exactly where lumber realization stands here one month in the quarter relative to 2Q? I know in the guidance you're expecting flat, but maybe just touch on where that sits for you currently just given the timing of shipments and things don't always completely tie with what's happening in Random Lengths?
Speaker 3
Yes. I would say quarter to date, we're roughly flat compared to where we were Q2, maybe down just a touch. We've still got two months left in the quarter. But our expectation is for prices to finish the quarter on average about where we wound up finishing up Q2. Our expectation is that things move higher as we get out into Q4 when a lot of those curtailment announcements up in BC start to take effect.
And hopefully we see higher demand for lumber. We're encouraged by the increasing orders we're seeing from some of the homebuilders. So hopefully, we see higher prices as we get into the fourth quarter.
Speaker 4
Okay. Appreciate the detail there. And then just one last one and I'll turn it over. On the balance sheet, just Jerry, any updated thoughts around the $40,000,000 of debt maturing this year and the plans for that?
Speaker 1
Yes. So what you're referring to Collins, we have $40,000,000 that matures December 1. And that will be a Board decision in terms of whether we refinance or pay it off. We certainly have the flexibility to do either. Having said that, rates obviously on the long end of the curve have gotten even more attractive than when we refinanced the $150,000,000 earlier this year.
In fact, they're probably down about 50 basis points as we sit here today for ten year money. So needless to say, I think a refinance looks attractive, particularly given some of the other priorities we have on the capital allocation front.
Speaker 4
Understood. Appreciate all the color. I'll turn it over. Thank you.
Speaker 6
Thanks.
Speaker 0
Your next question comes from Ketan Mamtora from BMO Capital Markets. Your line is open.
Speaker 5
Hi, good morning, everyone.
Speaker 1
Good morning. First
Speaker 5
question on Southern log prices, you guys actually outperformed the broad market as reported in TimberMart South. Can you talk about kind of what you guys saw and what drove the strength? And then along those lines, have you started to see prices ease? Or is your expectation that as we move through the quarter into Q4, we will see prices start to ease?
Speaker 3
Yes. So a couple of different things there. One is we are starting to see prices ease as we move into the back half of the year. We don't think we're going to give all of it up in Q3. We'll give up some of that.
And by Q4, we're back to kind of normalized Southern Yellow Pine sawlog prices in the call it $41 $42 a ton kind of range. In response to your earlier question, yes, we're always going be a little bit different than TimberMart South. TimberMart South is by and large stumpage deals that are not inclusive of log and haul costs. So and there are also future transactions that what hasn't yet been cut and delivered, whereas what we report is what is cut and delivered in the quarter. So there's always going to be small anomalies between us and TimberMart South.
Keaton, I'd
Speaker 2
also this is Mike. I'd also add that Arkansas probably is the state that was most impacted by extraordinarily wet weather in all of the South in the market. We didn't see much market change in Alabama or Mississippi. All of it was in Arkansas where logging conditions were really poor and many, many mills were out of logs. So I think it's expected that we saw a bigger jump in Arkansas than we did elsewhere.
Speaker 5
Got it. That's helpful color, Eric, in mind. And then as we move from Q2 to Q3, Eric, how does the hardwood mix change in the South?
Speaker 3
Well, the hardwood mix goes up as we move into Q3 and Q4. We have very little hardwood production in Q1 and Q2, anywhere from 0% to 2% more or less, particularly when you're in a really wet year like this year. But our expectation is that we get up to 8%, 9%, say in Q3 and Q4, which on balance is where we need to be to hit our harvest plans.
Speaker 5
Got it. So in your expectation for Q3 being flat in the South, that does take into account the higher hardwood mix. Is that fair?
Speaker 3
That's correct. Some of that higher hardwood mix is going to offset the decline that we're seeing in Southern Yellow Pine.
Speaker 5
Got it. That's helpful. And then on the lumber side, the projects that you all did in Q2, can you all quantify how much that increased your lumber capacity?
Speaker 3
Well, the project that we did in Q2 was not a capacity expansion project. It was an auto grader. So it's machine that grades the lumber automatically as opposed to manually. So that really is a grade yield improvement and labor reduction project.
Speaker 5
I see. Got it. And then just one last question from my side. We are hearing some reports of higher mortality rates on the seedlings that were planted in the South in 2018 and 2019. Have you guys seen any of that, if you all can confirm if that actually is accurate?
And then if that's the case, does it mean kind of higher replanting expenses as we look out the next couple of years?
Speaker 3
Yes, Ketan, I have not heard of any of that on our ground. Certainly, if it did happen, it'd be higher replanting expenses going forward, but I'm not familiar with any of that on our ground.
Speaker 5
Got it. Understood. That's very helpful. Good luck in the back half of the year.
Speaker 7
Thanks.
Speaker 0
Your next question comes from John Babcock from Bank of America Merrill Lynch. Your line is open.
Speaker 7
Hi. Good morning, Dash. Afternoon. Just want to start out, I was wondering if you could quantify the tonnage impact, I guess, from the downtime you had during the quarter?
Speaker 3
The tonnage impact from the down are you talking about in the sawmills? Or you
Speaker 7
Yes, exactly. Yes, sorry, at the sawmills.
Speaker 3
Well, we undershipped in the quarter for sure. I think we wound up shipping two seventy three million feet. Our plan was $280,000,000 to $295,000,000. We had plans to get to the midpoint of that range. What winds up happening when you get into really challenging market conditions is when you have operational interruptions like we lost power, we ran out of logs, we had a capital project that ran longer to get us to get it installed than we had planned.
Usually, we can make up those shortfalls by running incremental overtime days. But given the weak market conditions that we faced in Q2 and particularly in June, running overtime was not warranted. But I guess to answer your question in general, it was probably around 10,000,000 to 12,000,000 feet.
Speaker 7
Got you. And so was there just to kind of confirm, was there much economic downtime in there necessarily? Or was it really just not running full out to play catch up essentially?
Speaker 3
No, it really was not. It was not economic for us to run harder. We could have made up the volume had we chosen to if we could have gotten logs. But given how low prices were, you saw we took inventory write down in the quarter given how low prices were, it just didn't make sense to produce incremental volume at a loss.
Speaker 2
But John, we did not take any market related downtime during the quarter.
Speaker 7
Yes. Okay. Thank you. And then next question also on the lumber side. I was wondering if you could talk about how demand is so far in 3Q.
And I mean you talked about some of the homebuilder reports, but I wanted to get a sense for whether you're seeing any improvement in orders so far this quarter?
Speaker 3
No, I'd say it's kind of we're kind of limping along the bottom is kind of our feel. Industry capacity utilization is in the 86%, 87% kind of range. And there are no transportation issues to be found, whether in rail or in trucking, which means if you're a dealer somewhere, a wholesaler or a builder, you can get wood delivered pretty quickly. So our sense is that field inventories are low on the one hand, which is kind of would be good news. But on the other hand, they can live kind of hand to mouth in this environment.
So we're not really seeing a big pickup in demand right now. But our hope is that as we get out further into Q3 and Q4 and our expectation frankly is that with these order files building for the homebuilders and with these capacity curtailments announced up in BC that things will begin to improve.
Speaker 7
And then just last question, was just wondering if you could confirm what you guys are forecasting for the land basis for the full year for real estate?
Speaker 1
Yes. So that was in the slides, John. But for the full year, let me bear with me here. We are 15% to 20% of sales for rural land.
Speaker 7
Okay, thank you. That's all I had.
Speaker 0
Your next question comes from Steve Chercover from D. A. Davidson. Your line is open.
Speaker 6
Thanks. Good morning, everyone. So just wanted to first reconcile one thing. You just said that you believe that field inventory relatively low for lumber, but I also believe you said that it will take probably till the end of the third quarter for the downtime and curtailments to work its way through the snake. So do you expect to see actual tension in the market perhaps by fourth quarter?
Speaker 3
Yes. I think by the fourth quarter, you'll start to see it, Steve, probably September. I mean most of those announcements on those curtailments and closures, they don't really kick in until September and October. So you almost have the exact opposite thing right now happening, which is those mills up in BC are liquidating inventory. They're blowing through their log decks and planning everything they've got and they're trying to get rid of it, right?
They're trying to liquidate their working capital. But we think as you get out in the September and October timeframe, that capacity will come off the market and that should be beneficial.
Speaker 6
Yes. That's what I understood is that they're basically liquidating the inventory. And I was just wondering how that really reconciled with low field inventories, but I suppose that could also be a regional situation. Okay. Well, switching gears, well, just a wee bit.
I assume that unless we have a massive Q3 correction, we're not going to see another inventory write down on the lumber side.
Speaker 1
Steve, when it comes to inventory write downs, I mean, that's something we really can't predict or forecast. It's kind of the accounting that happens at the end of the quarter. But given our view that market conditions and prices should be in a position where they're improving, I would think the odds of that happening are lower. Yes.
Speaker 2
And our manufacturing costs should be lower in the third quarter as well.
Speaker 3
Yes. We'll have much higher production volumes, much higher shipments to absorb the fixed costs. And I think if we had the prices stayed the same, we would in all likelihood not have a write down.
Speaker 6
Well, come to think of it, it's kind of interesting that you had the write down because many of the curtailments were announced in early June and it kind of put a bid underneath lumber at least for the end of the quarter.
Speaker 3
That's true for Western, it's not for Southern, no.
Speaker 6
Got it. Okay. That's the difference. Steve,
Speaker 3
had these low prices occurred in April or May and prices come up from them, we wouldn't we probably wouldn't be having this write down. It's just that June happened to be the very low point and we have to do the LCM test at the end of the quarter. So we kind of got burned by and I think lots of other manufacturers got burned too, that, that was the low point for the year.
Speaker 6
Got it. So yes, and really I should have just thought that's more of a Southern phenomenon. And then now I am switching gears, forgive me if I should know this, but when you're selling the Delta Timberlands for $11,000 an acre and I think you said about $7,000 since the merger. It makes it sound like it's more HBU land than Timberland. Is it due to extraordinary stocking levels or proximity to the Chenal Valley?
Or what other attribute could make this land value three to five times average southern land?
Speaker 3
Well, if you go back to the merger Steve, Deltic really didn't have an aggressive HBU rural real estate program. And the acres that we're talking about here is $7,000 per acre on average. Those are relatively proximate to Little Rock. So these are not far off non strategic timberlands so to speak. This is stuff that's relatively close to a major metropolitan area.
And I think that's what by and large is driving that value.
Speaker 2
It is not that it's extraordinary timberland that somebody is buying to manage and for that purpose. It's rural land that's fairly poorly stocked with average growing sites that are below average and people want to buy it for alternative uses, whether it's hunting or fishing or recreation. And because it's between thirty and forty five minutes from Downtown Little Rock, that drives the price.
Speaker 6
Okay. So it's really HBU for all intents and purposes, although it's just stratified as garden variety timberland?
Speaker 2
No, we stratified 57,000 acres West Of Little Rock as land that would be have an HBU characteristics. Not all of it's going to sell for $7,000 an acre. But we all felt it we felt it would sell for somewhere between five and seven times its underlying timberland value and that's what we continue to do.
Speaker 6
Great. And I don't know if there was ever any strategic review of the Chenal Valley development, but does that remain a core part of your portfolio? Are you glad to have it in the family?
Speaker 2
Well, we have never been in the real estate development business in terms of developing residential lots to homebuilders to build homes and managing two golf courses. That is not core to our business. Having said that, we've evaluated whether or not it makes sense to sell the property to somebody else or to continue to manage it. And we think that it's fairly low risk to own it and manage it ourselves and develop the lots and sell them at attractive prices. And the capital that we're putting into them continues to recycle and provide adequate returns.
So we view it as a core business today.
Speaker 6
Thank you.
Speaker 0
Your next question comes from Mark Weintraub from Seaport Global. Your line is open.
Speaker 8
Thank you. First, just following up a little bit on the lands West Of Little Rock. So you mentioned you'd identified 57,000 acres. And I guess at this point, this year, think you said you'd sold 4,200 or so of those acres, assume of the 57. Is it right to understand you've got a little over 50,000 left?
Speaker 3
Yes. So what Mike referred to when he said 57,000 acres Mark, was that is the stratification that was done on the 530,000 acres that we picked up from Deltic.
Speaker 8
Of
Speaker 3
that 57,000 acres, roughly 11,000 was put into the HBU bucket, roughly 17,000 was put into recreational real estate and 29,000 was put into non strategic timberlands. And so each of those is going to have a different value attribute going forward. So we have sold year to date or excuse me, not year to date, but since the merger's closed, we've sold 4,200 of those acres. And those acres fall into those three different buckets that I just referenced.
Speaker 8
Okay. And so would it be fair to say the 1,800 had been in the HBU, that 11,000 bucket in curiosity?
Speaker 3
Actually, think that was not part of the stratification. So that was actually when we approached us. So here's timberland that we thought nobody would want from an HBU standpoint. And they approached us and made us a very attractive offer. So it kind of surprised us.
So we did not come out of the 57,000 acres that I referenced.
Speaker 8
Okay. And just to make sure I understand more clearly. So how much acreage do you have now that would be in the vicinity of that 1,800 acre parcel and basically the stuff West Of Little Rock?
Speaker 3
We have a lot. Measured in maybe 50,000 acres West Of Little Rock.
Speaker 8
Okay. And a portion of that then would be well, let me come at it a bit differently. So you got a pleasant surprise here with somebody coming up with these lands. I mean, you've been sitting with ownership of these properties for however long now, are you reassessing the potential in an optimistic fashion perhaps given the interest that you've seen? Or would that be early to make a judgment like that?
Speaker 3
Yes. I think we've very pleasantly surprised by the real estate opportunity that we have found here with Delta. We're always looking at our acres and thinking about restratifying. These were acres that we didn't even think had real HBU potential, yet we were approached shortly after the merger closed and it took us one year, one point five to get the deal done, surprised us. That said, the highest pent up demand will be right after the merger closed because all of a sudden the buyers recognize that there's a willing seller.
There hadn't been a willing seller previously. So there's puts and takes here, but to characterize it, I'd say we're very pleased with what we're seeing.
Speaker 8
Okay. Shifting gears real quickly. On CapEx, I believe the original guidance had been $135,000,000 You haven't spent a whole lot through the first half of the year. Is that original number still the right number? Or might it come in somewhat lower?
Speaker 1
Yes. The original number is still the right number, Mark. So we still expect it's going to be between $65,000,000 and $70,000,000 for the year.
Speaker 8
Okay. Any chance we can get a little bit of additional help on the Northern Sawlog pricing for the third quarter? I know you indicated the indexed log should be higher. Any sense of magnitude that you could provide?
Speaker 3
Yes. So as you know, there's really going to be there's two different components really that drive that sawlog price. There's always the weight density issue. That's going to favorably improve prices roughly 6% to 7% quarter over quarter. And we think the change in lumber prices Q3 to Q2, our view is that Western lumber prices will move higher roughly 3% of that price increase for sawlogs.
Speaker 8
Okay, great. Thank you. And then lastly, just be interested in a retrospective coming out of the last quarter, you obviously had as many of us did a more optimistic perspective on what would happen to lumber pricing. What do you think happened that it proved to be significantly lower than where you had at least three months ago thought it might play out?
Speaker 3
I think there's a couple of different factors there. Number one is housing has disappointed year to date. Now is that because builders aren't building affordable houses? Or is that due to excessive amount of rainfall that we saw in the first half of the year, which was unprecedented? We think it was largely due to the rainfall.
And now that that's behind us and interest rates and mortgage rates have really rolled over 100 basis points or so in the last six, eight months. We're starting to see demand come back into the housing market and you're seeing that with these new orders from the builders. I mean whether you're talking about Pulte, D. R. Horton, KB Homes, Lennar, NBC, Meritage, they're all posting sharply improved orders moving into the back half of the year.
So we think housing is coming back. But that lack of demand in the first half of the year with higher rates coupled with the unprecedented rainfall really kept demand for lumber down and hence prices.
Speaker 8
Okay. Thank you. Was there would you say there was more inventory in the channel than you had thought as well? Or is that not necessarily playing a significant role?
Speaker 3
Every time we talk to our sales folks about inventories in the system, what we hear is that inventories are low and we think they're going to as long as there are no transportation challenges, inventories in the system are going to remain at relatively low levels. These dealers, these builders, they can live hand to mouth with their order files. And so they're going to just run with low levels of inventory from here on out.
Speaker 8
Okay. Thank you.
Speaker 2
And Mark, there's been no supply concerns really in the marketplace this year with people worried about wildfires or really crazy weather events that just hasn't been on the supply side. So people unable to get what they need when they just pick up the phone and hence prices have stayed flat.
Speaker 7
Thank you.
Speaker 0
Your next question comes from Chip Dillon from Vertical Research. Your line is open.
Speaker 9
Yes. Good morning. Appreciate all the comments, Mike and Jerry, very helpful. First question is looking at the full year guide, it looks like on the real estate, it's going to end up being around $60,000,000 total. And you do you kind of infer that the lot sales will also be 50,000,000 give or take in the fourth quarter like it is in the third.
Is the fourth quarter basis and average price guidance the same as what you have on Slide 13 for the third quarter? Or how could it vary if at all?
Speaker 1
Yes. So real quick, Chip, I mean both basis should stay around 80% of sales per lot sales. And in terms of kind of the average price, again, we had guided that in Q4 and that should be, I think it was around $80,000 if I remember per lot.
Speaker 9
Okay. Got you. Alright. And then the you said $80,000 which will be down from 90,000 in the third, if I heard you right?
Speaker 1
Correct.
Speaker 9
Okay. Then looking at the future, you came into this year, guess, or less guiding to something in the 40 range, low 40s. And again, you're going to hit $60,000,000 And I know that there was a big sale, I think it was I forget exactly how big, but the one yes, 20,000,000 sale that you noted almost $20,000,000 What should be a good placeholder for 2020 and 2021? Should revert back down to that $40,000,000 per year range? Or would that be sort of the low end of what you would expect?
Speaker 1
Yes. It's way too early for us, Chip, to give guidance beyond 2019. We typically would give you a 2020 when we do the fourth quarter call. So we'll defer to that.
Speaker 9
Okay. And then how about as we you're very clear about saying that you felt your stock was a better investment than Timberland at this point. How about are there any thoughts of expanding your Wood Products footprint? I know you just recently exited MDF, but you do have a well capitalized lumber business and you certainly are in recent years have put a decent amount of CapEx in those mills. Is that an area you'd want to see some expansion in terms of the future for potash?
Speaker 2
Not after the quarter we just had, no.
Speaker 9
A good answer. Guess, but on that, if you could talk a little bit also about the CapEx as well. Is it going to stay in that 135,000,000 range in future years?
Speaker 2
No, it will roll over a bit. We had a number of really attractive high return projects to do, especially in our Southern Yellow Pine mills to play a little bit of catch up frankly on kind of modernizing equipment and infrastructure. And one of the mills that came in the Deltic merger, the Waldo exceptionally good mill that continues to provide really attractive returns. We want to invest in that. We'll continue to expand capacity with the infrastructure that we have, and we can do that with capital investments and grow our output a few percentage points each year.
We don't have any plans at this point to add more mill capacity on a stand alone basis.
Speaker 9
Okay. And then finally, you're guiding to about $10,000,000 in corporate expense in the third quarter. I assume that is sort of assuming no change in the stock price. So is that sort of a good place to go for it is like $40,000,000 annually? And then if or if not, let me know that.
And then what's again the rule of thumb of how we should think about how that number moves around the stock price?
Speaker 1
Yes. So $10,000,000 a quarter, Chip, or $40,000,000 for the year is kind of the normal base run rate. That would be kind of a clean number, if you will, without noise. Stock price doesn't have a real big effect. It used to in years past before we changed kind of the structure of some of our equity based awards that were in place in the past.
So it's not you might see corporate, you've kind of seen the range. It might bounce around on a rounded basis between 9% and slightly above 10%.
Speaker 9
Okay, got you. All right, thank you.
Speaker 0
Your next question comes from Paul Quinn from RBC Capital Markets. Your line is open.
Speaker 10
Yes. Thanks very much. Good morning, guys.
Speaker 3
Good Good morning.
Speaker 4
Hey, just to follow-up
Speaker 10
on this CapEx. It looks like you've reiterated guidance, but just trying to understand the downtime taken on the Wood Products side. Was it only the autograder that came in, in Q2? And I'm just trying to understand that $2,900,000 increase in cost, whether that's a one time or you expect that in the back half of the year with the rest of the CapEx spend?
Speaker 3
Yes. So the only project that went in that got installed in Q2 was the autograder. We do have a handful of other projects that are going in, in Q3 and Q4, But we don't expect to lose any production with those installs.
Speaker 10
Okay. And then I think Mike you commented that not too interested in growing the wood products business given the quarter. Just wondering if you've seen just on the M and A side, I mean, you're out in the business, whether you've seen any kind of appreciable drop in kind of ass for sawmills out there right now? I mean, everybody probably everybody in the quarter had difficulty. So have you seen a drop in what people are looking for their mills?
Speaker 2
We don't have any market evidence to substantiate anything. I mean, if mills trade at four to six times EBITDA or they trade at 300 to $500 a thousand on capacity, suspect that the EBITDA drag is going to bring valuations down a bit, but we're not in the market to be able to comment on that.
Speaker 10
Okay. And then just flipping over to the timber side, it seems like a couple of years now, if not three, that the amount of timberland transactions in the marketplace are very light. Just whether you've seen any change in that, whether you've seen any change in values? And does it is it different between different regions in The U. S?
Speaker 2
Well, the valuation part of it certainly hasn't gone down. In fact, the small transactions that have taken place, some of them have a really strong numbers, but these are for transactions that are in the 30,000 to 50,000 acre range. It's been a couple in the South, one in the West that have been really, really strong. But there's just isn't much on the market. It's very quiet.
There doesn't seem to be a lot of dollars chasing the market, and there aren't a lot of people that are selling in this environment. So it's kind of steady as she goes, but valuations seem to be holding up.
Speaker 10
Okay. And then I guess lastly for Jerry that refinance potential for the $40,000,000 if you refinance, so what's the potential savings?
Speaker 1
Yes. You're talking I mean, like I said, we're going we're working off today's rate quote, Paul, but that could be anywhere from $05,000,000 to $1,000,000 a year.
Speaker 10
Great. That's all I had. Thanks, guys.
Speaker 2
Thank you.
Speaker 0
Your next question would come from Ketan Mamtora from BMO Capital Markets. Your line is open.
Speaker 5
Thanks for the follow on. Eric, are you can you provide any update on what you are seeing in the Cedar Markets? If I remember correctly, last quarter you had talked about pricing moving up as we move into the back half of the year?
Speaker 3
Yes. In fact, Ketan, good question. We are in fact cedar prices are moving up. We feel like they bottomed in Q2 and they're starting to move up in Q3. We have a long ways to go to get to where they were a year or two ago, but we do feel like they bottomed and they are moving higher.
Speaker 5
Got it. Is there a way to quantify even on a Q2 basis where prices were relative to last year second quarter?
Speaker 3
I'm going have to dig that data out, Ketan. I know that I can just produce that off the top of my head.
Speaker 1
Yes. That's one, Ketan. When we talk later, I can follow-up with details.
Speaker 5
That's fine. Okay. And then just last question. Can you talk a little bit about what you're seeing in the repair and remodeling market? It seems like we are hearing from different reports, some suggesting that the market is probably not as strong.
From what you are seeing, can you talk about kind of how that market is doing?
Speaker 3
Yes. I've been we've been following those reports, Ketan, about R and R markets falling off here, largely driven by that Harvard Joint Center for Housing Studies report. And frankly, we don't see it in our own business. And anecdotally, I don't see it. I don't feel it.
Our box business is up roughly 6% year over year. Now some of that is introducing new products to Menards and others that we haven't previously, but some of that is just due to their business growing. And if we just look at Home Depot and Lowe's comps, which are really good proxies for the R and R market, they're up 3%, 4%, that kind of thing. And I just read an Ivy Zelman report, She does a really good job, her firm covering housing a variety of different ways. And she really challenges that Harvard Joint Center for Housing Studies report.
And her view, her firm's view is that R and R markets are going to move up 3% to 4% over the next year or two. So I'm not sure we're aligned necessarily with that Harvard report.
Speaker 5
Got it. But that's very helpful color. I really appreciate it. Good luck in the back half of the year.
Speaker 3
Thanks. At
Speaker 0
this time, I'm showing there are no more questions in the queue. I'll now turn the call back over to Jerry Richards for closing remarks.
Speaker 1
All right. Thank you, Michelle. And I also wanted to thank everybody for your interest in Potlatch Deltic and taking time to participate on the call this morning. Be available for any detailed modeling questions and hope everybody has a great day.
Speaker 0
Thank you, everyone. This will conclude today's conference call. You may now disconnect.
