Weyerhaeuser Company (WY) — Q4 2016 Earnings Call Transcript

Thank you, Brent. Good morning everyone and thank you for joining us today to discuss Weyerhaeuser's fourth quarter 2016 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Doyle Simons, Chief Executive Officer and Russell Hagen, Chief Financial Officer. I will now turn the call over to Doyle Simons.

Thank you Beth and welcome everyone. 2016 was a transformational year for Weyerhaeuser. Through our merger with Plum Creek and a $2.5 billion divestiture of our Cellulose Fibers business, we became a focused timberland and forest products company and nearly doubled the size of our timberland holdings. In the midst of executing these portfolio changes, we maintained our relentless focus on performance. In 2016, we increased full-year EBITDA by almost 55% to nearly $1.6 billion. We delivered the highest annual wood products earnings in over a decade. We captured merger cost synergies faster than expected and raised our 12-month run rate target by 25%, achieving over $100 million in operational excellence improvements. Finally, we returned $2 billion of cash to shareholders through the repurchase of common shares. For the full-year 2016, Weyerhaeuser reported net earnings of just over $1 billion or $1.39 per diluted share or net sales of $6.4 billion. These results include the solid fourth quarter performance I will highlight this morning. Our fourth quarter net earnings were $551 million or $0.73 per diluted share on net sales of $1.6 billion. This includes after-tax earnings of $489 million from discontinued operations, primarily the gain on divestiture of our pulp mills, and after-tax special charges of $44 million for a tax adjustment associated with repatriation of Canadian earnings following our Cellulose Fibers divestiture, merger-related expenses, and some non-cash real estate impairments. Excluding these items, we earned $106 million or $0.14 per diluted share. Adjusted EBITDA for the fourth quarter totaled $400 million. This is an improvement of over 60% compared with a year ago and represents substantial increases in each of our operating businesses. Before discussing our business results in more detail, I will make a few comments on the housing market. Single-family housing activity continued a steady improvement in the fourth quarter. Single-family starts rose 10% compared with the third quarter and ended up the year up 9% compared with 2015. Total U.S. housing starts finished the year at nearly 1.17 million, a 5% improvement from 2015. As expected, the single-family share of activity increased during the year, while multi-family activity remained volatile. For 2017, we expect single-family housing starts to increase by over 10%, and we anticipate total housing starts of approximately 1.25 million to 1.3 million. Economic fundamentals support a trajectory of continued steady housing growth. Employment and wages are rising. Consumer confidence is strong, mortgage rates remain historically favorable, and public surveys indicate builder confidence remained near historic highs. Although builders are managing through some constraints such as availability of skilled labor, stringent permitting requirements, and land and construction cost inflation, our customers echo the optimism seen in builder surveys and feel confident that the housing market will maintain solid upward momentum. Let me now turn to our business segments. I will begin the discussion with timberlands. Timberlands contributed $123 million to fourth quarter earnings, 1 million more than the third quarter, and $223 million to adjusted EBITDA. Western timberlands contributed $101 million to fourth quarter EBITDA compared with $109 million in the third quarter. Export log volumes declined due to seasonally slower construction activity and timing of shipments. Average realizations, however, improved moderately across all export markets as market dynamics remained favorable. In Japan, housing activity remained solid with wooden housing starts up 8% for the full year. Japanese lumber inventories, which were elevated for much of 2016 after a delay in the consumption tax increase, continued to decline to the seasonally slower construction period and are now at more normal levels. This created favorable supply-demand dynamics and supported improved pricing in the quarter. Pricing for our Chinese export logs improved also. Fourth quarter log inventory to Chinese ports were largely flat with third quarter levels, and we experienced continued strong takeaway throughout the quarter. In the Western domestic market, sales volumes were lower as mills took holiday downtime, but average realizations improved slightly. Our Western crews did a good job adjusting harvest plans to adapt to record October rainfall. Our fourth quarter harvest lines were unaffected by weather, and we had no infrastructure damage. However, per unit logging cost and road spending increased compared with the third quarter due to the wetter weather. Moving to the South, Southern timberlands contributed $112 million to fourth quarter EBITDA, up $4 million compared with the third quarter. Southern markets remained flat as mills had adequate inventory, and average log realizations were largely comparable to the third quarter. The harvest volumes increased modestly as the fourth quarter typically includes a higher volume of stumpage sales. As in the West, our crew successfully flexed target settings to adjust to November's severe weather, and we had no material damage to our timberland. Silviculture expenses declined as the fourth quarter typically includes fewer site preparation and hardwood management activities. EBITDA for Northern timberlands totaled $7 million. This was unchanged from the third quarter on comparable prices and volumes. The strategic review of our Uruguay operations is proceeding well. We continue to see strong interest and look forward to providing further information when the review is complete. Real estate, energy, and natural resources contributed $13 million to fourth quarter earnings. Excluding special items, the segment earned $27 million, $12 million more than the third quarter. EBITDA increased nearly two and a half times to $90 million. Our average price per acre declined due to mix as the fourth quarter included a large transaction in Montana, where timberland prices are regionally lower. For the full-year 2016, we sold approximately 83,000 acres, or roughly 0.6% of our land base. Fourth quarter special items included $14 million of non-cash impairments. These resulted from a change in strategy for several small legacy real estate projects that were formerly targeted for development. The asset value optimization work continues to proceed well. As we indicated during our December Investor Day, we have finished applying the AVO process across our Southern ownership and are in the process of listings in the 500,000 newly identified acres. Our focus has now turned to the West, where we are evaluating our Washington and Oregon acres. This work is going very well and remains on track for completion by mid-year 2017. Wood products contributed $99 million to fourth quarter earnings. The business delivered full-year 2016 earnings of $512 million, the strongest annual earnings since 2005. Fourth quarter adjusted EBITDA totaled $132 million, $71 million lower than the third quarter primarily due to seasonally lower sales volumes and operating rates. Lumber contributed $57 million to EBITDA, $28 million lower than the third quarter. Sales volumes declined 12%, average lumber realizations decreased 2%, and Western log costs increased. Operating rates were lower and unit manufacturing cost increased due to planned downtime for installation of capital projects at several of our Southern mills. Heavy rains and regional flooding resulted in modest weather-related downtime in some of our Western and Southern locations and higher manufacturing costs for our Canadian mills. EBITDA for OSB totaled $46 million, $17 million lower than the third quarter. Sales volumes declined 18%, and average sales realizations were comparable to the third quarter. Operating rates declined due to downtime for planned maintenance as well as repairs to our Sutton, West Virginia mill. As we previously disclosed, the Sutton mill experienced a fire on November 1st. This was an insured event. Repair activities progressed rapidly and successfully, and the mill resumed full production around year-end. The net fourth quarter financial impact of this fire on the OSB business was approximately $5 million, the amount of our deductible as we brought the mill up and received insurance reimbursements faster than expected. We anticipate no net financial impact from this event in the first quarter as modest repair expenses should be offset by reimbursements received within the quarter. Engineered Wood Products contributed $26 million to EBITDA, $17 million lower than the third quarter. Sales volumes for Solid Section and I-Joists declined approximately 10%, and operating rates were lower due to planned maintenance and holiday downtime. Average realizations increased modestly. EBITDA for distribution totaled $5 million, slightly lower than the third quarter. By focusing on improving product margins and tightly managing cost, the business performed well in what is typically a seasonally challenging quarter. I will now turn to discontinued operations. We closed the sale of our pulp mills and printing papers business on December 1st and November 1st respectively. This completed the divestiture of our Cellulose Fibers segment. Net after-tax earnings from discontinued operations of $489 million are primarily comprised of the gain on these two divestitures. As I mentioned in my opening remarks, I am proud that each of our businesses maintained its relentless focus on improving relative performance and delivered strong 2016 operating results throughout the merger integration process. Each of our businesses has met or exceeded its 2016 operational excellence target. Timberland has delivered $42 million of operational excellence improvements, primarily from merger-related operational synergies. In Wood Products, OPEX improvements included $16 million in lumber, $21 million in OSB, $12 million in Engineered Wood Products, and $15 million of EBITDA improvement for distribution. The benefits of these improvements are clearly visible on our bottom line. In total, wood product EBITDA improved by almost $270 million in 2016 compared with 2015. A $41 per thousand square feet year-over-year improvement in our OSB realizations created a tailwind of $120 million, and an $11 per thousand feet improvement in our lumber realizations provided a tailwind of approximately $50 million. The remaining $100 million improvement was largely attributable to nearly $65 million of wood products OPEX and the addition of the Plum Creek wood products mills. For 2017, we are targeting additional operational excellence improvements of $95 million to $125 million across our businesses. This includes $40 million to $50 million in timberlands, $20 million to $25 million in OSB, $10 million to $15 million in Engineered Wood Products, and $5 million to $10 million in distribution. I will now touch briefly on our merger cost synergies. We have been achieving our targeted cost synergies faster than anticipated. As we mentioned in December, the scope of opportunity has exceeded our initial expectations. We raised our cost synergy target by 25% to $125 million and remain highly confident we will achieve this full amount on a run rate basis by the end of the first quarter 2017. We also remain on track to eliminate the $35 million of cost formerly allocated to our sale of fibers business no later than 2017 year-end. I'll close this morning with a few comments on the softwood lumber agreement. Although discussions between U.S. and Canadian negotiators continued through the end of 2016, we have been unsuccessful in reaching an agreement. With the change in administration, negotiations are currently on hold while U.S. trade representative and Department of Commerce appointees are confirmed and take office. In the meantime, the U.S. International Trade Commission and Department of Commerce have continued to evaluate the petition for countervailing and anti-dumping duties filed by the U.S. Coalition at the end of November. On January 6th, the ITC unanimously determined that there is a reasonable indication that the U.S. has been materially injured by imports of softwood lumber products from Canada. The U.S. Department of Commerce is currently conducting an investigation that will result in a determination regarding preliminary duties. We expect the announcement regarding preliminary countervailing duties in late April with an anti-dumping determination following in late June. Our preference remains for a negotiated agreement. The U.S. coalition continues to work closely with the Office of the U.S. Trade Representative, and we look forward to resuming negotiations. I will now turn it over to Russell to discuss some financial items and our first quarter outlook.

Thank you, Doyle and good morning. The outlook for the first quarter is presented in chart 16 of the earnings slides. In our timberlands business, we expect first quarter earnings and adjusted EBITDA will be comparable to the fourth quarter. In our Western timberlands operations, we expect increased log sales volumes and slightly higher average sales realizations in the first quarter primarily driven by higher export mix. Export volumes to Japan and China are expected to increase as a result of the timing of shipments and continued favorable demand. Domestic log sales volumes and average sales realizations are expected to be comparable to the fourth quarter as a result of continued stable demand. Western road costs will decrease due to lower road spending, which is typical in the winter months. Southern harvest volumes are expected to be seasonally lower than fourth quarter levels as a result of harvest timing in some of our southern markets. We expect average sales realizations for the first quarter to be similar to fourth quarter levels. Silviculture spending in the South will be higher than in the fourth quarter as we perform more forestry activities such as competition control and fertilization during the first quarter of the year. In the North, we anticipate first quarter sales volumes will be slightly lower than the fourth quarter. However, we expect average sales realizations will be comparable to the fourth quarter levels. Real estate, energy, and natural resources earnings and adjusted EBITDA for the first quarter are expected to be significantly lower from the fourth quarter as a result of the timing of our real estate sales, with the first quarter EBITDA comparable to the first quarter of 2016. We typically close fewer transactions in the first and second quarters of the year as recreational buyer traffic slows during the winter months. The spring and summer months are the most active selling seasons, with the largest portion of the sales closing in the second half of the year. We continue to expect over $250 million of EBITDA from our real estate and energy and natural resources business in 2017. As we discussed at our December Investor Meeting, we expect land bases as a percentage of real estate sales to be between 45% and 65% for the full year 2017. For wood products, we anticipate higher sales volume across all product lines in the first quarter as we enter the spring building season. We expect manufacturing costs will improve as our operating rates return to normalized levels following the fourth quarter's decreased levels resulting from maintenance and capital project installations. Realizations remained relatively strong going into the fourth quarter as we did not experience the seasonal declines in wood product pricing that typically occur during the holiday season. We anticipate lumber and OSB sales realizations in the first quarter will be comparable to fourth quarter levels. Overall for wood products we expect adjusted EBITDA and earnings for the first quarter will be higher than the fourth quarter and will be roughly $50 million higher than the first quarter of 2016. Chart 11 outlines the major components of our unallocated items. For the fourth quarter, the $31 million earnings experienced in unallocated items is driven by a $20 million increase in non-cash charges related to LIFO inventory adjustments, profit elimination, and foreign exchange. Moving on to our retirement and pension plans, the year-end 2016 funded status of our defined benefit pension plans and post-employment retirement plans decreased by $383 million compared to 2015 as a result of the decrease in the prescribed discount rate. Discount rates decreased by approximately 20 to 30 basis points for both the U.S. and Canadian plans. We did not make any cash contributions to the U.S. qualified pension plan in 2016, and we don't anticipate any cash contributions in 2017. Cash paid for all other pension and other post-employment retirement plans in 2016 was nearly $100 million, which included one-time payments related to the Plum Creek merger. We expect cash payments in 2017 will be approximately $70 million. We expect to report approximately $100 million of non-cash, unallocated pension and post-retirement expense in 2017. Chart 14 summarizes our key financial items. As Doyle mentioned, we closed the sale of the Cellulose Fibers pulp mills on December 1st; pursuant to U.S. GAAP, the cash proceeds from the sale are recorded in different categories within our cash flow statement. The $2.2 billion of cash proceeds from the sale is showing cash from investing activities. Immediately following the close of the sale on December 1st, we used a portion of the proceeds to pay off the $1.7 billion term loan, which you can see in cash flows from financing activities. Finally, we paid $494 million of taxes related to the sale of our Cellulose Fibers mills in the fourth quarter, which is recorded in cash from operations and results in the negative $151 million of net cash from operations. Excluding the cash taxes paid on the Cellulose Fibers sale during the fourth quarter of 2016, cash from operations would have been $343 million. Moving on to debt, we ended the quarter with $6.6 billion of long-term debt. We have one scheduled maturity in August of 2017 for $281 million, which we intend to repay with available cash. Capital expenditures for the fourth quarter totaled $207 million, including $22 million related to discontinued operations. Net of discontinued operations, capital expenditures for the full year 2016 were $425 million. Looking ahead to 2017, we expect total CAPEX will be approximately $435 million, $300 million for wood products and $135 million for timberlands. Interest expense was $108 million in the fourth quarter. We expect interest expense will be approximately $400 million in 2017. Our 2016 effective tax rate for continuing operations was approximately 18%, slightly above our earlier forecast due to a tax adjustment reported as a special item in the fourth quarter in connection with the sale of our Cellulose Fibers business. For 2017, we expect the tax rate will be between 15% and 17% based on the forecasted mix of our earnings for our REIT and taxable REIT subsidiary. I’ll wrap up with chart 15, which provides some additional detail on our share count and repurchase activities. During 2016, we repurchased 68 million shares at an average price of $29.49 per share. There were no share repurchase activities in the fourth quarter, and we ended the quarter with about 749 million shares outstanding. Now I’ll turn the call back to Doyle and look forward to your questions.

Thank you, Russell. I am proud of our 2016 achievements. We have transformed our portfolio, delivered strong operating performance, and taken substantial strides towards a successful and value-creating merger integration. And in 2017, I'm very optimistic about the opportunities in front of us. We remain strongly committed to driving industry-leading performance, capturing merger synergies, fully capitalizing on improving markets, and demonstrating disciplined capital allocation to drive superior value for our shareholders. And now I’d like to open the floor for questions.

Good morning.

Good morning, Anthony.

With regards to the CAPEX guidance, I think you said $300 million for wood products. Is it possible to say if you're adding or debottlenecking capacity in lumber and OSB for the year and roughly what percent capacity growth you might anticipate? And then specifically with regard to the anti-dumping duties, which we might get in spring/summer, are you taking steps to rebalance capacity between the U.S. and Canada in your system?

So let me start with your second question regarding the anti-dumping duties. We are not taking any steps to rebalance, Anthony. As we've talked about previously, if you look at our Canadian operation, about a third of our Canadian operation production is sold in Canada, a third is sold in export markets outside the United States, and a third comes into the U.S. Overall, our Canadian lumber operations is roughly 20% of our overall lumber operations. So, that 20% times a third is not a big part of the driver for our lumber operation. In terms of CAPEX, the $300 million is in line with what we've done over the last couple of years, and our primary focus in our CAPEX in our Wood Products operation is low-risk, high-return projects that drive down our overall cost structure and that's been a key part of accomplishing our OPEX. With that said, some of those projects do in fact result in debottlenecking and additional capacity. We are in the process of rebuilding two of our mills, Dirk's and Millport, which have been good mills for us historically. To dive down the cost structure of those mills, we essentially needed to rebuild them in place, and that will result in some additional capacity as well. But again, the primary focus is on cost improvements where we will be increasing capacity as a result of some of the projects that we've put in place.

Okay, that's helpful. And then just regarding the real estate guidance for 2017, should we expect land sales to be weighted towards the South and maybe the North as you're still working through AVO in the West? And if you could just talk generally about the demand you're seeing for timberlands and rural lands, and if you could highlight any difference in demand between the West and the South?

Sure Anthony, this is Russell. As you know, the real estate business is a little lumpy, but getting through our AVO process in the South, and as Doyle indicated, we're starting to work through to bring some of that AVO work to market. We've identified 500,000 acres, and now we're starting to bring a portion of that into the marketplace. I would expect the activity to be weighted a bit to the South. We still have opportunities in the North, and we will be looking at that. As we get through the AVO process in the West, we'll start looking at what opportunities there are to bring that to market. Development for rural real estate, particularly in the South, there has been continued demand. There's a strong recreational buyer activity in the South. We do have demand in the North, but it is a different buyer, one more focused on small plot timberland ownership. However, we see good, strong demand in the South for recreational properties.

Okay, that's helpful. I'll turn it over.

Thanks. Hi, everyone, good morning. Thanks for all the detail and congratulations on the progress. First question, I just wanted to double-check something. I thought I heard you say, Russell, that the pension liability ultimately went up, I want to say something like $300 million, but you didn't anticipate funding being required this year. If I heard that correctly, could you discuss why? I think you also threw out a pension expense figure for this year, but I did not catch that; if you could repeat that, that will be great?

Sure, so the pension liability or the pension – the funded liability was down $383 million. As far as the pension expense, it did increase. That's really a function of a couple of things. First is the return on the pension assets, so we did decrease our rate down from 9% to 8%, and then we have additional amortization on pension loss. So that's really driving the increase. That total on an unallocated basis is $100 million. As for the funding, well, the funding requirements are really prescribed by GAAP funding and IRS funding. So we don't have any funding requirements in 2017.

Okay, thank you for the clarification there. Could you talk about what operating rates, recognizing it's early in the year and a lot can change, what kind of operating rates do you think you'll be running at across the major wood products businesses? And then as it relates to distribution and engineered wood products, are you finding any opportunity to further marry those businesses and have them coordinate to a greater degree to take share within the large builder pack market?

George, in terms of operating rates, we are optimistic about demand as we move into 2017 for all of our products. I would tell you there will be some seasonality as there always is, but I would anticipate lumber operating in the low to mid-90s, OSB operating in the low to mid-90s, ELP normally operates about 10% lower than that, so I would anticipate that being in the mid-80s type range. As I said, we are encouraged by what we're seeing in terms of demand. As we talk to our customers, they are bullish on housing and increasing demand for all of our products in 2017. In terms of coordination between engineered wood and distribution, that's something we've also done a lot of work on. I would tell you those two operations are working more closely together than they ever have historically, and that's been beneficial in driving improvements in both our EWP and distribution business. I think there will continue to be further opportunities for that coordination as we move forward.

Doyle, is there a way to size if at all what kind of benefit you might get from that in 2017? And then my last question, not that you haven't had great performance on this over the last couple of years, but I noticed a little bit of a pickup in G&A. Is that just still the residual effect of putting Plum Creek into the business, or are there other expense categories that are growing that you'll need to manage for in 2017? Thank you and good luck in the quarter.

Thank you, George. In terms of G&A, I would tell you that the slight increase in the fourth quarter versus the third quarter is just timing. If you look at where these companies were before we combined them in 2015 versus where they are going up in 2017, we're highly confident that we're going to meet or exceed our $125 million target by the end of the first quarter of 2017. As I said earlier, we're at basically a $100 million run rate through the fourth quarter of 2016. So, we're in really good shape on our G&A, and as I mentioned earlier, the $125 million is 25% higher than what we originally factored in when we announced the merger. In terms of engineered wood products and distribution coordination and quantifying that, George, as you would expect, that is difficult to quantify, but it is part of the OPEX improvements that we've highlighted in 2017. There may be some upside as these two operations continue to work together and find ways to drive value for customers and improve bottom line profitability.

Thank you for the details.

Hey, good morning. First question from me just as it relates to the lumber dispute. As we enter the potential look-back window, have you started to see any change in Canadian shipments for the U.S. just more broadly in the marketplace?

You know, Collin, it's hard to tell yet. I mean we're only into January, and as you know the look-back will be roughly 90 days. So, it's hard to determine yet if there's been a significant change in the Canadian activity. Canadian activity was up significantly in 2016, and we'll be watching how that plays in 2017. A lot of rumors floating around as to what may or may not happen but too early to tell what changes, if any, the Canadians may be taking as we move into 2017 in the potential look-back period.

Okay, thanks for that Doyle. Switching gears, just your guidance on real estate seems to be a little more optimistic than the December Investor Meeting, just given kind of language around looking for it to exceed the $250 million in adjusted EBITDA. Am I reading too much into the language choice there, or is there something driving maybe a little bit more optimism on the real estate front?

What I would tell you is as we continue to learn more about our real estate operation and what the opportunity is there, we continue to be encouraged by the AVO process and what that's unveiling. So we are confident that, that number will be over $250 million for 2017.

Okay, and then curious, given the potential for tax reform, can you touch on how important 1031 exchanges are to the real estate business? I know that's something that Weyerhaeuser legacy has engaged in to some degree, but how do you think about it now given your current pack that it’s on a combined basis?

So Collin, this is Russell. As far as the 1031 program, you're correct, Weyerhaeuser had used that in the past and that was primarily because they were in the built-in gains period. Now that we're out of the built-in gains period, on a combined basis, that really isn’t a tool that we would use going forward in a meaningful way.

Okay great. I'll turn it over. Thanks guys.

Hi, good morning. Can you give a little bit more color on what you're seeing in the export market? A lot of other commodities have seen a big uplift in volumes to China; are you sensing any of that at all in either log or lumber from North America or some other parts of the world?

So Gail, we continue to be encouraged about what we see in the export markets. Let's start with Japan; as you know, that's our biggest market. Prices were up in fact in the fourth quarter, which was encouraging. Volumes were down, but that was due to seasonality and frankly some of the timing of our shipments and how the ships played out that were going to Japan. In the first quarter, we anticipate volumes will be up. Our best guess right now is flat pricing, but we continue to be encouraged by what we see out of Japan. Housing market activity was up 8% roughly through the month of November, which is the last data point that we have. As we look to China, the situation looks encouraging as well. As you know, log inventories continued to be at normal levels, and pricing was in fact up in the fourth quarter. Volume, again, was down seasonally, and as we move into the first quarter, we anticipate good demand out of China, and we anticipate volumes will be up in the first quarter versus the fourth quarter.

Okay, can you give a little bit more color on the charges on some development projects? Are there any projects that we might have heard of, or are they just really small?

Yeah, this is Russell. As we've gone through an AVO process, part of that is also to identify any kind of small development projects, and Weyerhaeuser had done some small development activities really around minimal infrastructure investment. As we went through the portfolio, given the change in our strategy related to development, we chose to move those into an HPU category and sell through those quicker. Because of that, we took the impairment against those assets, but they are very small properties, and we don't expect to have any material impairments going forward.

Okay, Doyle, can you give any sense of where your customer log inventories are positioned moving into the year?

Yes, I would say customer log inventories in the West are towards the low end of normal as we move into the year. In the South, they are at normalized levels in terms of where you would have seen log inventories historically.

Okay, and just last one. Obviously you're looking for fairly stable Southern pricing in the first quarter; can you give any perspective on what your outlook is for the year? Are you seeing any sense of traction of building?

You know, our take is the first and second quarter we would anticipate pricing to be essentially flat. We do think there's the possibility of slight improvements in pricing as we move to the second half of the year, and then as we look further out than that, we continue to be quite optimistic about the improvement in Southern log prices. As housing continues to improve, that will drive demand. As you also know, there are significant projects that are being built and will be coming online in 2017 and 2018, which we think will drive 12 million to 13 million green tons of additional demand. A big component of this will be what happens with Canada, and we think either as a result of hopefully a negotiated agreement or the duties, that will have an impact on the amount of lumber that is coming in from Canada, which will create more demand for Southern saw logs. So, all those factors have us encouraged, and we like to say we're hopeful that we'll see some slight improvement in the second half of this year, but more importantly as we move into 2018 and beyond, we think we're going to see some pricing power as a result.

Okay, thank you.

Thank you.

Thank you. A couple follow-ups first. Do you guys get a sense of inventories of the customers on logs? Do you have a view where they are on lumber and OSB?

Mark, I would tell you that our sense is inventories for lumber and OSB are pretty thin. I would say it is below normal levels, and that seems to be how our customers are running their business, but I would say inventories are latent.

Have you considered what the impact would be on lumber and OSB imports from Canada if a border tax adjustment were included in a new tax bill? Do you have any insights on how it might be handled or its potential implications?

We've looked at the implications of that. But as Doyle mentioned, given we have relatively low volumes coming in from the Canadian operations into the U.S., we're primarily a domestic producer and sell into the domestic markets. We don't think it would have a material impact on our operations or the U.S. industry.

I guess coming from the other angle, would it have material implications on wood coming in from Canada not produced by you? Essentially, home builders might not be inclined to buy wood from the Canadians and act as a further umbrella for U.S. pricing?

At this point, that's generally fair. More work to be done and more specifics to be learned, but to your point, if anything, it should be a net positive for our company and the U.S. industry.

Okay, thanks so much.

Thank you.

Yes, good morning everyone.

Good morning, Chip.

First question is Doyle, I remember it was about three years ago when you got into your current role; it seemed like you had a couple of years where you were going to improve the wood products business. I think it's fair to say you've exceeded expectations. But I was under the impression that after those two years, CAPEX might come down, and you would sort of be in a position where maybe you would have viewed accelerated opportunities. What I think I’m seeing today is CAPEX is staying elevated, but to be fair, you're also having continued high targets. In fact, it looks like lumber and OSB have higher savings in 2017 compared to 2016. So, the question is what changed? Has it been that since you've been in there, you have found new things you can do to plants you've already worked on, or are you just expanding the number of plants that you're putting capital in to achieve these savings?

It's a good question, Chip. When we started this process, as you were recalling, a lot of the improvements were non-capital improvements because our take was to show that these mills could make operational excellence improvements without capital. Once you show that and you earn the right to capital to further drive down the cost structure. We initially said okay, let's do this without capital. Once you show that and earn the right to capital, if it drives down the overall structure of our mills, that's been a key part of accomplishing our OPEX. We've made good progress and there's still more work to be done, but we now have confidence, Chip, as we put in this capital that we will continue to deliver on these OPEX improvements. More importantly, we'll continue to drive down the overall cost structure of our mills to outperform the competition in the current upturn that we're in. Our outlook is that when things roll over, which we think is many years from now, we will be back at the bottom. I don't want to give you the sense that this $300 million of capital is going to be the level forever. We think there are a couple more years of spending at this level to fully position our mills from a cost perspective, then you would see capital fall off to a more normalized level in the $200 million to $250 million range.

Okay, so $200 million to $250 million. Then the second question is, as we've looked at the situation in 2017, there would be a lot of TMO-type partnerships that were established 10 to 15 years ago that are coming up for renewal. Yet it seems like the timberland market has stayed pretty solid. I don't know if it's great, but it's been solid. I didn’t know if you had any thoughts on if you are seeing these partnerships extend, or are you instead seeing them dissolve but still with solid demand for substitutes from investors taking over these ownerships?

Chip, I would tell you that timberland markets continue to be strong. We see that consistently, especially for high-quality timberland. There's a lot of interest in this investment class, and there's a lot of interested buyers, both domestic and increasingly international buyers starting to show up. As these TMOs do mature, some of them you see being extended due to performance, some trading back and forth, but there's a lot of interest in this asset class. Any process that is being run, and there are some being run, we participate in just about all of those. There are a number of interested parties involved.

Any update on your thinking about the dividend and dividend policy at this point?

As we mentioned at our Investor Day, over 90% of our business assets are in timberlands, and as you just highlighted, we have significantly improved the cost structure for wood products. Our ongoing cash flow will be much more stable, and that's intentional. We're in the process of discussing the payout ratio with our Board, and we will update you when those conversations are complete. We think there is the opportunity to increase the payout ratio as we look forward. In terms of a dividend increase, as we've consistently said for the past few years, we're committed to a sustainable and growing dividend. As we look into 2017, we're clearly going to benefit from cost and operational synergies, continued OPEX improvements, and as we've talked about this morning, stronger housing markets. All those factors will be considered as we work with our Board on decisions regarding our dividend.

Great, thanks for the update.

Hi, good morning and congratulations on the strong 2016 results. We are seeing some inflation out in the economy these days with a lot of commodity prices moving higher. Just wondering if you're starting to see that in your business from cost pressure, and related to that, maybe just wondering if the higher oil and gas prices might have any benefit on the energy part of the real estate segment just in terms of royalties and if that's factored into your outlook or not?

On the second part of your question, clearly higher natural gas and oil prices will benefit our Energy and Natural Resources segment. We have a lot more leverage to natural gas. For rough numbers, every dollar improvement in natural gas contributes $5 million to our bottom line, all else being equal. But as you would also anticipate when pricing increases, that also gives you opportunities to lease more. We don’t have quite that type of leverage to oil, but as oil prices continue to improve there will be more opportunity from a leasing perspective. In terms of commodity price pressure, we're starting to see a little bit of that, not big numbers at this point, but that is why OPEX is so important as at some point we are going to see some cost push. A big part of our operational excellence efforts are to ensure that we are doing things that offset that or more than offset that so that the benefits we see from our increased pricing and volume fall directly to the bottom line.

Okay great. And then the other area where there has been a lot of volatility lately has been just in currencies, and you get some sensitivity to the Yen. Just wondering what kind of impact the post-election move in the dollar is having on realized pricing or competitive trade flows, particularly into Japan where I know you have some competition from some European producers?

As you said, the strong U.S. dollar continues to be a headwind for us. All other currencies that are important to us weakened versus the U.S. dollar after the election. Some of them have strengthened slightly in December, but overall they remain weaker than where they were at the end of the third quarter. In Japan, as you said, the risk there is the strong U.S. dollar that pressures prices our customers' products compete with lower-cost lumber imports from Europe, but as I said earlier, despite all that, we continue to have good demand for our logs into Japan. We actually saw some fall-off in the imports that were coming in from Europe during that time period. So, net-net while it’s not positive, we work through that and continue to have good demand from our Japanese customers, and part of that is built on the long-term relationships and unique relationships we have with our customer base in Japan.

Okay, just one last one I could. Just on the corporate expense in the quarter, I think there was maybe a LIFO or inventory hit there in the quarter. It seemed like maybe just a year-end true-up, but just thinking about what kind of run rate level we're at going into 1Q there and as you remove some of the stranded costs from Cellulose Fibers, where do you think we would become ending the year there?

As far as the $14 million LIFO adjustment, that was a combination of LIFO and profit elimination, and that was really a function of increasing inventories at year-end. Then also bringing on some of the Montana inventories that were legacy to Plum Creek, we increased log inventories particularly in those regions to anticipate when to break even. So, it's really just an increase in inventory versus the driver for the LIFO on profit elimination. As Doyle mentioned, we're on track to capture our synergy targets of $125 million by the end of the first quarter, and we're making good progress on both those accounts.

Okay, thanks very much.

Thank you.

Thanks Doyle. I'm just expanding on Chip's question; are the nature of the operational excellence improvements in timberlands any different now? I'm just curious whether things are evolving there and maybe maturity schedules and things are getting involved?

The biggest difference in timberlands versus where we were the first two or three years are the additional opportunities presented as a result of combining Weyerhaeuser and Plum Creek. So a portion of the $42 million that we got in 2016 was due to those operational synergies. The ability to rebalance wood flows, minimize costs, increase realization, optimize silviculture practice costs is enhanced with our larger scale. Frankly, best practices in harvesting and transportation were also improvements resulting from the merger. We're confident in achieving significant targets of $40 million to $50 million in 2017, similar numbers anticipated for 2018 due to the opportunities created by combining these two companies, leveraging best practices, and driving down the overall cost structure of our timberlands operations. Our teams are excited about it as they find additional opportunities for OPEX as a result of the combination.

Very helpful, thank you.

Thank you.

Good morning Doyle, good morning Russell.

Good morning Mark.

Doyle, I wonder if you and Russell could just give us some sense of how your appetite is right now for timberland acquisitions and where your biases would be regionally?

Right now our focus, what I like to say is number one, two, and three is continuing to make sure we fully capitalize on the value that we can create by combining Weyerhaeuser and Plum Creek and driving the synergies and other benefits to the bottom line. That's our primary focus. As we continue to work through that and, as I like to say, learn to continue to grow, we will look at timberland acquisitions to potentially grow our company. We like both the South and the West, so we're not biased toward one more than the other; we would look to potentially grow in both regions as we move forward.

Okay, and then on the other side of the equation, Doyle, just I know you're still in the midst of the evaluation down in Uruguay, but can you just give us some sense of any tax consequences on that sale?

If that were the case, we would have minimal tax impacts on that transaction.

Doyle, the last question I had is just over engineered wood. I know that there have been some conversations about more fire code restrictions around particularly I-Joists. Can you just update us on what that situation is and how Weyerhaeuser deals with those changes in regulation?

Good question, Mark, and there are various regulations and potential regulations concerning that. I can tell you we're doing an immense amount of work on that front. We've got a really good technology group that is exploring different applications for engineered wood products that would extend what's called the burn-through test and enable compliance with any new requirements that may come from that. We have a lot of work being done, and we are optimistic about what we've seen so far in the tests we're conducting, and we're confident that we will be well positioned as we go forward in engineered wood products.

How widespread is this Doyle? Is this just kind of state by state or is this more of a national basis?

No, it's clearly state by state. That's how these things work. Again, there's a lot of uncertainty regarding exactly what that may look like and what the timing may be. But we've been on top of it and feel good about the opportunities to deal with this on a go-forward basis.

Okay, just the last question – also on I-Joist. I just noticed your graph indicates that prices of I-Joists have been declining for four to six quarters, yet at the same time kind of the inputs like OSB for web stock are actually going up. Would you expect to see those higher input costs starting to roll through to I-Joist prices here over the next few quarters?

Yes, Mark, I do think there is an opportunity for price improvement in engineered wood products as we move through 2017.

Okay, very good. Good luck this year, guys.

Alright, thank you.

Yeah, thanks very much and good morning, gentlemen. Just a question on softwood lumber negotiations. You mentioned that government appointments haven't been made yet, so there are no government-to-government negotiations. But maybe you could just give us some color on whether the industry is talking and whether you're making any progress, and when you expect negotiations to start.

I think it's going to take time for the appointments to be in place and approved before we'll get back into it. I can't tell you exactly when negotiations will start again. It's going to take some time. In terms of the U.S. coalition, a lot of work continues to be done to make sure we don't lose any momentum during this period. The U.S. coalition is all on the same page, and we remain hopeful for a negotiated settlement as we move forward.

Great, that is all I had. Thanks a lot, guys.

Thank you. As I understand it, that was our final question. I would like to thank everybody for joining us this morning. We really appreciate your interest in Weyerhaeuser. Take care.