Weyerhaeuser Company (WY) — Q3 2017 Earnings Call Transcript

Thank you, Dennis. Good morning, everyone, and thank you for joining us today to discuss Weyerhaeuser's third quarter 2017 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. This morning, Weyerhaeuser reported third quarter net earnings of $130 million, or $0.17 per diluted share, on net sales of $1.9 billion. Our third quarter results include after-tax special items of $129 million, primarily related to previously announced charges for product remediation. Excluding these special items, we earned $259 million, or $0.34 per diluted share for the third quarter. This is an improvement of over 20% compared with the second quarter 2017 and 50% higher than a year ago. Adjusted EBITDA increased to $569 million, 12% more than the second quarter and over 30% higher than one year ago. I am very pleased with our third quarter operating performance. Employees across the company worked together to overcome a variety of weather-related challenges and each of our businesses delivered strong operating results including another record quarter for Wood Products adjusted EBITDA. We also continue to deliver on our efforts to simplify our operations and strategically optimize our Timberland portfolio by completing the sale of our Uruguay operations for over $400 million and in October redeeming our ownership interest in the Twin Creeks joint venture and announcing an agreement to sell 100,000 acres of non-strategic Southern Timberlands for $225,000 per acre. We have also eliminated over 80% of the cost formerly allocated to our Cellulose Fibers business and remain on track to achieve the full $35 million of reductions by year-end. Before I discuss our business results, let me make a few brief comments regarding the housing market. The U.S. housing market continues its upward trajectory. Although September housing starts weakened sequentially as hurricanes suspended construction activity, single family starts rose 6% year-over-year in September and are up over 9% year-to-date. With construction labor temporarily drawn to the repairing model activity to support hurricane recovery efforts, we now expect total housing starts of approximately $1.2 million in 2017. With continued favorable housing market fundamentals including solid single-family permit activity, strong builder confidence, rising employment and wages, and consumer confidence at 13 year highs, we continue to anticipate steady improvement in the housing market for several years to come. Let me now turn to our business segments. I will begin the discussion with Timberlands. Timberlands contributed $131 million to earnings before special items compared with $135 million in the second quarter. Adjusted EBITDA totaled $220 million. Western Timberlands delivered $111 million third quarter EBITDA, $13 million lower than the second quarter but $2 million more than a year ago. Fee harvest volumes declined 16% compared with the second quarter. Mandatory state fire restrictions limited working hours for our Washington and Oregon crews in July and August and forced us out of the woods completely for up to two weeks in September. This year's Western fire season was extremely severe, but we experienced no material damage to our timberlands. All Western Timberlands employees did an outstanding job of proactively assessing fire risk and rapidly deploying resources as needed, and less than 1,000 of our 2.9 million Western acres were affected. The severe fire season limited log availability, driving strong Western domestic market conditions throughout the quarter. Mill inventories remain tight and pricing for domestic logs improved moderately due to continued steady demand. Export demand also remained favorable, with higher log sales volumes and realizations across all markets. In Japan, year-to-date housing starts have risen 1% through August and post-and-beam starts are up 2%. Our customers' log and finished product inventories are relatively low and demand for our logs remains solid. In China, demand is steady and pricing strengthened as customers competed against strong demand from U.S. domestic buyers. Log inventories at Chinese ports were stable throughout the quarter and remain within a normal range. Moving to the South, Southern Timberlands contributed $95 million to third quarter EBITDA, $4 million more than the second quarter. Fee harvest volumes increased compared with the second quarter but were modestly lower than planned as most Southern regions lost a few production days due to hurricane activity. We experienced no material damage to our Southern lands and our employees and contractors did an excellent job of safely staging equipment to avoid damage and enable crews to resume operations as quickly as possible. Overall Southern market conditions improved during the third quarter as wet weather limited log availability, and Southern sawlog realizations increased slightly compared with the second quarter. Our average log realizations were comparable to the second quarter as the third quarter included a higher proportion of pulpwood due to seasonal thinning activity. Forestry costs increased slightly. Northern Timberlands contributed $4 million to EBITDA, $2 million more than the second quarter. Fee harvest volumes increased seasonally but were less than planned as mandatory fire restrictions curtailed harvest activity in Montana for nearly six weeks. Average realizations declined due to mix. Timberlands continues to make strong progress on its operational excellence initiatives and is well positioned to achieve its $40 million to $50 million OpEx target for 2017. Real Estate, Energy & Natural Resources contributed $47 million to third quarter earnings, an improvement of $24 million compared with the second quarter. Adjusted EBITDA doubled to $74 million. The average price per acre sold was lower than the second quarter, as the third quarter included a large sale of lower value Montana acres. Wood Products contributed $241 million to third quarter earnings before special items, an increase of $3 million compared with the second quarter. Adjusted EBITDA improved $4 million to $278 million. EBITDA for lumber totaled $117 million, $10 million lower than the second quarter. Sales volumes declined approximately 4% as we were forced to curtail operations at our Princeton, British Columbia mill for over a month due to a nearby forest fire. Log cost for our Canadian and Western mills also increased. These factors were partially offset by a 2% increase in average lumber sales realizations. Although log availability was challenging in the West due to fires and in the South due to extremely wet weather, our Timberlands and Wood Products teams worked together to develop creative solutions and keep our mills running. Our Western operations expensed no log-related downtime in the quarter, and we lost only a few operating shifts across our Southern lumber system. OSB contributed $102 million to EBITDA, $15 million more than the second quarter and nearly $40 million more than a year ago. Average sales realizations improved 11% compared with the second quarter. Operating rates and sales volumes declined slightly due to a small increase in planned maintenance downtime. Engineered wood products contributed $50 million to EBITDA compared with $52 million in the second quarter. Manufacturing costs increased due to rising fiber prices for fiber, resin, and OSB, and seasonally higher maintenance. This was largely offset by improved sales realizations as we captured most of the remaining benefit from price increases implemented during the first half of this year. Distribution contributed $12 million to third quarter EBITDA, $1 million lower than the second quarter but $5 million more than the third quarter 2016 despite direct hurricane activity in several of our markets. Our Houston, Atlanta, and Jacksonville employees did an exceptional job of developing and implementing plans to keep our associates safe and resume operations as fast as possible following Hurricanes Harvey and Irma. Each of the Wood Products businesses is on track to achieve their respective OpEx initiatives, and we remain confident we will deliver collective benefits of $55 million to $75 million from this segment in 2017. I will now give a brief update on remediation efforts for our Flak Jacket product. We are absolutely committed to doing the right thing to take care of our customers and resolve this situation as quickly as possible. As of yesterday, remediation was complete or underway in over 80% of the affected houses. We expect the vast majority of the work will be completed by year-end with a significant portion of the costs covered by insurance. I will wrap up the Wood Products discussion with a few comments on the Softwood Lumber Agreement. Through most of the third quarter, Canadian softwood lumber imports were subject to preliminary combined countervailing and antidumping duties of 25% to 30%. On August 25, the countervailing duties which were assessed at approximately 20% for most producers were statutorily suspended pending the International Trade Commission's final determination of injury. The U.S. continues to collect preliminary antidumping duties which are assessed at approximately 7% for most producers. The Department of Commerce is collecting and evaluating additional information to support its determination regarding final countervailing and antidumping duty levels. We expect that determination to be released no later than November 14. We anticipate the collection of countervailing duties will resume around year-end following the ITC's final determination regarding material injury to U.S. producers. The U.S. coalition continues to work closely with the Department of Commerce, and we remain hopeful we will be able to negotiate a quota-based agreement. I will now turn it over to Russell to discuss some financial items and our fourth quarter outlook.

Thank you, Doyle, and good morning. The outlook for the fourth quarter as presented in chart 12 of the earnings slides. In our Timberlands business, we expect fourth quarter earnings and adjusted EBITDA will be approximately $20 million higher compared to third quarter. In our Western Timberland operations, we anticipate fourth quarter fee harvest volumes to be higher than third quarter as we plan to make up most of the third quarter volume loss due to summer fire restrictions. We anticipate domestic sales realizations will increase in the fourth quarter as demand remains solid and mills look to build inventories in advance of winter weather. Japanese export log sales volumes will increase modestly compared to third quarter volumes while average sales realizations are expected to be slightly higher compared to the third quarter supported by continued solid demand in the Japanese housing market. Chinese export log volumes and average sales realizations are expected to be comparable to the third quarter. Western road spending was delayed in the third quarter due to fire restrictions. Spending in the fourth quarter will increase as we expect to complete the deferred roadwork by year-end. In the South, we expect slightly higher harvest volumes as we make up for volume not harvested in the third quarter due to hurricanes and wet weather. We anticipate average sales realizations for the fourth quarter will be comparable to third quarter results. Forestry spending in the South is expected to increase as we deferred activities from the third quarter into the fourth quarter due to wet weather. We also expect hauling costs will increase as we compete with hurricane recovery efforts, which is increasing demand for truck transportation. In the North, we anticipate fourth quarter sales volumes and sales realizations to be comparable to the third quarter. As Doyle mentioned, on October 12, 2017, we announced the redemption of our ownership interest in the Twin Creeks joint venture and the termination of the management agreement, which will occur at year-end. The Twin Creeks activity was reported in Other Timberlands and will no longer be included in our results starting in the fourth quarter. Real Estate and Energy & Natural Resources earnings and adjusted EBITDA are expected to significantly increase as compared to third quarter as the fourth quarter is when we typically expect the largest portion of our real estate transactions to close. We continue to see strong HBU interest in activity across our markets, although transaction volumes in several Southern markets have paused temporarily following hurricane activity. We currently expect approximately $250 million of adjusted EBITDA from our Real Estate and Energy & Natural Resources business in 2017. Turning to Wood Products, we anticipate fourth quarter earnings before special items and adjusted EBITDA will be comparable to third quarter. Strong demand and low inventories throughout the supply chain have led to historically strong October pricing for lumber and OSB. Overall, we expect modestly higher quarter-over-quarter lumber and OSB sales realizations, and slightly higher engineered wood product sales realizations. Sales volume for lumber and OSB will be comparable with the third quarter. In addition, we expect a slight increase in log cost for our Western lumber production compared with the third quarter. We expect the decrease in engineered wood products sales volumes in the fourth quarter as well as higher input costs and increase per unit manufacturing cost due to planned seasonal and maintenance downtime. Chart 11 summarizes our key financial items. We ended the quarter with a cash balance of nearly $500 million. Cash from operations during the quarter was $323 million. Capital expenditures for the third quarter totaled $97 million. And we continue to expect our full year capital expenditures to total approximately $435 million, $300 million for Wood Products, and $135 million for Timberlands. As a reminder, the fourth quarter is historically the highest quarter of capital spending. Investing cash flows for the quarter also included $403 million of proceeds from the sale of our Uruguay operations. Moving on to debt, we ended the quarter with $6 billion of debt outstanding. During the quarter, we completed the refinancing of our $550 million term loan which was scheduled to mature in 2020, replacing it with a new $225 million term loan maturing in 2026 and prepaying $325 million. In addition, we paid down a scheduled bond maturity of $281 million during the quarter. Interest expense was $98 million in the quarter, a slight decrease from the second quarter due to a lower average balance of debt outstanding that resulted from the debt pay-down during the third quarter. And now, I'll turn it back to Doyle and look forward to your questions.

Thank you, Russell. I am proud of our third quarter performance as employees across our businesses and functions once again worked together to overcome challenges and produce strong operating results. Looking forward, we remain focused on delivering continued operational improvements and capturing the full benefit of market conditions to drive value for our shareholders. With that, we would like to open the floor for questions.

Thank you. Just one sort of maintenance fee type question. The $20 million in other in the unallocated items, was that a reversal of LIFO or what was that $20 million?

Mark, this is Russell. That $20 million is really related to one-time gains from asset sales and some operational true-ups, so we wouldn't expect that to occur in the fourth quarter.

Okay. Any single significant one or multitude of smaller items?

Really it's a multitude of smaller items. We sold some surplus offices and we had some true-ups on some gain calculations.

Okay. And any updated thoughts on Southern saw timber pricing and the outlook for next year? It does seem there's been an acceleration of capacity announcements for additional lumber. And just wanted to get your updated thoughts on where that supply-demand balance in saw timber is and when an inflection point might conceivably be reached and we get some improvement in pricing?

Yeah, Mark. And we do think there's some potential for pricing traction as we enter 2018, really driven by four things. Number one, as we mentioned, housing demand continues to grow and we are constructive on housing as we move into 2018. Secondly, as you just highlighted, more capacity is being added, and I'm particularly encouraged by the number of recent announcements, including GP announced a greenfield mill in Talladega and said they are evaluating potential additions in Georgia, Texas, or Mississippi, all of which would be good locations. Canfor said they are going to increase their Southern production by 300 million board feet and they're evaluating a potential greenfield mill in the South. I think this week's announcement of Potlatch and Deltic getting together and their intent to significantly increase lumber production. West Fraser's purchase of Gilman and their plan to increase capital spending, and our 300 million board feet of additional capacity at Dierks and Millport that we've talked about. And all of that is on top of about 1.2 billion board feet of additional lumber capacity that's happening in 2017. So, all of that is good on the demand side. The other thing I would point out – or two other things I'd point out is the Softwood Lumber Agreement. We do fundamentally believe there's going to be less lumber coming in from Canada, either as a result of final duties or hopefully a negotiated agreement. And then the final factor is we're really encouraged by the development of the Southern export markets. We are now shipping to India out of Charleston, South Carolina. We're shipping to China out of Wilmington, North Carolina. We're continuing to work to develop exports out of other ports including some in the Gulf South. And while it's still early on that, those volumes as we've previously said could be equivalent to a small mill in the 2018 timeframe. So, we think all of those factors are coming together. And as I've said, we are hopeful that we could see some pricing traction on Southern sawlogs beginning in 2018.

That's super helpful. And lastly tying into that, as you think about the dividend, is that mostly going to be determined by what you're expecting to happen in timber profitability? Or the strength that we've had in Wood Products, is that enough that it really does factor into your willingness to move sooner rather than later on the dividend degrees of magnitude?

Sure. So, let me give you some thoughts on that. Yeah. We are, as we've said, committed to a growing and sustainable dividend. And going forward, the board will continue to regularly review the dividend in light of a full range of external market conditions as well as our internal improvement. As you very well know, our largest asset is our Southern Timberlands, and we expect the biggest driver for a substantial dividend increase will be improving pricing for Southern sawlogs as we just talked about, as that will generate a sustainable and growing earnings stream that provides strong support for the dividend over time. With that said, there may be opportunities for incremental increases before that occurs. So, that's kind of how we're thinking about it.

Thanks a lot.

Thank you.

Good morning.

Good morning, Anthony.

I had a question on the OSB market. Prices have obviously rocketed up following the hurricanes. Can you give us a little color in terms of what you're seeing in the OSB market right now in terms of pricing and demand? And then, in terms of your ability to meet customer demand in the fourth quarter, I think you said sales volumes in the fourth quarter for OSB would be similar to third quarter. I think normally, those volumes kind of fall seasonally. If you're running at higher operating rates or are you deferring maintenance or debottlenecking some capacity? Just any kind of color you can give on OSB market and your ability to meet customer demand would be helpful?

Yeah. So, you're exactly right. OSB markets have been very strong. And I would tell you current realizations for Weyerhaeuser are approximately $40 above the third quarter average, and that's been primarily driven by just underlying strong demand and thin inventories. Anthony, as we look into the fourth quarter, nothing customary regarding what's going on there. As we said, we did take a little bit of downtime in the third quarter for maintenance. We'll take a little bit in the fourth quarter, but we're not doing anything to try to adjust from a market perspective. That's just how the maintenance fell during the year. But we continue to be optimistic about OSB markets. As we all know, we are moving into a little bit slower seasonal period, so that may have some impact. But we continue to be constructive on OSB markets as we move through the fourth quarter and into next year.

Okay. That's helpful. And then, you announced the Twin Creeks exit earlier this month. Can you remind us why that didn't fit Weyerhaeuser's portfolio versus when Plum Creek entered that JV? And then, when you think about the opportunity to acquire timberlands, are you seeing compelling opportunities in the South, any specific regions, and is valuation an obstacle?

So, Anthony. This is Russell. As far as Twin Creeks, you're right, that was originally formed by Plum Creek with institutional investors, and then Silver Creek was the manager of kind of the overall relationship. We did close on that transaction last April. Weyerhaeuser had the property management requirements for that, and then we retained a 21% equity interest. As we look at our 13 million-acre portfolio today and the strength of our balance sheet, we really don't need a structure like that to continue to grow the business. When we had originally – or when we had closed in April, we shortened the timeframe from the original 15 years that was negotiated by Plum Creek down to three years, with the intent of having a transition out of the venture, and we had the opportunity to exit the venture a little early, and so we took that opportunity. As far as acquiring timberlands, we see strong timber pricing in the South. And fortunately, we're in every wood basket in the Southern market. And so we have an opportunity to see really everything that's coming into the market and then everything that's adjacent to us in those markets. So if we see an opportunity to acquire that fits our portfolio and creates shareholder value, we'll pursue that.

Okay. That's helpful. I'll turn it over.

Yeah. I'd like to actually, Russell and Doyle, just come back on that last question. I thought a couple of quarters ago that you were suggesting the real focus was on the integration of the two companies rather than acquisitions. Is that view now shifted as you get deeper into the integration of the two companies?

Yeah. Good question, Mark. And we're about 18 months into the integration of the two companies. I can tell you at least from my perspective, it has gone very well. We still have some work to do, but most of the hard lifting is behind us. As you know, we exceeded our original synergy target and continue to make improvements by implementing the best practices from each company. So as we look forward, we would consider potential acquisitions. With that said, we're going to be very disciplined, Mark, as we move forward. As Russell said, we are in every major market in the South. We have a good presence in the West. So, we don't feel compelled to grow because we are in every market, so we will be very disciplined and look for opportunities where we can clearly create value for our shareholders through timberland growth opportunities.

All right. And then, Doyle, just kind of turning to that Southern Lumber issue because you're correct. You pointed out a number of these initiatives that are out there, and from what we understand in the market, there's actually even more behind that potentially. Are you guys looking at any potentially a greenfield or the acquisition of more lumber capacity? Or indeed, what would be your view sort of overall on kind of growing the Wood Products portfolio?

Yeah. And so, as we look at potential growth of the company, as we very consistently said, we think our biggest opportunities will be in timberland. With that said, we would absolutely look at what I would call bolt-on acquisitions in the lumber business especially if it met up with our strategic footprint on our timberlands. In terms of growing capacity, I think our bigger opportunities, Mark, will be by investing in our existing mills, things like Dierks and Millport, as opposed to building a greenfield mill. As we look at the return opportunities from those two options, we think that's the best approach for Weyerhaeuser going forward.

Okay. Very good. I'll turn it over, Doyle. Good luck in the fourth quarter.

Thank you, Mark.

Thank you. Hi, guys. Good morning, and thanks again for the details.

Good morning, George.

How are you doing? I just want to pick up on the lumber capacity question that Mark keyed up. So, as I recall, Dierks and Millport add 8%-9% to your capacity over the next couple of years, and I remember there's one project comes on this year, and then the other one comes on next year. Can you correct me if I'm wrong in any of that? And what ability do you have to flex your existing capacity beyond this project in the 400 million board feet you're getting from it?

Yeah. So, you're right in terms of the timing. Dierks is in the process of coming on now. We'll see the benefit of that in early 2018, and then Millport is later in the year and into 2019. In terms of flexing our existing mills, George, we will continue to work on that. Part of OpEx, of course, is increasing the productivity and reliability of those mills. And I would tell you we should be able to do that 2% to 3% on an annual basis, and we'll continue to focus on that going forward.

And, Doyle, on that front, you don't need to add shifts to get there, correct? That's just through improving the reliability, in theory, if you needed to. Even though, I know it's not necessarily a good thing from a safety and operating standpoint. You could add later shifts in the workday or a third shift or something to that effect. Would that be a fair assessment?

That is a fair assessment. The 2% to 3% is just by running our mills more reliably. As you know, we're spending capital at our mills, so that helps in some ways to run our mills more reliably. And that does not include any additional shifts.

Okay. One question, can you let us know where currently realizations in lumber are versus your third quarter average?

Yeah. As I mentioned, OSB's current realizations are up $40 versus the third quarter, and lumber is up $15 to $20 versus third quarter levels.

Okay. Two more, and I'll turn it over. One thing – if we look at the timber outlook for exports, to Asia in particular, the next several years, are there any specific points that give you encouragement? And the question behind the question is, obviously, you're still largest in terms of your exports to Japan. Japan has been kind of a flat to declining market for U.S. exports, I believe, over time. And Japan has been growing its ability to supply its own timber over time as well. So, key points of optimism, if any, in terms of the Asian export market opportunity, considering what's been going on with Japan? And then, lastly, SG&A, it looks like you're more or less plateauing there after really a very good performance early in the OpEx program. Is there anything left to do there? Thanks. And welcome back, Beth, as well.

Yeah. We're all glad to have Beth back, so thanks for that comment. In terms of Japan markets, George, as you know, the big driver for us in Japan is post-and-beam construction. As we said, that is up roughly 2% year-over-year. That for post-and-beam construction, they need – the Japanese need the Doug Fir that we are able to produce and supply. And as you look forward, most projections have overall housing in Japan as you said flat, but post-and-beam construction continuing to grow and we are, by far, the largest supplier to Japanese saw-millers of the Doug Fir that's needed for the post-and-beam construction.

And then as far as SG&A, as we mentioned, we've achieved $125 million SG&A target and that was related to the costs associated that we're going to remove from the Plum Creek integration. So, we're very pleased that we achieved that target, and then as Doyle mentioned, we're 80% into the $35 million of the SG&A cost related to what we call the stranded costs related to cellulose fibers. So, our $160 million target, we feel we'll meet that target by the end of the year. Going into 2018, we'll have a continued focus on SG&A. Our OpEx efforts in our manufacturing in the timberlands. We have a very similar mindset as it relates to SG&A. So, that's always an area that we will have a lot of focus on and looking for opportunities to improve and reduce those costs.

All right. Thanks, Russ. That's very helpful. Good luck in the quarter.

Thank you.

Thank you.

Hey. Good morning, Doyle. Good morning, Russell.

Good morning, Collin.

Good morning.

First question from me, just going back to Mark's question earlier, maybe I'm posing a little bit differently in terms of the dividend policy adjustment to 85% of CAD over the cycle and again the prepared remarks about housing. Just more specifically, Doyle, where do you think the company and how does the Board think about Weyerhaeuser – where Weyerhaeuser is in terms of the cycle, early, middle, late innings? Just given that there's some moving pieces between the housing outlook, wood product pricing, how do you characterize that in terms of what inning we're in?

Yeah. I still think we've got a lot of runway in front of us in terms of housing, Collin. As you very well know, housing has historical averages of about 1.5 million in starts. This year, we think we're going to be at 1.2 million. So I would say we're in the early to maybe mid-innings in terms of overall – the overall cycle because, as we all know, it's ultimately going to be driven by housing. And also, as we said in our remarks, we think for a number of years, housing is going to continue to improve. So lots of runway in front of us.

Okay. And then switching to – thinking about CapEx and again in context of where we are in this cycle. I know, Doyle, in the past, you've kind of talked about some of the capital that has been put into the – really to the company on couple different fronts, and maybe seeing that kind of peak at this point in the cycle. Is that still consistent with your thinking or just going back to some of the prior questions about the opportunities that you see across the businesses, could maybe there be – maybe a longer runway of elevated CapEx, just given kind of the cash flow you guys are throwing off right now and maybe some of the opportunities?

Yeah. Collin, what I would tell you is our CapEx this year is going to be roughly $435 million, $300 million in Wood Products and $135 million in Timberlands. We're still working with the Board, but we would anticipate a similar type number in 2018. And then as we've also said, we think over time, we would see that start to tail off in our wood products business as we complete the projects that we're focused on and deliver on our OpEx initiatives and make our wood products business where it will be black at the bottom. And just to remind everybody, we believe we'll be roughly 85% of the way there by the end of this year.

Great. I'll turn it over. Thanks, Doyle. Bye.

Thank you, Collin.

Hi. Good morning.

Good morning, Gail.

In your comments in terms of the fourth quarter, you mentioned repair and remodel, perhaps stealing some thunder from new home construction, and I'm just wondering kind of how you think that plays out as you move into 2018 because I presume we're not going to finish kind of all that repair work, and labor seems to be pretty tight in the homebuilding side?

Yeah. I think if you look at repair and remodeling markets overall, Gail, and I said – directly to your question, we continue to be encouraged there and those are up probably 7% to 8%. The remark we made or I made was regarding the hurricane activity and what we've seen in some markets is the labor that would normally be used to be building new houses is fixing houses that were damaged as a result of the hurricanes. I think we'll continue to see some draw from that as we move into 2018. However, some of the houses that were damaged were completely damaged and those will in fact be new houses that will show up in the housing starts number as we move into 2018. As you know, there's normally a tail on the amount of time it takes to completely recover from hurricane efforts and especially in Houston I would tell you I think that that's going to be somewhat of a tailwind in those markets through 2018. But there's no doubt labor continues to be the biggest constraint whether it's in the overall single family construction or finding labor available to work on the repair of the homes that were damaged from the hurricanes.

Okay. And just again kind of similar question, kind of looking past fourth quarter into 2018, but do you expect any material after effects from the fires in D.C.? And I think one producer yesterday said they're starting to compete a little bit in the U.S. with Canadian wildfires. Just how extreme do you think that might be over the next couple quarters?

I think it clearly had an impact as we talked about in the third quarter. As we move into the fourth quarter, that seems to be normalizing. So, other than the ultimate effect it's going to have on the availability of logs in Canada, which were already being impacted, of course, by the southern pine beetle, I don't see any specific impacts as we move into 2018 and beyond.

Okay. But it was kind of that log availability that I was trying to get some insights into.

Sure.

And maybe I missed it, but your comments on kind of the OSB outlook, I don't think you really addressed the new supply coming on and just if you could talk about how that fits into your outlook relative to current incredibly strong realizations there?

Yeah. So, as we – as I said, we continue to be constructive on OSB markets as we move forward. With that said, clearly, there is additional capacity coming online, and we'll see exactly how that comes online and what the timing is. One thing we know about OSB capacity is it's pretty lumpy in terms of coming online. So, I think there will be some disruptions and impacts on pricing as the OSB capacity comes online over the next couple of years. Frankly though, we're going to need – we, as an industry, are going to need some additional OSB capacity as housing continues to grow. So, there won't be an exact match, of course, between supply and demand and the timing thereof. But if you look – if you assume housing is going to continue to grow and then you look at the incremental supply that's going to come online, those should be fairly well matched. There will be some timing issues, as we all know, as we work through that.

Okay. Thank you.

Thank you.

Hey. Good morning, everyone.

Good morning, Brian.

Just a question on the balance sheet. I think the leverage is down now. Net leverage is almost to 3 times. And it sounds like after you got the Twin Creeks proceeds, then you have, it sounds like, higher EBITDA sequentially in the 4Q. You'd probably be down, closer to that 2.5 times range to exit the year. So, I'm wondering if you've had any change of thoughts on where that leverage should sit and just kind of general thoughts about redeploying all the cash flow from the Uruguay sale. I know a lot of that was to pay down debt, but that obviously reduces the net leverage. Just any thoughts on the – where the leverage should go from here and whether it's the dividend or share repurchase or acquisitions kind of where you would sort of prioritize putting incremental cash to work now?

Sure. So, Brian, as we've stated in the past, our target net debt-to-EBITDA is 3.5 times. You're correct. We're now below that, and that's a function of we had some debt pay-downs this year. We're down to $6 billion of debt, and then we've had growth in EBITDA. And so, that's favored the ratio. So, as far as going forward on the proceeds, we'll look at the proceeds and we'll do our capital allocation program and really allocate that capital in the best way possible to create shareholder value. But that's something we continue to work with the Board on going forward.

But Brian, I do think it's important to note that our financial priorities have not changed, continue to be consistent and, first and foremost, is returning cash to shareholders primarily through growing dividend, but also share repurchase. So, that's number one on the list.

Okay. That's great. And then just on the Wood Products, it's obviously great performance with the run-up in product pricing, but also a lot of work on the OpEx side. I think last year you got about $65 million of OpEx savings this year that's sort of the midpoint of what you're targeting I think. And just – I know you want to get the 2017 savings in before you start to think about 2018 too much. But could we be in for another year in 2018 where there is something in that ballpark in terms of OpEx savings?

Yeah. We, as you would anticipate, are still working on that, Brian. But I would tell you, we would anticipate something in a similar ballpark. And as I mentioned earlier, by the end of this year, we're going to be 85% of the way to being what we call black at the bottom, and assuming we get a similar type number and have a similar type target in 2018 and achieve that target, we would be close to 100% of being black at the bottom by the end of 2018. So, that's how we're thinking about things, are encouraged by the progress we made, know there is more work to do. And we're also encouraged by the fact that now mostly ideas are being bottom-up driven, rather than top-down driven, and that's also a very positive development for our company.

Okay. That sounds great. Yeah. Combined with the cellulose fiber stranded cost removal sounds like a pretty good uplift from cost takeout there. And then, just on the – one last one on the Flak Jacket remediation, just trying to think about how the cash impacts of all this, as it sounds like you've spent $190 million in the quarter, and maybe there's some more to come in 4Q. Just wondering if you got any insurance proceeds yet or maybe the timing on when you'd expect to get that, sort of can you kind of think about the impact to cash flows starting from October and going forward?

Yeah. Brian, what I would tell you is we expect to receive the reimbursements in 2018 and are very confident on our claim, and we will break those out on a quarter-by-quarter basis as those come in so everybody can track it.

Yeah. And, Brian, I would add, we've actually spent $60 million in the quarter. That's the cash expenditures.

Okay. Great. That helps. Thanks.

Thanks. Doyle, you said that the Southern land didn't get much damage from the weather. Do you have a sense of other people's Southern land? People we've been talking to don't seem to see a lot of damage in general.

Yeah. I would agree with that, Mark. And talking to some of our competitors, I think, unlike some previous hurricanes where you've been around a long time as I have, there was extensive timberland damage. I think that was mostly avoided with these two hurricanes. So, I think from an overall timberland perspective, we were very fortunate as an industry.

Just one more question. On the real estate acreage that you sold, could you give us a rough sense of how much of that was stepped-up land versus not stepped-up?

We'd have to get back to you on the details, but a lot of the transactions that were closed in the last quarter were in the Montana area. And so, that property would have been stepped up.

Good morning, and congrats on a good quarter.

Thank you.

Thank you.

First question is your Western log realizations, as you pointed out, are up really nicely year-over-year. Assuming a more normal fire season next year, do you expect the same pricing trend or should log prices stabilize a little bit more as we go into 2018 in the West?

Yeah. So, we're really encouraged by what we see out of the Western markets. I think there's no doubt that the fire season helped on a temporary basis. But as you look at the domestic markets, the log decks were – are thin coming out of fire season. I think more importantly from a domestic market, California housing continues to be very robust. Those permits are up 17%. And we think California is going to continue to kind of outpace the market because it lagged the market for so long. So, from a domestic side, we think demand is going to be strong. We are also, as we look into 2018, encouraged by what we see from export markets, both Japan and China. So, we're optimistic about Western log markets as we move into 2018.

Okay. That helps. Switching gear to Wood Products. You've addressed a lot of the questions. But do you have any insight on your customers' inventory levels? Have any of your customers really been able to rebuild inventories, or are they still tight after all the hurricane events and other – in the strong market?

Yeah. What I would tell you is customer inventory levels continue to be lean. Now, I would anticipate as we move into a slower seasonal period, Thanksgiving and Christmas and the winter months, you would start to see our customers have the opportunity to rebuild inventories but currently, inventories continue to be lean.

Yes. Good morning.

Good morning, Chip.

Yeah. Doyle, my first question has to do, and I apologize if this was asked, but if you could talk a little bit about plywood. I know it's not a big business for you, but there's been some bumpiness with imports. And as I think about OSB and the fact that there's less and less substitutability or at least in practice, are you seeing anything that might cause plywood to maybe recouple with OSB, or at least be stronger than it's been in recent years notwithstanding that the last month, few months have been good?

Chip, we don't see anything that's fundamentally changed in those two markets. As you know, we've all watched them together over the past many years in the substitution from plywood to OSB. But as we look forward, we don't see anything fundamentally changing in that relationship.

Okay. And then the second question is when you look at your distribution of cash, Doyle, and I know you talked a bit about this already, but there seems to be some reluctance to, I guess, to create a steady component of the dividend from Wood Products, and obviously, because of the cyclicality. But how do you wrestle with the fact that it's making so much money now and could continue to? And how do you balance between a stable dividend and distributing cash during periods of very strong Wood Products results, which frankly could persist for a while?

Chip, I'm not sure I would agree with the reluctance comment. What I would tell you is we very purposefully raised our payout ratio from 75% to 85% over the cycle to reflect the fact that we think we have raised the floor on our Wood Products operation due to the significant change we made in our cost structure. We will continue to work closely with our board on the appropriate dividend level going forward, factoring in Wood Products markets and the fact that we're optimistic on Wood Products markets as we said earlier and also, factoring in what we're seeing on the Timberland side. So that's kind of how we're thinking about it.

Okay. And quickly for Russell. I don't know if you gave us the specific guide on the real estate EBITDA for the fourth quarter, but if you could just let me know that and what basis we should expect it would be?

So, on the EBITDA, we're going to be at about $250 million. And then the basis...

For the year.

Correct.

And that's for the year as well?

Correct.

Yeah. Thanks very much. Good morning, Doyle, Russell and Beth.

Good morning, Paul.

Good morning, Paul.

Hey. Two questions. One on Timberland portfolio. You guys have done a number of things in the quarter – in the past, selling Uruguay, redeeming Twin Creeks, selling $100,000 in the U.S. South. What can we expect going forward here on your portfolio? And I'm specifically thinking about the North, which historically hasn't been part of the Weyerhaeuser portfolio?

And so, Paul, what I'd tell you and what we've consistently said is we're constantly reviewing our overall Timberland portfolio. We do feel good about the moves we made, both through Uruguay and Twin Creeks, as Russell said earlier, to focus and simplify our portfolio. But we'll continue to look for ways to create value for our shareholders going forward, whether that's through potential acquisitions or potential dispositions from a portfolio perspective.

Okay. And then, maybe just a question on softwood lumber. Canadian companies seem pretty pessimistic on an agreement. In fact, West Fraser went as far as to say that Coalition seems unwilling to negotiate. I don't want you to get into negotiations on the call. But just from your perspective, what's stopping the agreement at this point?

I'm not sure anything is necessarily stopping an agreement at this point, Paul. As we said, we continue to be hopeful that we will be able to reach an agreement with the Canadians. We're working very closely with the Coalition and the Department of Commerce. We fundamentally believe that a quota-based agreement is the best option going forward for all parties involved because of the certainty and the simplicity that it brings to the tables. So that's how we're thinking about it and we'll continue to pursue and hopefully be able to reach an agreement with the Canadians going forward.

Okay. Best of luck with that and your financials going forward. Thanks.

Thank you, Paul.

Thank you.