Weyerhaeuser Company (WY) — Q2 2018 Earnings Call Transcript

Thank you, Dennis. Good morning, everyone and thank you for joining us today to discuss Weyerhaeuser’s second quarter 2018 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 second quarter net earnings of $317 million or $0.42 per diluted share on net sales of $2.1 billion. Second-quarter results included net after-tax charges of $15 million for special items. Excluding special items, we earned $332 million or $0.44 per diluted share. This is an improvement of 21% compared with the first quarter and 57% higher than a year ago. Adjusted EBITDA for the Company totaled $637 million, 17% more than the first quarter and 26% more than a year ago. I’m very pleased with our second quarter results. Our business has delivered solid operating performance and capitalized on very favorable markets for lumber, OSB, and Western logs. This enabled us to drive our highest wood products EBITDA on record and Weyerhaeuser’s highest quarterly EBITDA since 2006 when the Company’s operations were nearly three times larger than they are today. Before I discuss our business results in more detail, let me make a few comments regarding the housing market. Housing market fundamentals remain strong, employment growth continues, wages are rising, and consumer confidence has surpassed previous sessions. Although mortgage rates have risen, housing affordability remains very favorable compared with historical averages. First-time entry-level buyers are entering the market and builder sentiment remains positive. As has been the case for this entire recovery, housing data remains volatile; total starts surged to 11 year highs in May, pulled back in June, and those variations will likely continue as heat, wet weather, and many other factors affect monthly construction activity. However, the year-to-date trend illustrates a steady upward trajectory we anticipated. Through June total housing starts have averaged approximately 1.3 million on a seasonally adjusted annual basis, an improvement of nearly 8% year-to-date. Single-family starts have improved by over 8%; permit activity remains strong with total permits averaging over 1.3 million year-to-date. Our builder customers are effectively navigating labor and lot availability and cost and are well-positioned to continue meeting pent-up demand. For 2018, we continue to expect approximately 1.3 million total housing starts with single-family starts nearly 10%. Let me now turn to our business segments. I will begin the discussion with Timberland. Timberland contributed $161 million in second-quarter earnings compared with $189 million in the first quarter. Adjusted EBITDA totaled $240 million, $28 million lower than the first quarter, but $18 million more than a year ago. Western Timberland delivered over $152 million of second-quarter EBITDA, $13 million lower than the first quarter, but $28 million higher than a year ago. Demand for Western domestic logs remained favorable throughout the quarter as record lumber prices encouraged continued purchases, and average log sales realizations improved slightly. Pricing in some regions softened late in the quarter due to a seasonal increase in log supply from non-industrial landowners. However, many Oregon markets remained tight as mills built log decks in advance of the third-quarter fire season, which has begun earlier than usual. Fee harvest volume declined slightly compared with the first quarter. Unit logging and hauling costs increased due to rising fuel costs and longer hauling distances as snow diminished, prompting harvest of higher elevation stands. Silviculture and road expenses also increased. This activity typically accelerates in the second quarter due to improved weather. Turning to our export markets in Japan, demand for our logs remained solid and average log sales realizations were comparable to the first quarter. Log sales volumes declined slightly due to timing of shipments. Compared with the year-ago quarter, sales volumes were moderately higher and realizations improved substantially. In China, sales volume increased nicely compared with the first quarter and average realizations were slightly higher; construction activity and daily log takeaway remained very solid, and log inventories at Chinese ports declined during the quarter. Overall, Chinese demand for our logs remains very favorable and our volumes and realizations were significantly higher than a year ago. Moving to the South, Southern Timberlands contributed $84 million to second quarter EBITDA compared with $98 million in the first quarter. Average log sales realizations increased slightly due to a heavier mix of pulpwood and slightly lower pulpwood realizations; average realizations for southern saw logs remained flat. Fee harvest declined 2% versus the first quarter, and per unit harvest and hauling costs increased due to additional spending activity and higher fuel costs. Other revenue also declined seasonally. Compared with the year-ago quarter, EBITDA declined due to higher fuel costs and lower average pulpwood realizations. Northern Timberlands contributed $3 million to EBITDA, $3 million less than in the first quarter but $1 million more than a year ago. Fee harvest volume declined seasonally as spring break-up limited activity in some areas; average realizations improved compared to the first quarter as strong lumber prices boosted demand for hardwood saw logs. The Timberlands business is making good progress against its 2018 operational excellence initiatives and is on track to achieve its $40 million to $50 million OpEx target for the year. Key focus areas include improving the productivity of harvesting and hauling operations, reducing road costs, optimizing forestry spending, and maximizing the revenue from every log we harvest. Real estate, energy, and natural resources contributed $22 million to second quarter earnings and $47 million to adjusted EBITDA. EBITDA was $6 million higher than the first quarter and $10 million more than a year ago. Contribution to earnings decreased slightly compared with the first quarter due to a higher average land basis for the mix of properties sold. Average price per acre increased significantly compared with the first quarter due to the mix. Quarter acreage sales in Montana where Timberland prices are regionally lower. EBITDA from energy and natural resources increased compared with the first quarter, due to seasonally higher sales of construction materials. The real estate business is solidly on track to meet or exceed its target of a 30% premium to timber value for 2018. Wood products contributed $349 million to second quarter earnings before special items, nearly $100 million more than the first quarter. Adjusted EBITDA totaled $385 million. This is the highest quarterly EBITDA ever for this business, an improvement of over 40% compared with a year ago. EBITDA for lumber totaled $195 million, $55 million more than the first quarter and over 50% more than a year ago. Compared with the first quarter, our average sales realizations improved 9% and sales volume increased by nearly 11%. This was partially offset by higher Western and Canadian log costs. Lumber prices increased through much of the second quarter as strong building activity drove consistent demand, and rail supply issues continued to constrain shipments for many Canadian producers. As rail service began to normalize late in the quarter, industry shipment volume increased, with lumber usage typically moderate as the second quarter concluded, pricing and selling channels recalibrated. All of the worst Canadian rail disruptions have been resolved. Transportation logistics remain challenging for both rail and product shipments due to tight supply and strong summer shipping demand. Our wood products team has done an outstanding job of implementing options such as direct tracking, additional reloads, and rail car repositioning to flow product to customers, and as of today, we have cleared all of our shipment backlog. Second quarter charges for countervailing and anti-dumping duties on Canadian softwood lumber totaled $6 million, compared with $5 million in the first quarter. In the first quarter of 2018, these duties were no longer reported as a special item. OSB contributed $129 million to EBITDA, $37 million more than the first quarter and nearly 50% more than a year ago. Pricing rose throughout the quarter due to continued strong demand, and average sales realizations increased by about 17%. Sales volume increased 2% and fiber costs increased slightly. Engineered wood products contributed $58 million of EBITDA, $13 million more than the first quarter and $6 million more than a year ago. Average sales realizations improved approximately 3% compared with the first quarter as we continue to capture the benefit of our early 2018 price increase, and sales volumes improved due to seasonally higher demand. Unit manufacturing costs were comparable to the first quarter as improved operating rates offset higher prices for oriented strand board. Distribution contributed $12 million to second quarter EBITDA, $3 million more than the first quarter, and slightly lower than one year ago due to higher fuel and labor costs. This business remained highly focused on managing costs and product margins. The second quarter wood products results included one special item: a net pretax charge of $20 million for finalization of remediation costs associated with our Flak Jacket product. Wood product is on track to achieve its OpEx target of $40 million to $60 million in 2018; teams are highly focused on reducing controllable costs, increasing recovery, improving reliability, enhancing product margins, and maximizing the benefit of focused capital investment. I will now turn it over to Russell to discuss some financial items and our third quarter outlook.

Thank you, Doyle, and good morning. The outlook for the third quarter is presented in Chart 13 of the earnings slides. In our Timberland business, as customary, we expect our third quarter earnings and adjusted EBITDA will be seasonally lower than the second quarter but slightly higher than the third quarter a year ago. In our Western Timberlands operations, we expect third quarter fee harvest volumes will be comparable to the second quarter. Domestic log demand is expected to be stable during the third quarter with third quarter average sales realizations at levels slightly below the second quarter average. Third quarter realizations could be higher if a severe fire season limits regional log supply during the quarter. Japanese export log volumes are expected to be comparable to the second quarter, while average sales realizations are expected to be slightly lower. Overall, we are seeing continued steady demand from our Japanese customers. Chinese export demand remains strong; however, sales volumes are expected to soften, which is typical during the summer months. Log realizations are expected to be slightly lower. Western road costs are expected to be seasonally higher, and log and haul costs will also increase as we continue to harvest at higher elevations during the summer months, resulting in longer haul distances. Fuel costs are also expected to increase. In the South, we anticipate third quarter average sales realizations will be comparable to the second quarter and fee harvest volumes will be seasonally higher. Silviculture and forestry spending in the South is expected to increase as we perform more hardwood management and site preparation work during the dry weather, and continue our thinning activity. We also anticipate higher fuel costs and per unit log and haul expenses. In the North, we anticipate third quarter harvest volumes will be significantly higher than the second quarter, as we move past the spring break-up season. Real estate and energy and natural resources earnings and adjusted EBITDA for the quarter are expected to be 35% to 40% higher than the second quarter. As is typical with our real estate business, markets are most active in the summer and fall months, with the largest portion of sales closing in the fourth quarter. We continue to expect approximately $250 million of adjusted EBITDA from our real estate and energy and natural resources business in 2018. Second quarter land basis, as a percentage of real estate sales was slightly higher than our full year guidance of 40% to 50% due to the mix of acres sold. We now anticipate that land basis will be at the higher end of this range for the full year 2018. For wood products, we expect third quarter earnings before special items and adjusted EBITDA will be 10% to 15% lower than the second quarter, but significantly higher than a year ago. This includes a $25 million impact from extended maintenance downtime at our Grayling OSB mill, as we undertake a scheduled press replacement. Although pricing has softened from record highs, we anticipate lumber and OSB prices will stabilize over the next few weeks, and average realizations for the third quarter will be moderately lower than the second quarter average. Sales volumes for lumber should be comparable to the second quarter. The sales volumes for engineered wood products should increase. Third quarter OSB volumes will be approximately 10% lower than the second quarter due to the Grayling press replacement. Chart 11 outlines the major components of our unallocated items. The $26 million favorable variance in earnings before special items compared with the first quarter is primarily attributable to the non-cash elimination of intersegment profit in inventory and life of reserve. During the first quarter, we incurred expenses as we built inventory of logs and lumber at higher prices; in the second quarter, we began to deplete those inventories. Our unallocated pension and postretirement benefit costs also decreased; each year in the second quarter, we finalize prior year-end estimates for pension plan assets and liabilities. As a result of this work, we now expect to record a total of approximately $75 million in non-cash, non-operating pension and postretirement expense for the full year 2018, a reduction of $25 million from our prior guidance. This should result in a non-operating pension and postretirement expense of approximately $19 million for each of the remaining quarters in 2018. Chart 12 summarizes our key financial items. We ended the quarter with a cash balance of $901 million; cash from operations during the second quarter was $597 million, an increase of $461 million over the first quarter, which is typically the lowest cash flow quarter of the year. Capital expenditures for the second quarter totaled $97 million. We continue to expect total CapEx will be approximately $420 million, with $300 million for wood products and $120 million for Timberlands. Moving on to debt, we ended the quarter with approximately $5.9 billion of debt outstanding. We have no remaining maturities in 2018. Moving on to taxes, we continue to expect our 2018 effective tax rate to be between 11% and 13% based on the forecasted mix of earnings. Finally, I would like to update you on our share repurchase activity. During July, we have purchased $75 million or approximately two million shares at an average price of $34.82 per share; as of yesterday, we have $425 million remaining on our share repurchase authorization. Now, I will turn the call back to Doyle and look forward to your questions.

Thank you, Russell. Our second quarter financial performance was the strongest in over a decade, and I’m incredibly proud of the effort our teams have put into achieving these results. They reflect several years of hard work to capture OpEx opportunities. Improved relative performance in each of our businesses positions us to capitalize on the markets we are experiencing today. At the same time, we have significant runway ahead; our operational excellence work is not complete, and with favorable housing fundamentals, a strong market outlook, and a relentless focus on improving our relative performance, we will be well positioned to derive as much value as possible for shareholders. And now, I would like to open the floor for questions.

Good morning. Doyle, you are generating record cash from wood products. You are very conservatively levered coming into the quarter and now you are kind of more under-levered. I was wondering if you could talk about capital allocation. Are there properties out there in the market that are potentially good value? Are there parts of our portfolio that could be augmented through acquisition? Or Russell talked about your share repurchases in July. Are there opportunities to accelerate your buybacks? Is that a sign of things to come? Any thoughts you could share will be helpful.

Sure, let me talk about how we think about capital allocation and our financial priorities. First and foremost, as we talk about returning cash to shareholders. As you alluded to, as we continue to capitalize on strong market conditions and our OpEx improvements, we are generating a lot of cash. We are committed to returning cash to shareholders, primarily through a growing dividend. But also through opportunistic share repurchase, as Russell just mentioned, in the last week or so we have repurchased $75 million of shares, and we will continue to work very closely with our Board to review opportunities to continue returning cash to shareholders through a growing dividend, share repurchase, or both. In terms of other uses, our CapEx is going to be roughly $420 million this year, probably similar level next year, and then it will start to trend down. We will also look for growth opportunities, Anthony, and as we said, those would be primarily in Timberland where we will be very disciplined in finding opportunities that we think create incremental shareholder value on a go-forward basis. With our land base, that allows us to be very disciplined and very choosy as to what opportunities we look at from a growth perspective. Finally, in terms of capital allocation, as you alluded to, we are committed to maintaining a strong balance sheet, but our balance sheet is in very good shape currently.

Okay, that's helpful. And then just on the wood product side, do you still expect to complete the black at the bottom initiative by year-end? And then where do you think wood products CapEx could shake out moving forward, kind of relative to the $300 million you expect this year? Do you see opportunities after the work at the New York signal port for CapEx investments in your lumber mills?

In terms of the CapEx, Anthony, as you know, we are about $300 million this year. I would anticipate a similar number next year, and then start to trend down; probably an ongoing number around $250 million in terms of CapEx. In terms of additional opportunities, we will continue to find opportunities to spend capital in our wood product operation, primarily to focus on driving—continuing to drive down costs, and some of that $250 million will be spent on exactly those types of projects. In terms of 'black at the bottom,' just to remind everybody what that is, it's when you go back and re-create the situation that occurred back in the last downturn. We modeled that and figured out what our cost structure needed to be to ensure if we have that type of situation again, which none of us anticipate or hope we do. But if we do go through another recession, we want to make sure that our wood products operation would be positive cash flow, and by the end of 2018, when we accomplish our $40 million to $60 million of OpEx, we will be at the level where we would be 'black at the bottom' if we entered what we refer to as the Great Recession.

Okay. That’s helpful. I will turn it over.

Hey, good morning everyone. Just want to ask on some of the inflationary cost pressures you talked about in like fuel and transportation in general, kind of are the worst ones. But you know labor I suppose also probably seems to be tightening. Just wondered if you could comment on what trends at the exit of the quarter head into 3Q and the outlook for the back half of the year you are seeing. Are you expecting some pickup in those inflationary pressures, and are there any opportunities to put in for charges or other things to sort of offset it, or do you just let the market prices take care of that?

So, as you just referenced, we are experiencing cost inflation, primarily related to fuel and transportation; labor and input costs are also rising, but to a much lesser extent. Just to give you a sense, those costs owned from a fuel and transportation standpoint were up less than $5 million in the second quarter versus the first quarter. So there are numbers, but we are doing everything we can to manage those and offset those primarily through our OpEx efforts and things like improving our efficiency, our truck scheduling, and capital and non-capital improvements to the efficiency of our materials usage—all those types of things we are focused on to offset the inflationary costs that we are experiencing and probably will continue to experience for the next few quarters.

Okay, I appreciate that. Obviously in the quarter, lumber and OSB prices have gone pretty high, it's correct? Lately, just wondering if maybe you can share your thoughts on where you think that the correction needs to eventually pace out at and how much of it is just tied to seasonality and how much of it is just tied to the better rail availability and logistics and better supply availability in general?

Sure, and we have spent a lot of time thinking about this. Let me give you our perspective on what has happened in the lumber market this year. So if you start back in Q1, we had late inventories, we had continued growth in demand driven by housing that was partially offset by weather; you had supply constraints primarily due to transportation, so you had a positive pricing environment where prices worked nicely in the first quarter. You then moved into the second quarter, had lean inventories, and strong demand driven by continued improvement in housing and seasonality, you had continued supply challenges, although the transportation improved late in the second quarter. In the second quarter, you had a very positive pricing environment and prices were up sharply. As we moved into the third quarter, inventories were still in good shape, but we had slower demand seasonally; we had the transportation challenges abating, resulting in more supply. So, not surprisingly, pricing is pulling back, which is normal seasonally. Looking forward, while we continue to see some volatility, we anticipate that the remainder of 2018 and 2019 lumber prices will continue to be at favorable levels, supported by lean inventories, strong U.S. housing demand, and a lagging industry supply response. In connection with what's happening right now, as Russell said in his comments, prices have softened; we anticipate that they will stabilize over the next few weeks, and that's what we have built into our third quarter projections.

So stabilizing around current levels and maybe just modestly lower than where we are today, is that about right?

Correct, that is correct.

Okay, that makes sense. Just one last one for me, team in housing starts were weak; we don’t want to make too much out of one month—lots of noise in the numbers—but some people were calling out maybe the impact of higher lumber prices may have prompted some homebuilders to pause and be cautious. Do you see any signs of that, and do you think with this correction back in the lumber prices we might see some pickup back in those starts actually now?

We heard some of that. You've got to remember that only roughly 2% of the cost of a new house is attributable to lumber prices. So while I think it may have some effect on the margins, both when it’s up and when it's down, I don’t think that’s a big catalyst for what happens on the housing starts or housing sales numbers. Thank you.

Thanks everyone. Good morning, and thanks for all the details, Doyle and team. Doyle, maybe starting out big picture, I had a couple of nuts and bolts to follow. You have been through more than one cycle. What gives you comfort, given your many years of experience and a lot of that in wood products, that this isn’t based on what we are seeing in the markets—concern is in the beginning of a bigger downturn? What gives you comfort, based on your experience, putting aside we know what the longer-term housing start number should be based on demographics? What, based on your experience, tells you this is a path that still has a lot of runway?

Well, I think it's all the things, or some of the things that you just referred to. If you are talking specifically about housing, it's just the demographics, it's the wages, it's all the things that ultimately drive demand for housing, and all of those continue to be very positive. We spend a lot of time with our homebuilders, customers, and they continue to be positive and are seeing good activity. If you are talking about lumber and OSB, I have learned anything—and I think you know, a nice way of saying it—I’ve been around a long time and I’m getting old, and that’s correct. The one thing I have learned, George, and I think you have learned as well, is that supply and demand ultimately matter. If you just look at lumber, for example, while there is additional supply coming on in the South, the additional supply that is coming overall from a lumber perspective is less than what is going to be needed to meet the demand if housing continues to grow at the rates we think it will. Supply and demand ultimately matters, and that’s why we made the comments I made earlier that we feel optimistic about lumber prices being generally favorable for the foreseeable future.

Alright. Thanks for that, Doyle. I guess maybe to the point you are mentioning on supply and demand is one of the questions I have is good segue. Can you comment on what your operating rates look like over the back portion of the year, again within the key wood products businesses, and whether there has been a significant change in your outlook or the rates we were running at in the first half of the year, just as for seasonality, if you could? And then, two quick ones and I'll turn it over. One, how do you define modestly down? How sensitive would that be—would that be like within 5% from current levels? And then regarding capacity going into panels—but it’s obviously not in OSB; it’s in MDF and other products that don’t really compete against yours and Greyling as well. But does that create any kind of labor competitive issues for you as you are operating there and bringing that new press on? Thank you, guys, good luck in the quarter.

Thank you, George. What I would tell you about operating rates is for the first half of the year, lumber has run in the mid-90s, pretty much flat; OSB running in the mid-90s; and EWP running in the high 80s to low 90s. I would anticipate continued strong markets as we talked about and those types of rates going forward, excluding our scheduled maintenance, of course including the scheduled maintenance of our Grayling mill being down the entire third quarter, as we had previously announced. In terms of your last question regarding additional capacity coming online and what the impact that has on labor—labor is a constant struggle. It’s something we spend a lot of time on; we feel like we've done a pretty good job of finding the labor that we need, but as additional capacity comes online, that will continue to be a challenge going forward. I think to your other question, George, referencing what we think is going to happen with lumber and OSB prices and what we deem as 'modestly down,' I guess I would say, as I think we said earlier, we do think and have built into our third quarter numbers that prices will stabilize over the next few weeks. So that's kind of what we built in. It's also important to realize we are talking about averages-to-averages. If you look at it right now, our third quarter-to-date averages, lumber and OSB are basically in line with the second quarter. Now clearly, spot prices are down as we have talked about, but if you look at it quarter-to-quarter, it is important to realize that there is some averaging that happens there in terms of what we built into those numbers.

Thank you very much, Doyle.

Thank you.

Hey good morning. Maybe just sticking on pricing for a second. You are looking for pretty near-term stabilization, and I’m just wondering given that the recent spending has actually, if anything, accelerated the decline. Are you seeing that? I mean, are you seeing those signs emerge or is that still somewhat hopeful that over the next few weeks incremental supply trend in Western Canada or whatever will work its way out?

Yes. Gail, as you said, at least in the last week, the decline has accelerated. So we are not yet seeing signs of that, but as we step back and look at supply and demand fundamentals, we are—and who knows, right? But we are hopeful and do anticipate that prices will stabilize. If they don't, then we will need to adjust the numbers for that. Based on everything we know today, prices ran up more than I think anybody anticipated in the second quarter; they are now recalibrating. We will see where that goes, but the fundamental supply and demand balance has not changed other than the timing issues.

Alright. Then maybe shifting to southern— I guess with log and lumber market, in the last quarter, you talked about seeing some pockets of tension perhaps starting to build on some of your log market. Taking a step back, lumber production data is pretty lagged, but it’s only up for 2% in the South through April, but it was up 10% in the West. I’m just wondering, does that surprise you, and are you seeing southern outputs starting to respond, or do you think that’s really just capacity constraint? It doesn’t seem consistent with the operating rates being reported on an industry level?

I think in the South, Gail, our sense of what is happening there is that there's a lot of additional capacity that has been announced, but it's taking a while to get that built and get it fully up and running. So, I think that number will continue to grow as we move forward, but it’s just going to take a little time to get there.

And on the log side, are you still seeing some pockets of retention around where there have been announcements?

Yes. You know we are encouraged about what we have seen, some of the pockets where new mills have started up. There is a mill in Weyerhaeuser, Mississippi, where it started up and we have seen some tension in there, and then in Georgia there are a couple mills that have been specifically announced but not yet started. We have seen some tensioning in that wood basket. So we are starting to see pocket tensioning, and with that gets where additional capacity has either come online or been announced.

Alright. And just one last quick one. There has been a lot of headlines lately on labor negotiations at West. I’m just wondering if you can get some insight into where that stands.

Yes. So there have been some headlines regarding labor relations. We are negotiating with our labor union housing in the West; we are continuing to work with union leaders, and we look forward to reaching an agreement on that front.

Okay. Thank you.

Thank you.

Thanks. Good morning, all.

Good morning, Collin.

Good morning.

Going back to Anthony’s question just on capital allocation front. Just as you think about the affirmation strength in wood products, the balance sheet, and the progress toward the black of the bottom initiative; has the thinking regarding tying a more sizable dividend bump to southern log prices evolved at all?

You know, Collin, as we said, we are generating a lot of cash in the Company. Right now, we are spending a lot of time with our Board regarding how to best deploy that cash. As Russell talked about, we have bought $75 million of shares back and will continue to work with our Board regarding the proper level of a dividend going forward. Southern saw log will be a factor; clearly, that is considered an important factor, but it’s just one of many factors that we and the Board think about regarding the appropriate dividend level going forward.

Okay. Switching over to wood products, recognizing there is some seasonality, but on EDP just how do you think about the sustainability of kind of recent EBITDA generation from that segment in particular? Because again, it's a very strong result during the quarter, and kind of some strength there.

Yes, we are encouraged by what we see in EWP. As you know, Collin, we had a price increase announced in early 2018; we have captured about half of that, and we anticipate capturing the other half through the fourth quarter. Demand continues to be good for that product, our teams have done a really nice job of figuring out ways to lower costs and run more efficiently and effectively in our EWP operations, so we are encouraged by what we have accomplished, but we think we still have some runway ahead of us.

Okay. And then just one last one for me; I will turn it over. Just can you expand on prepared remarks on Japan? It appears wooden construction starts there have been trending down year-over-year for several months. Just what are you doing from your customers in our market? How have they responded to the shrink in log prices in the specific Northwest over the last several months? Just if you could put a little bit more color on the Japan business, just given how vital it is to your export platform.

Sure, and I will try to do that—it is important. What I would tell you is Japanese demand remains steady; log inventories are moderate. Post-in-being, while general housing starts are down, I think, 4% year-to-date, post-in-being, which is our market, is relatively stable— I think down 1%, 1.5% so far this year. Our outlook for the third quarter is for stable volumes and slightly lower pricing. Another thing you should probably start to think about is there is another consumption tax increase scheduled for the fall of 2019, and we do typically see some demand pull forward in advance of such increases, assuming that actually plays out. So that’s kind of how we think about Japan.

That’s helpful color. Thanks, Doyle.

Thank you.

Good morning, Doyle. Good morning, Russell.

Good morning, Mark.

Good morning.

Doyle, just to kind of start out here, I wonder can you give us an update on your first half Southern log exports? I mean, you have had some pretty aggressive targets for this year in terms of kind of year-over-year improvement in Southern log exports?

Yes, we are encouraged by what is happening in the Southern exports markets. We are continuing to grow our export business out of the south. As you know, we have been exporting Southern yellow pine from the Atlantic coast, and that’s to India and China. Then early this month in July, we expanded our operations by starting up another program out of the Gulf South and physically New Orleans, where we are shipping to China from New Orleans. As we had originally said, we expect to triple the size of our export program in 2018 versus 2017, and we are on track to do that. As you look further out, we think there's potential for significant additional upside as we move into 2019 and beyond.

Okay. And then switching over to distribution—do you have any kind of read from your distribution business and what you kind of hear from others, just in terms of how full that distribution channel is right now? I know we've been lean in recent years, but I've been hearing when supply was tight in the first and second quarters, maybe some distributors were placing multiple orders; now that product is starting to flow, the system is a little fuller?

Yes. I would say from inventory levels, it's kind of lean to normal. In that range is how I would characterize it from a distribution perspective.

Okay. And then if we look at not only your kind of I-joist and LVL volumes, but the industry numbers—not the APA—they're kind of flattish for the first half of this year, which is a little bit hard to reconcile with that housing start data that's out there. Have you got any thoughts on that?

You know what I would say is I think from a weather perspective and some other things, there have been challenges in your part of the world, and the East. If I break it down between the East and West as we do, the West has been strong and the East has been a little weak. I think over time that will rectify itself, Mark, but you’re right—the numbers look a little out of sync. I think it's more of a timing and weather-related issue than anything fundamental.

Okay. And then the last one from me, there is a timber MLP around Puget Sound that's got a large shareholder that's agitating for a sale. I’m just curious, are there any kind of practical or regulatory issues with you expanding your land position around Puget Sound?

Mark, this is Russell. There are no constraints as far as us being able to expand our ownership in the West.

And just any thoughts on the attractiveness of kind of the Northwest versus other parts of the U.S., like the South?

Well, I mean the West is very attractive given where current log prices are and where timber values are, but the South is also very attractive from the long-term investment perspective. So we look at both of those areas very closely. As Doyle mentioned, we are in really every wood basket in the United States, and we are very familiar with all the transactions that are out there, and we look at everything. If it makes sense and adds shareholder value, we will pursue them.

Okay. Fair enough. Good luck in the second half.

Thank you.

Doyle, just one question. How do you think about the cyclicality of the real estate business these days and how these are obviously strong? I’m trying to get a handle on how much of a secular tailwind you think you have in that business, given the reemphasizing you've done over the last couple of years.

This is Russell. As far as our real estate business, we do have some tie-in, but it’s just the cyclical nature of the housing market, as we see some of our properties go into more sold to developers. But a lot of our real estate activity is driven by higher and better uses—recreational uses, conservation uses, and alternatives to commercial timber operations. While we do see a little bit of that, I think the overall trend sits with the availability of discretionary spending from the buy side. We are seeing strong markets in the South and in the West for our real estate program.

So, Russell, do you think that’s going to be a continued source of growth or steady performance?

You know, our target is for $250 million of EBITDA from the real estate, energy, and natural resources business. We have really positioned this business to run it for the long term. As we mentioned, we have gone through our ABO process, which is really our methodology of identifying that subset of acres that have a higher value than commercial timber operations, and we position our portfolio really to sell through over the next 10 to 15 years. So, Mark, I think that's going to be a steady-state business with some upside as we see continued pricing appreciation.

Sure. Superb. Thank you.

Thank you. Wanted just to focus a little bit; you have kind of been grouping lumber together and some of the comments in terms of expecting stabilization, et cetera. But I see that maybe there are some different dynamics in the markets as well, and wanted to get your feel on it. In particular, there has been a lot of that peak capacity that has started up in the first part of the year. And I'm curious as to whether or not you think that production is now being felt in the market and whether or not the likelihood of there being potentially divergent behavior between OSB and lumber, at least over the short to medium term, given maybe some different dynamics on the capacity side, even if the demand drivers tend to be the same.

Mark, good question. I think short-term—not medium-term or long-term—but short-term, there is a possibility for divergence for the reasons you outlined, there’s been additional capacity that’s come online. It’s been slower to come online than anybody expected, but it seems to now be happening. So, I think in the very short term, you could see, as we have said all along, when it comes on, it tends to be lumpy, and you could see one of those lumps happening in the short-term. If you look at it longer-term, basically, demand is growing at about a billion board feet a year, and the plant is ramping up at roughly the same rate. Yes, you are going to have these times where it gets chunky and you have a big chunk coming on at the same time, but if you just sit back again, like I said in lumber, and look at the supply and demand equation and the amount of growth and the amount of supply that’s coming online, operating rates are very high. It feels like we should experience favorable pricing for OSB going forward.

Okay, thank you. And then, obviously, lots of talk on a trade war in China in particular. As you think about potential implications for Weyerhaeuser, what would you highlight?

Mark, there is a lot of uncertainty as you very well know regarding trade policy and China tariffs. What I would tell you at this point is the proposed tariffs on U.S. goods do not affect our export logs. Thus far, we have not seen any impacts to our business. If something does change, we will figure out a way to manage through it. The bottom line is China does need to source some percentage of their logs from the United States on a going-forward basis.

Okay, that’s helpful. And just lastly, I know the tax rate seems to be, if I’m doing my math right, it was a fair bit higher in the second quarter, and that just caused you more money in the wood product business than you were expecting, and then it comes back down in the second half of the year. It looks like there was a $0.02 or $0.03 from a higher tax rate in the second quarter than what I would have expected?

Mark, this is Russell. Yes, that’s correct. We just generated more income in our taxable REIT subsidiary, basically the wood products business. But the full-year guidance is still 11% to 13%.

Superb. Thank you.

Hi, yes, good morning Doyle, good morning Russell.

Good morning.

Good morning.

First question has to do with the strong cash generation in the quarter. I think you mentioned that the second quarter, if I heard you right, was technically not one of the stronger cash generation, I guess working capital builds up and taking your leverage down to 2.2 times. The question is do you see more of that kind of cash generation in the second half? And secondly, as you think about the buyback situation versus acquisitions, can we read into the $75 million and the fact that you are looking to do more in the buyback front, suggesting that it is more attractive to buy timber by buying your stock at current levels versus going out and buying land?

This is Russell. Cash generation—we did have a strong quarter, and it is our strongest quarter. I would say it's pretty consistent with our prior year trends as far as how that cash flow generation will look going forward; as far as the share repurchase, you know, as Doyle said, we are committed to the return on the cash flow there, and we will do this either through dividends or share repurchases. We had an opportunity in July to get into the market and buy $75 million worth of shares, and this is part of overall capital allocation strategy. So, whether it would be dividends or share repurchase or investing in a business, they are all tied together.

Chip, we are confident of weighing the benefit of share repurchase versus potential acquisitions as a constant analysis that we do and we will continue to do because just as Russell said it’s all tied together, and we are trying to figure out how to allocate capital to create the most value for shareholders going forward.

Okay. And then the second quick question is I think Russell mentioned in his comments that EBITDA and OSB would be down, I think 10% sequentially due to the downtime tied to the press replacement. Did I hear that correctly? Was that a way of saying that it would have been 10% lower in this past quarter, or are you guiding us to a $110 million number? And if that's the case, how confident are you given the volatility that we typically see in OSB prices?

To be very clear on this, what we said was that the impact from Grayling being down for the entire quarter on EBITDA would be $25 million. We also said that volume out of OSB would be 10% less than it was a year ago, based on Grayling being down for the quarter.

Okay. That’s very clear. Thanks for that clarification. Thank you.

Thanks, good morning. I have got couple of questions. The first one is contingent on the second one. So, first of all, high level of earnings generated by wood products and maybe real estate too, is it jeopardizing the REIT status? I mean, as I recall, there used to be some threshold that the TRS could exceed; I think it was 15%.

So, Steve, this is Russell. We have plenty of room in our REIT overall retail some income and assets, even with the elevated income generation in the taxable subsidiary. So that's not a concern of ours.

Okay, terrific. And even if we would have kept going at current levels, that would remain the case?

We really don’t have a concern with that.

Which means let me get to number two. Have you looked into expanding your Wood Products beyond EWP and perhaps into cross laminated timber or some of the panelized construction that I think WRECO used to actually do?

Yes, this is Russell. As far as the wood products portfolio, we are very happy with the way it's configured and set that it has with Timberland. As far as expanding even further downstream onto CLT or some of these other emerging wood products businesses, again, we are very focused on what we do well. In each one of our wood products businesses, we are performing very well. We definitely welcome the emergence of those new products in the industry, as CLT will pull on lumber demand, which also improves overall log demand. But it's not an area that we would expand into readily.

Great. Thanks, Russell.

Yes, thanks very much. Good morning, guys.

Good morning, Paul.

Hey, I just had one question. I just wanted to dive in a little bit on the supply-demand on the lumber side. Lots of announcements have been made on capacity additions to the market, and just what you're feeling is on whether they will all come up, and your sense from the equipment side, you know, when you deal with that equipment vendor, what their orders files are like and how easy it is to bring on capacity.

Yes, so Paul, I think they will—all of them are strong work—but I think nearly all of them, and I think we probably will see additional announcements as we move forward just because we, as an industry, are going to need the additional supply to meet the demand. So pretty encouraged by what we see there. Like I said, I think nearly all of the ones that have been announced will, in fact, happen, and we could even have additional announcements as we move forward. With that said, I think to your second point and it’s going to take longer than most people factored in to get those up and fully running. Fortunately, our two big projects, Dierks and Millport, were kind of ahead of the curve, so we were able to secure the contractors and, as you know, we will be starting both of those up fairly shortly and in good shape. But I can tell you, in talking to contractors and just getting filled for order files, they are full; they are very full. So as a result, I think some of our competitors who have announced these mills, it’s potentially going to take longer and maybe cost a little more than they originally anticipated.

Great. Thanks for that. Best of luck.

Thank you. If I understand it, that is our last question. I want to thank everybody for joining us on the call and for your interest in Weyerhaeuser and hope everybody has a good day and a good weekend. Thank you.