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Weyerhaeuser Co
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Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser Second Quarter 2018 Earnings Conference Call. All lines have been placed on mute, to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Ms. Beth Baum, Senior Director of Investor Relations. Please go ahead ma’am.
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 $317million 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 log.
This enabled us to drive our highest wood products EBITDA own 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 session has.
Although mortgage rates have risen, housing affordability remains very favorable compared with historical averages. First time in entry-level buy where [agent] (Ph) enter the market and builder sentiment remains positive.
As is been the case for this entire recovery, housing data remain volatile; total starts surged to 11 year highs in May, didn’t pull back in June and those variations will likely continue as heat, wet weather and many other factors affect monthly construction activity.
However, 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 and improvement of nearly 8% year-to-date.
Single-family starts have improved by over 8%; permit activity range strong with total permit averaging over 1.3 million year-to-date. Our builder customers still there, 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, Charts 4 to 6. 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 Western domestic logs remained favorable throughout the quarter as record lumber prices built continue 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 tangent as mills built log deck 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 cost increase due to rising fuel costs and longer hauling distances as snow diminish increase began to harvest higher elevation stand. 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 remain 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 take away remain 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 were flat.
Fee harvest declined 2% versus the first quarter and per unit harvest and hauling costs increased due to additional spinning 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 in the first quarter but a $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 built demand for hardwood saw logs.
Timberlands business is making good progress against this 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 cost, optimizing forestry spending and maximizing the revenue from every log we harvest.
Real estate, energy and natural resources, Chart 7 and 8, real estate and E&R 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 mix. Quarter acreage sales in Montana where Timberland prices are regionally lower. EBITDA from energy and natural resources increased compared with first quarter, due to seasonally higher sales of construction materials. The real estate business is solidly on track to meet or exceed its target 30% premium to timber value for 2018.
Wood products, Charts 9 and 10. 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 continue to constrain shipments for many Canadian producers. As rail service began to normalize late in the quarter, industry shipment volume increased with flaming lumber usage typically moderate - as the second quarter concluded, pricing and selling, while channel inventories recalibrate.
All of the worst Canadian rail destructions have been resolved. Transportation logistics remain challenging for both rail and product shipment due to tight supply and strong summer times shipping demand.
Our wood products team has done an outstanding job of inviting 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. At our first quarter 2018 these duties are no longer reported as a special item.
OSB contributed a $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 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 rate 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.
Second quarter with products result include 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 by recovery, improving new reliability, enhancing product margins and maximizing the benefit of focused capital investment.
I will now turn it over 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’s business as customary, we expect our third quarter earnings and adjusted EBITDA will be seasonally lower than the second quarter 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 law demand is expected to be stable during the third quarter with third quarter average sales realizations at level 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. Long realizations are expected to be slightly lower. Western Road costs are expected to be seasonally higher, log and haul costs will also increase as we continue to harvest at higher elevations to 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. Civil culture and forestry spending in the South is expected to increase as we perform more hardwood management and site prep work during the dry weather and continue our thinning activity. We also anticipate higher fuel cost 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 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 a 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, 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 is soften 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 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, 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, $300 million for wood products and $120 million for Timberlands.
Moving on the debt. We ended the quarter with approximately $5.9 billion of debt outstanding. We have no remaining maturities in 2018. Moving on the 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 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 and position 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, 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.
[Operator Instructions] And your first question is from line of Anthony Pettinari with Citi. Please go ahead.
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, kind of any thoughts you could share will be helpful.
Sure, let me talk about our how we think about capital allocation and our financial priorities. And first and foremost as we talk about as returning cash to shareholders. As you alluded to, as we continue to capitalize on strong marketing conditions and our OpEx improvements we are generating 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 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 to return cash to shareholders through a growing dividend, share repurchase or both.
In terms of other uses, we are 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. And 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.
And then finally in terms of capital allocation and you alluded to, it’s we are committed to maintain a strong balance sheet, but our balance sheet is in very good shape currently.
Okay, that's helpful. And then just on 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 and do you see opportunities after the work at the New York signal port for CapEx investments in your lumber mills.
So 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 round numbers would be in the 250 range in terms of 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 cost and some of that $250 million will be spent on exactly those type of projects.
In terms of black at the bottom and to just remind everybody what that is, when you go back and re-create the situation that occurred back in the last downturn. So we modeled that and we figure out what our cost structure needed to be to, if we have that type of situation again which none of us anticipate or hoped that we do.
But if we do go through another recession that level, we wanted 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 went back into what we refer to as the great recession.
Okay. That’s helpful. I will turn it over.
Your next question is from the line of Brian McGuire with Goldman Sachs. Please go ahead.
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 he worse one. But you know labor I suppose also probably seems to be tighten. 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 are expecting some pick up 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 to take care of that?
So, as you just referenced, we are experiencing cost inflation, its 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 cost owned from a fuel and transportation 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 that primarily through our OpEx efforts and things like improving our efficiency, our truck scheduling, capital and non-capital improvements to efficiency, of our materials usage all those type of things are things we are focused on to track 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 OSD prices gone pretty high it’s correct, lately just wondering maybe you can share your thoughts on where you think that the correction needs to eventually re-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 and let me kind of give your 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 and 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 and prices worked nicely in the first quarter as we all know.
You then moved into the second quarter, did have lean inventories, had strong demand driven by continued improvement in housing and seasonality, you had continued supply challenges, although the transportation got better late in the second quarter, but 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 to your point. While we continue to see some volatility, we anticipate the remainder of 2018 and 2019 that lumber prices will continue to be at favorable levels supported by lean inventories, strong U.S. housing demand and a lagging industry supply response.
And in connection with what's happening right now as Russell said in his comments, prices are solved 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 that maybe just modestly lower than moreover 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, lot of noise in the numbers, but some people were calling out maybe impact of higher lumber prices, maybe given some of the homebuilders pause and caution do you see any signs of that and do you think with this correction back in the lumber prices we might see some pick up back in that starts, actually now.
We heard some of that. You got to remember that you know 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 margin both when it’s up and when its down, I don’t think that’s a big catalyst for what happens on the housing starts our housing sales numbers.
Okay. Thanks very much.
Thank you.
Your next question is from the line of George Staphos with Bank of America Merrill Lynch.
Thanks everyone. Good morning, 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 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 base on your experience tells you this is a path that still has a lot of run way.
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 George, it just is 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 home builders, customers and they continue to be positive and are seeing good activity. If you are talking about the lumber OSB, I have learned anything and I think you know nice way is - what you say is the nice way of saying. I have been around a long time and I’m getting old and that’s correct.
[Technical Difficulty]. The one thing I have learned George and I think you learned as well, the supply and demand ultimately is what matters and if you just look at, let’s just take lumber for example while there is additional supply coming on the south.
The additional supply that is coming overall from a lumber overall prospective is less than its going to be needed to meet the demand if housing continues to grow with the rates we think is going to and supply and demand ultimately matters and that’s why we made the comments, I made it little bit 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 question I have is good segway. Can you comment on what you are 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 were running at in the first half of the year, just as for seasonality if you could.
And then two quick and I will turn it over. One how do you define modestly down comes your pricing sensitivity would that be like within 5% from current level and then there is capacity going in panels, but it’s obviously not in OSB, it’s in MDF and other products that don’t really compete against yours and Grayling 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 on operating rate is for the first half of the year lumbers run in the mid 90s pretty much flat, OSBs running in the mid 90 and ELP lowing running in the high 80s low 90s.
And I would anticipate continued strong markets as we talked about and those type of rates going forward, excluding our scheduled maintenance, of course including 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 have done a pretty good job on finding that 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 referenced what we think is going to happen with lumber and OSB prices and what we deem, but moderately I guess I would say as I think as we said earlier, we do think and had built into our third quarter numbers that prices will stabilize over the next few weeks. So that’s kind of what we have built in.
I think it’s also important to realize, we are talking about averages-to-averages. So 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 quarter-to-quarter I think it's important that you 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.
Your next question is from the line of Gail Glazerman with Roe Equity Research. Please go ahead.
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 - spend actually if anything in correlation of 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 we 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 is, but 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, last quarter you talked about seeing some pocket of tension perhaps starting to build on some of your log market and taking a step back, lumber production, the data is pretty lagged, but it’s only up for the 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 industry level?
I think in the south Gail, our sense of what is happening there, there is a lot of additional capacity that you know that’s been announced, but it's taking a while to get that built and get that 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 has been announcements.
Yes. You know we are, we are encouraged about what we have seen, some of the pockets where new mills has started up and there is a mill and Weyerhaeuser, Mississippi where it started up and we have seen some tension in there and then in Georgia there's a couple mills that have been specifically announced not yet started, but we have seen some tensioning in that wood basket. So we are starting to see pocket tensioning and with that gets where additional capacity is either come online or been announced.
Alright and just on 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’s stands.
Yes. So there had 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.
Your next question comes from the line of Collin Mings with Raymond James. Please go ahead.
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 you think about the sustainability of kind of recent EBITDA generation from that segment in particular, because again it’s a very strong results 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, we anticipate capturing the other half through the fourth quarter.
Demand continues to be good for that for that product, our teams have done a really nice job of figuring out ways to lower cost and run more efficiently and more effectively in our EWP operations that were encouraged by what we have accomplished, but we think we still have some runway ahead of us.
Okay and than 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 they responded is really the shrink in log prices in the specific North West over the last several months. Just if you could put a little bit more color on the Japan business just given how format is 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 third quarter is for stable volumes and slightly lower pricing and the other 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 and 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.
Your next question is from line of Mark Wilde with BMO Capital Markets.
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, that’s the India and China and then early this month in July we expanded our operations by starting up another program out of the Gulf South and fiscally 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 and 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 have been lean in recent years, but I have been hearing when supply was tight in the first and second quarters maybe some distributors were placing multiple orders and 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 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 are kind of flattish for the first half of this year, which is a little bit hard to reconcile with that housing start data that is 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 that there has been challenges in your part of the world and the East if break it down between the East and West as we do, the West has been strong, the East has been a little weak.
I think overtime that will rectify itself Mark, but you're right the numbers look a little out of sync, but I think is more of a timing and weather related issues than anything fundamental.
Okay. And then the last one from me, there is a timber MLP at around Puget Sound that it’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 is 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 at 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 add shareholder value we will pursue them.
Okay. Fair enough. Good luck in the second half.
Thank you.
Your next question is from the line of Mark Connelly with Stephens. Please go ahead.
Doyle just one question. How do you think about the cyclicality of the real estate business these days and how these obviously strong, but I’m trying to get a handle on how much of a secular tailwind, do you think you have in that business. Given the reemphasizing you've done over the last couple of years.
So this is Russell. As far as our real estate business. We do have some tie-in but it’s just a 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 of recreational uses, conservation uses, alternatives to commercial type timber operations.
So while we do see a little bit of that. I think the overall trend really sits with the availability of discretionary spending from the buy side, we are seeing strong markets in the South and in the West for the for our real estate program.
So Russell do you think that’s going to be a continue source of growth or sort of steady performance.
You know our target is for $250 million of EBITDA from the real estate, energy and natural resources business and we have really positioned this business to run it for the long term. And so as we mentioned, we have gone through our ABO process, which is really our methodology of identifying that subset of bakers that have a higher value than commercial Timberland 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.
Your next question from the line Mark Weintraub with Buckingham Research. Please go ahead.
Thank you. Wanted just to focus a little bit, you have kind be grouping with 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 curious as to whether or not you think that production is now being felt in the market and whether or not the likelihood of their being potentially divergent behavior between OSB and lumbar at least over the short to medium-term given me maybe some different dynamic on the capacity side, even if the demand drivers tend to be the same.
Mark good question and 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 has been additional capacity that’s come online, it’s been slower to come online than anybody expect it, but it seems to now be happening.
So I think in the 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. But if you look at it longer term essentially demand is growing at about a billion board feet a year, 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 very high. It feels like we should experience favorable pricing for OSB going forward.
Okay thank you. And then obviously lots of talk on trade war in China in particular as you think about potential implications for warehouse or 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 this point is the proposed tariffs on use case 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 go forward basis?
Okay that’s helpful. And just lastly, so 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 then you were expecting and then it comes back down in the second half of the year and looks like there is 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 generate 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.
Your next question is from the line of Chip Dillon with Vertical Research. Please go ahead.
Hi yes, good morning Doyle, good morning Russell.
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 and I guess 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 acquisition, are we to kind of read into the 75 million and the fact that you're looking to do more on the buyback front, pretty much saying that it's more attractive to buy timber by buying your stock at current levels versus going out and buying land?
So 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 and share repurchases. So we have an opportunity in July to get into the market and by 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.
And 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 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 you are kind guiding us to $110 million number and if that's the case, how confident are you given the volatility that we typically see in OSB prices.
So to be very clear on this, what we said was that the impact from the 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.
Your next question is from the line of Steven Chercover with D.A. Davidson. Please go ahead.
Thanks good morning. I have got couple of questions and I guess the answer is number two was contingent on number one. So first of all, get ready. High level of earnings generated by wood products and maybe real estate too, is it jeopardizing the weak 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. So we have plenty of room in our REIT overall retail some income and assets has 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 keep going its kind current levels that would remain the case.
We really don’t have a concern with that.
Okay which means let me get to number two. Have you looked into any 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 its 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 were very focused on what we do well, in each one of our wood products businesses were performing very well.
We definitely welcome the emergence of those new products in the industry is 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.
Your next question from the line of Paul Quinn with RBC.
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 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 vendors 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 announcement 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. And 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 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.
Alright, 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 good weekend. Thank you.
Ladies and gentlemen, this does conclude the Weyerhaeuser second quarter 2018 earnings conference call. You may now disconnect.