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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 Fourth Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Ms. Beth Baum, Director of Investor Relations. Please go ahead.
Thank you, Dennis. Good morning, everyone, and thank you for joining us today to discuss Weyerhaeuser’s fourth quarter 2017 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website.
On the call this morning are Doyle Simons, Chief Executive Officer; and Russell Hagen, Chief Financial Officer.
I will now turn the call over to Doyle Simons.
Thank you, Beth, and welcome, everyone. Weyerhaeuser delivered strong financial and operational performance in 2017. I’m proud of the team work, dedication and creativity our employees displayed throughout the year, as they work together to accomplish goals, overcome challenges and deliver strong results.
In 2017, we increased full-year adjusted EBITDA by 31% to nearly $2.1 billion; generated over $1 billion of Wood Products EBITDA, the most since 2004; captured nearly $140 million of operational excellence improvements; grew Real Estate, Energy and Natural Resources EBITDA by nearly 30%; completed the asset value optimization process for Western Timberlands; delivered a 55% premium to timber value from real estate sales; exceeded our merger costs synergy target by 25%; and fully eliminated $35 million of costs formerly allocated to our Cellulose Fibers business.
We also further simplified and optimized our portfolio by divesting our Uruguay operations, redeeming our ownership in the Twin Creeks joint venture, and selling 100,000 acres of Southern Timberlands for collective proceeds of over $700 million.
Finally, we increased our dividend for the sixth time since 2011, consistent with our commitment to return cash to shareholders through a growing and sustainable dividend. These accomplishments are reflected in our financial results.
For the full-year 2017, Weyerhaeuser reported net earnings of $582 million, or $0.77 per diluted share, on net sales of $7.2 billion. This represents a 40% improvement in full-year earnings from continuing operations.
For the fourth quarter, Weyerhaeuser earned $271 million, or $0.36 per diluted share, on net sales of $1.8 billion. Fourth quarter results include a $37 million after-tax benefit from special items. Excluding special items, we earned $234 million, or $0.31 per diluted share for the fourth quarter. This is more than double our earnings for fourth quarter 2016. Fourth quarter adjusted EBITDA totaled $551 million, 38% higher than one year ago.
Before I discuss our business results in more detail, let me make a few comments regarding the housing market. The U.S. housing market finished the year on a solid note, as strong demand and favorable weather in many areas enabled building activity continue – to continue late into the year.
Total annualized housing starts averaged $1.25 million for the fourth quarter, an increase of almost 7% compared with the third quarter. For the full-year 2017, U.S. housing starts totaled just over $1.2 million. As expected, growth in single-family starts was strong, while multi-family activity remained volatile.
Single-family housing starts rose approximately 8.5% compared with 2016. Approximately 71% of total starts were attributable to single-family homes, compared with 67% one year ago. This mix shift is very beneficial for Wood Products demand.
Entering 2018, housing market fundamentals remain favorable. Millennials are becoming more active in the market and homeownership among households headed by someone under age 35 rose to 36% in the fourth quarter from 34.7% a year earlier. Builder confidence is holding strong at levels comparable to prerecession highs. Permit activity is healthy. Single-family permits increased 9% for the full-year 2017 and total permits averaged over $1.3 million in the fourth quarter.
Economic growth remains solid, employment and wages continue to rise and consumer confidence remains historically strong. Although constraints on labor and lot availability may provide some guardrails for the rate of building activity, our builder and dealer customers see significant opportunity to serve continued pent-up demand and are optimistic for a strong 2018. For 2018, we expect single-family housing starts to increase by nearly 10% with total starts approaching $1.3 million.
Let me now turn to our business segments. I will begin the discussion with Timberlands, Charts 4 to 6. Timberlands contributed $166 million to earnings before special items, $35 million more than the third quarter. Adjusted EBITDA increased to $252 million. Western Timberlands delivered $140 million of fourth quarter EBITDA, $29 million more than the third quarter and $39 million more than a year ago.
Fee harvest volumes increased 14% compared with the third quarter as favorable logging conditions and strong production by our harvest crews enabled us to catch up on volume that cannot be harvested during the severe third quarter fire season. Western domestic market conditions were strong throughout the quarter, as underlying demand remained steady and mills rebuilt log decks depleted during the third quarter fire season.
Pricing for domestic logs increased throughout the quarter. Per unit logging and hauling costs increased slightly due to higher contract trucking rates and additional high elevation logging.
Turning to our export markets. In Japan, prices rose steadily throughout the quarter, as Japanese demand remained solid. Log and lumber inventories for our Japanese customers remain relatively low and they are running at high operating rates. Log sales volumes were comparable to third quarter and stronger takeaway was offset by timing of shipments.
In China, demand for our logs remains steady and pricing strengthened as customers competed against strong demand from U.S. domestic buyers. Log inventories at Chinese ports declined slightly during the quarter and remain within a normal range.
Moving to the South, Southern Timberlands contributed $101 million to fourth quarter EBITDA, $6 million more than the third quarter. Demand improved as mills resumed normal operations following third quarter weather events and our fee harvest volumes increased 6%, compared with the third quarter as we caught up on production days lost during hurricane activity. Average sawlog and pulpwood realizations were comparable to the third quarter. Unit transportation costs increased slightly due to higher fuel and trucking rates.
Northern Timberlands contributed $9 million to EBITDA, $5 million more than the third quarter. Fee harvest volumes increased as we caught up on Montana harvest, they cannot be accessed, while mandatory fire restrictions were in place. Average realizations improved due to mix.
Finally Timberlands fourth quarter results include a $99 million non-taxable gain on the previously announced sale of 100,000 acres of Southern Timberlands for $2,025 per acre. This is reported as a special item. The quarter includes non-earnings contribution from operation of the Twin Creeks joint venture due to redemption of our ownership interest.
Real Estate, Energy & Natural Resources, Chart 7 and 8. Real Estate and ENR contributed $50 million to fourth quarter earnings, $3 million more than the third quarter. Adjusted EBITDA increased by $13 million to $87 million. Fourth quarter transaction volume was slightly weaker than expected, as some activity paused due to buyer uncertainty regarding the several budget and tax policy.
The average price per acre sold increased compared with the third quarter. Fourth quarter sales included a greater proportion of Southern acres, while third quarter included a large sale of lower value Montana acres.
For the full-year 2017, the Real Estate business sold just over 97,000 acres, or approximately 0.7% of our land base. Real Estate significantly exceeded its 30% targeted premium to timber value, capturing an average premium of 55% in 2017.
Wood Products, Charts 9 and 10. Wood Products contributed $221 million to fourth quarter earnings before special items, compared with $241 million in the third quarter. Adjusted EBITDA totaled $258 million for the fourth quarter and over $1 billion for the full-year 2017. This is the highest annual EBITDA since 2004 and over $150 million more than EBITDA from 2005, when we operated almost double the number of facilities and production volumes were over 60% higher.
EBITDA for lumber totaled $116 million comparable to the third quarter and more than double a year ago. Average sales realizations for lumber improved 4%. This was offset by higher log cost for our Western and Canadian mills and a 5% decrease in sales volumes, as shipments from our Canadian mills were delayed due to weather-driven disruptions in rail transportation.
OSB contributed $104 million to EBITDA, $2 million more than the third quarter and $58 million more than a year ago. Average sales realizations improved 2% compared with the third quarter. This price improvement was largely offset by 6% decrease in sales volumes, again, due to issues with Canadian rail transportation. Resin costs also increased.
Engineered wood products contributed $34 million to EBITDA, $16 million lower than the third quarter, but $8 million more than a year ago. Sales volumes declined seasonally and manufacturing costs increased due to higher prices for OSB, fiber and resin.
Distribution contributed $5 million to fourth quarter EBITDA, compared with $12 million in the third quarter. This business focused on managing cost and product margins and performed well in what is typically a seasonally challenging quarter.
Fourth quarter results for the Wood products segment include a pre-tax charge of $50 million for remediation for our Flak Jacket product. This charge reflects higher than expected labor costs, resulting from the strong demand for home remediation services following Hurricane Harvey and Irma.
As of yesterday, we have completed remediation in 99% of the affected houses. We continue to expect a significant portion of the cost will be covered by insurance.
I will wrap up the Wood Products discussion with a few comments on the Softwood Lumber Agreement. On December 7, the U.S. International Trade Commission issued its final determination, affirming material injury to U.S. lumber producers. Final countervailing and anti-dumping duties became effective on December 28. These collective duties are assessed at approximately 20% for most producers.
Fourth quarter results include a $9 million net pre-tax benefit from an adjustment for the final applicable periods and rates associated with the countervailing and anti-dumping duties. Final duties will remain effective for a minimum of five years unless reduced upon appeal by NAFTA or the WTO.
Although Canadian producers have initiated appeals to both bodies, we expect the process will extend for several years before the panels reach a decision. The U.S. coalition continues to work closely with the U.S. Trade Representative, and we remain hopeful, we will be able to negotiate a quota-based agreement.
Chart 12, operational excellence. As I mentioned in my opening remarks, our Timberlands and Wood Products business achieved almost $140 million of operational excellence improvements in 2017. Timberlands delivered standout performance, significantly exceeding its $40 million to $50 million target. The business captured $66 million of operational excellence improvements, primarily from merger-related operational synergies.
Wood Products captured $71 million of operational excellence at the high-end of its $55 million to $75 million target. Lumber and OSB met their targets with improvements of $21 million in lumber and $20 million in OSB.
Engineered wood products and distribution exceeded their targets capturing $16 million and $14 million of improvements, respectively. Although we have captured almost $500 million of operational excellence improvements since 2014, we have more opportunity to improve our relative performance in each of our businesses.
In 2018, we are targeting OpEx improvements of $40 million to $50 million in Timberlands and $40 million to $60 million in Wood Products, including $20 million to $25 million in lumber, $5 million to $10 million in OSB, $10 million to $15 million in engineered wood products, and $5 million to $10 million in distribution.
Finally, we fully delivered on our commitments to eliminate the $35 million of costs formally allocated to our Cellulose Fibers business by 2017 year-end. Identifying and capturing these cost reductions require collaboration across corporate functions and operating segments and I’m proud of the team work that enabled us to achieve this goal.
I will now turn it over to Russell to discuss some financial items and our first quarter outlook.
Thank you, Doyle, and good morning. The outlook for the first quarter is presented in Chart 14 of the earnings slides. In our Timberlands business, we expect first quarter earnings and adjusted EBITDA will be comparable to fourth quarter earnings before special items.
In our Western Timberlands operations, we anticipate continued strong realizations and favorable domestic demand. We expect harvest volumes to decrease modestly compared to the fourth quarter, as the fourth quarter included additional volumes that were deferred from the third quarter because of fire restrictions.
Japanese export log sales volumes and average sales realizations are expected to increase compared to the fourth quarter. We are seeing continued strong demand in the Japanese housing market combined with low-channel inventories, which is providing strong price support. Chinese export log volumes and average sales realizations are expected to decrease modestly compared to the fourth quarter on seasonally softer demand due to the Lunar New Year.
In the South, we expect seasonally lower demand and sales volumes, and we anticipate average sales realizations for the first quarter will be comparable to the fourth quarter. We also expect higher fuel and trucking costs. In the North, we anticipate first quarter sales volumes will decrease, while sales realizations will be comparable to the fourth quarter.
Full-year 2018 harvest volumes for the South and the North are expected to be comparable year-over-year. In the West, we expect harvest volumes to decrease slightly compared to 2017, as a result of our previously announced exit from Twin Creeks joint venture, we will no longer have harvest volume to report in the category titled Other.
Real Estate and Energy and Natural Resources earnings and adjusted EBITDA are expected to be significantly lower compared to the fourth quarter. In Real Estate, we typically closed fewer transactions in the first and second quarter of the year, as recreational buyer traffic slows during the winter months. The summer and fall months are the most active selling seasons with the large portion of sales closing in the second-half of the year.
We expect Real Estate and Energy and Natural Resources adjusted EBITDA for the first quarter to be comparable to the first quarter of last year. We expect approximately $250 million of adjusted EBITDA from our Real Estate and Energy and Natural Resources business in 2018. Land bases as a percentage of Real Estate sales should be between 40% and 50% for the full-year 2018.
For Wood Products, we anticipate first quarter earnings and adjusted EBITDA will be comparable to the fourth quarter earnings before special items. For Lumber, we expect average sales realizations will be slightly higher. For OSB, we expect the average sales realizations will be lower quarter-over-quarter. Engineered wood products sales realizations will be comparable to the fourth quarter.
We recently announced price increases of 6% to 12% for engineered wood products, which we will begin capturing in the second quarter. Sales volumes and operating rates are expected to increase quarter-over-quarter for all product lines, as we typically have lower production in the fourth quarter due to seasonal and maintenance downtime.
Chart 11 outlines the major components of our unallocated items. For the fourth quarter, the decrease in earnings before special items and adjusted EBITDA compared to the third quarter are driven primarily by an increase in non-cash charges related to intercompany profit elimination and LIFO inventory adjustments, as we rebuild depleted log inventories in our export yards and wood products mills during the fourth quarter.
In addition, fourth quarter unallocated items include pre-tax special items of $42 million of insurance reimbursements for environmental remediation costs incurred in prior years and $14 million of Plum Creek merger and integration costs.
Following the successful completion of the merger, we do not anticipate additional merger integration costs in 2018. For our pension and postretirement plans, the year-end 2017 funded status decreased by $138 million compared to 2016, as a result of a decrease in discount rates. Discount rates decreased by approximately 60 basis points for the U.S. plans and 20 basis points for the Canadian plans.
We did not make any cash contributions to the U.S. qualified pension plan in 2017, and we are not required to make any cash contributions in 2018. Cash paid for all other pension and postretirement plans in 2017 was $78 million. Our required cash payments for these plans 2018 will be approximately $60 million. We expect to record approximately $100 million, or $25 million per quarter of non-cash, non-operating pension and postretirement expense in 2018.
Chart 13 summarizes our key financial items. We ended the quarter with a cash balance of $824 million. Cash from operations during the fourth quarter was $354 million. Capital expenditures for the fourth quarter totaled $160 million and for the full-year 2017 are $419 million.
Looking ahead to 2018, we expect total CapEx will be approximately $420 million, $300 million for Wood Products and $120 million for Timberlands. Investing cash flows for the fourth quarter also include approximately $108 million of proceeds from redeeming our equity interest in the Twin Creeks joint venture and $203 million of proceeds from selling $100,00 acres Southern Timberlands to Twin Creeks.
Moving on to debt. We ended the quarter with $6 billion of debt outstanding. Interest expense was $96 million in the fourth quarter. We expect interest expense will be approximately $380 million in 2018.
Moving on to taxes. Following the enactment of the federal tax reform, we benefit from the lower federal tax rate on the earnings generated by our taxable REIT subsidiary. These earnings will now be subject to federal tax at 21%, rather than the prior 35%. The new law does not affect our REIT status, or the provisions that allow us to pay capital gain dividends to our shareholders. Further, we do not anticipate any limitations on our interest deductibility.
In our fourth quarter results, the net tax adjustment was included in special items. The adjustment is primarily to remeasure our net deferred tax assets, following the reduction in the federal tax rate. We currently expect our 2018 effective tax rate will be between 11% and 13% based on the forecasted mix of our earnings for our REIT and taxable REIT subsidiary.
Now, I’ll turn the call back to Doyle, and I look forward to your questions.
Thank you, Russell. 2017 was a strong year for Weyerhaeuser as we successfully completed our merge integration, further focused our portfolio, delivered improved financial performance across all our businesses and returned cash to shareholders by increasing our dividend.
Going forward, I’m extremely optimistic about 2018 and our ability to continue to improve performance through operational excellence, fully capitalize on market conditions and demonstrate disciplined capital allocation to drive value for shareholders.
And now, I’d like to open the floor for questions.
[Operator Instructions] Your first questions is from line of Mark Wilde with Bank of Montreal. Please go ahead.
Good morning, Doyle. Good morning, Russell.
Good morning, Mark.
Good morning, Mark.
Just to start off, I wondered if you could talk just a little bit about the markets, because we’ve gotten off to a much stronger start than I would have expected here in January in all of these Wood Products markets. How do you read what’s going on here?
Yes, Mark, I’ll tell you. I’m encouraged by what we see in the Wood Products market. If you look at lumber markets, you’ve got growing demand from housing going up, and as I said, optimistic about what we’re going to see in 2018. I’m encouraged that the millennials are showing up, also anticipate strong repair remodeling markets. You’ve got lean inventories. You’ve got high operating rates. You’ve got less lumber coming in from Canada and that was down roughly 5% in 2017 versus 2016, and now, we’re moving into the stronger building season.
So encouraged by what we’re seeing in lumber markets. Likewise in OSB, clearly have growing demand, driven by the same things I just outlined again, lean inventories, high operating rates. Now, we all know there’s new capacity coming on. But I think, this industry should be able to absorb that capacity assuming demand continues to grow, which it will.
Now there will be some volatility and lumpiness as that new capacity comes online. But the other thing about the new capacity, Mark, as you very well know, it takes – normally it takes longer to bring up new capacity, especially when you’re bringing up capacity of mills that have been down for an extended period of time. So overall, pretty optimistic about what we’re seeing.
And then, of course, in engineered wood products, as we mentioned, we have announced a price increase of 6% to 12%. And we think in terms of that, we all should – we’ll start to realize that in the second quarter and by the end of second quarter probably have half of that, or maybe a little more that we will realize by the end of the second quarter. So overall pretty optimistic about wood products markets.
Okay. And then just as a follow-on question. Well – but this Western log market just is also surprisingly strong. I wondered, if you want to put any more color behind that? And also, is there any effect from the weakening in the U.S. dollar?
So, Mark, as you said, Western log markets have been very positive. We continue to be encouraged about what we see in those markets. Domestically, you’ve got the strong demand and pricing improvements, and Japan continued solid demand low inventories. We anticipate higher prices and volumes in Q1 versus Q4. Post and beam construction was up, which is the key driver for us, I present in in 2017 versus 2016.
And in China, we’ll have a little policy here as we go through the Lunar New Year. But if you just look at 2017 versus 2016, log exports were up from the U.S. to China up over 10% and we can – we expect continued strong markets. Overall, it’s a weaker – as we said a strong dollar is bad for Weyerhaeuser, or weaker dollar is a positive for Weyerhaeuser. So if the dollar does weaken, net-net that will be a positive for us overall in these markets.
Right. Thanks, Doyle. I’ll turn it over.
Thank you.
Your next question is from the line of Anthony Pettinari with Citi. Please go ahead.
Good morning. This is actually Randy Toth sitting in for Anthony.
Good morning.
We’re hearing a lot of commentary from companies that we cover in regards to freight tightness and labor tightness. I just want to know how you guys think that might impact you in the 2018?
Yes, we like other companies are in fact seeing that type of tightness, as we mentioned in the fourth quarter, a real impact on wood products earnings as a result of transportation issues, specifically in rail out of Canada, but also in trucks out of Canada. And one mill, for example, that we have in Canada, shipments from rail were delayed by over two weeks and one much better from a rail perspective.
So as we move into 2018, we think that will continue to be a headwind in terms of availability, but more so increasing rates, both on the truck and rails side. And we’re going to work really hard to offset that through our operational excellence initiatives in 2018.
Okay, thank you. And then can you talk a little bit about timber exports out of the U.S. South. I know, they grew quite a bit in 2017 although off a small base. How much are you guys participating in that, and do you think that growth is sustainable?
Yes. We are participating in that and it’s a key initiative for us. What we would tell you is, while you’re right, it is off a low base. We anticipate that in 2018, our shipments could be three times higher than they were in 2017. And our best guess now is the takeaway that will go into export markets would be the equivalent, just to try to dimension it a small sawmill in the U.S. and what they would use.
So you’re right. It’s off a small base, but growing. We’re spending a lot of time and resources developing that market and are very optimistic about that market long-term.
Okay. Thank you very much. I’ll turn it over.
Your next question is from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.
Everyone, good morning. Thanks for all the details. Congratulations on the year Doyle and Russell. I guess, the first question I had, maybe piggybacking off of Mark’s earlier question. So where do you see your customers log decks at present in the West? And overall, if you had mentioned, I’d missed it. Where do you see lumber inventories overall in the channel? Do you think things are more or less back to normal? Are they still below normal in terms of average inventory levels, any thoughts that would be helpful? And I had a couple follow-ons?
Yes. So if you look at lumber inventories, they are pretty lean across the entire system. If you look at log decks in the West, as you know, they got very, very low during the fire season. They have started to rebuild. I would say, they’re kind of somewhere between low and normal, but log decks are being rebuilt in the West.
Okay. And Doyle, one question I had for you. On that subject, are wood margins high enough do you think across the market in the West present demand destruction on Western log? So in other words, are you seeing a sufficiently strong lumber prices out there and demand to keep pulling Western logs?
Yes. The answer is yes. The – we have not seen any – what you would call value destruction from that pricing and demand continues to be strong. Where the competition is occurring is between domestic logs and Chinese logs, because as prices have run up, those are competing directly against each other. And the beauty of our system is, we’re able to play that and thin logs to where we can create the most value.
Okay. Two last questions, I’ll turn it over. One segueing off that comment and then comment just on OpEx. So one thing that we noticed in the deck and as always, we appreciate the detail. The Chinese export log revenue seemed to drop a bit more sequentially 3Q to four 4Q than it did last year just eyeballing it. And you mentioned, there’s further sequential drop off in the first quarter coming up because of Lunar New Year, which didn’t seem to have as much of an effect last year.
Is there something else going on in China that we should be mindful of, or that you’re maybe guarding against as a kind of a what-if. And then in terms of OpEx, congratulations on the performance there. What gives you confidence, I guess, four years into the program that with all the work you’ve done in OSB and lumber that there’s still more in the tank in 2018? Thank you guys and good luck in the quarter.
George, in terms of what’s going on in China, it’s pretty simple that the reason it’s down in the fourth quarter versus third is the strength in domestic markets. And as I’ve just mentioned, we can swing back and forth. And as domestic markets have continued to improve, we are selling more to the domestic market and less to China. It has nothing to do with a falloff in China, as I mentioned, actually log shipment overall to China were up. And I mean, from an industry perspective, we’re up 10%.
Yes.
And we’ll get through this Lunar New Year and you never know what impact that will have, but we continue to anticipate strong demand in China in 2018.
In terms of OpEx, as mentioned in the earlier comments, we’ve made good progress. We have made good progress in 2017, but there’s much more opportunity in front of us. But the reason I’m so encouraged by what’s happening in OpEx is, when we first started this program three or four years ago, it’s very top down-driven.
Now what’s happening is, it’s bottom-up driven. Our employees are out working in the mills, are out working in the Timberland every day are finding additional opportunities to drive OpEx improvements, that’s how we’re defining winning, that’s how people are being compensated.
So encouraged that we will be – can able to meet or exceed the targets that we’ve laid out in 2018. Although, as you’re exactly right, it does get harder. We’ve got most of the low-hanging fruit and you did see the numbers in Wood Products come down slightly in 2018 versus 2017 which is indicative of that, but encouraged by the opportunities that we have in 2018 and confident we will meet those targets.
Thank you very much. Good luck on a quarter.
Thank you.
Thank you.
Your next question is from the line of Collin Mings with Raymond James. Please go ahead.
Hey, good morning, Doyle. Good morning, Russell.
Good morning.
Good morning, Collin.
Just to start for me. Just given the growing flexibility offered by the balance sheet, just maybe talk a little bit more about how you’re approaching external growth on the Timberland front this year, especially just given the recent termination of the Twin Creeks JV?
Yes, Collin, this is Russell. As far as how we look at the timber markets, we have 12.5 million acres in the United States and we’re in every major wood basket. And we have a team that really all they focus on is timber valuations and making sure that we understand kind of the relative values in the market.
So we see everything coming on to the market. And if there’s an opportunity that fits within our portfolio and we can create shareholder value, we’ll take a hard look at that. But we always approach this in a very disciplined manner. Again, our goal over the long-term is to continue to grow the business and increase shareholder value. But we’re going to do it very disciplined.
Okay. Any sizable transactions out there kind of in the pipeline, or anything on that front?
There’s a couple of transactions that I think will carry over into 2018 that were kind of in the pipeline in 2017 that didn’t close. But beyond, probably what’s in the broader news and what’s available, I don’t see anything else meaningful.
Just sticking with the kind of capital allocation just on the debt maturing this year, Russell, do you plan to pay that off with cash and recognizing it, it’s still early, but you got pretty meaningful maturity in 2019 at a pretty high-cost, just how are you thinking about the debt maturity here just when you’re still well below your kind of targeted debt to EBITDA number?
Yes. So let me take that in a couple of steps. The first is, we do have $62 million maturity that we actually paid off yesterday and that was a pretty high coupon rate about 7%. We paid that off with available cash, because it really wasn’t – it didn’t make sense to go and refinance such a small maturity.
As far as our $1.8 billion, I think that you’re referring to are the future debt maturities. We have a lot of flexibility around that and we’re well positioned from a balance sheet standpoint to address that when it comes up, but we don’t see any concerns with that.
As far as our leverage ratios, you’re correct. We are – have a target leverage ratio of 3.5 times net debt to EBITDA and that’s really over the cycle. So in some years, we’re going to be a little lower and some years we’re going to be little higher. Right now, we’re a little lower and that’s a function of – we have paid down some debt and restructured some debt, but we’ve also had improvement in our EBITDA.
So we see that. We’re in a very comfortable position, and it provides us with a lot of flexibility should an opportunity arise and we want to go tap the capital markets.
Okay. And then one last one for me just as far as on the Timberland guidance. Just given the strength particularly on the West just given log pricing momentum there that would start 2018, can you maybe just quantify how much we should expect in terms of the downtick in harvest volumes? I think in the prepared guidance remarks, you suggested that the West would be down and the North and South would be flattish year-over-year. But again, at least, in the first quarter which seem to imply a pretty meaningful year-over-year decline in the Western volume. So just how should we quantify that?
Sure. So, first, big picture. We’re harvesting on a sustainable level. So in the West, as we mentioned at our Investor Day last year, the harvest will decline modestly in 2018, and that’s really a function of working through the older age timber on the Longview acquisition. And so we’ll see the harvest level, level out starting in 2018 and then we’ll see moderate growth in that in 2023.
Okay. And should we think about any other noise seasonality as it relates to those harvest volumes?
Coming into the first quarter?
Just in the West in general, yes?
Yes. So in the West, we’re going to have some seasonally lower volume in the West.
Okay. I appreciate the color, guys. Thanks.
Your next question is from the line of Brian Maguire with Goldman Sachs. Please go ahead.
Hi, good morning, guys.
Good morning, Brian.
A couple of times, you mentioned some negative impact from rail and trucking issues in Canada in the Wood Products segment. I just wonder if there’s any way you can size that? Is it like a $5 million or $10 million hit to EBITDA in the quarter, or more immaterial than that?
You’re talking about in the fourth quarter?
Yes, in the fourth quarter?
Yes, Brian, it was a significant issue in the fourth quarter, and it was primarily due to just the lack of trucking in Canada. As I mentioned, at one of our mills, shipments were delayed for – I said trucking, I mean, rail. So let’s back up. So we’ve got rail and truck issues, both of those were a problem in the fourth quarter. For example, one of our mills, shipments were delayed for a full two weeks due to rail issues, primarily due to the extremely cold weather in Canada.
With that said, because of the surge in – demand in the fourth quarter for trucks, trucking availability was also a problem. So I would say, the – it was a probably $10 million to $15 million hit in the fourth quarter. Part of it was due to higher prices, but more so, we just couldn’t ship the volume, because there wasn’t rail or trucking available and that primarily happened in the month of December.
Okay, that helps. And then it sounds like 1Q maybe seeing some similar disruptions, maybe not just in Canada, but in the South, I know down here in the Gulf states, we’ve had a lot of these winter storms we don’t normally have. Just wondered if there’s going to be an impact maybe in the Southern logs or Southern Wood Products that you’re seeing so far in 1Q?
I think in 1Q, it’s going to be more just higher cost as opposed to just not being able to ship. As I mentioned in my earlier comments, I do think rail and trucking will be a headwind, as we move into 2018. We’ve not seen the disruptions in terms of availability that we saw in the month of December. But we do have higher rates going in and just both in truck and rail. We’re about currently 60% truck, 40% rail. We will be shifting more to truck when possible just because as we look at the options that’s the better one as we move forward.
Okay. Just one on Southern log prices. It’s sort of an area we start off thinking, maybe this will be the year we start to see a little bit of tension in the market and prices start to pick up. And since it’s Groundhog Day today, I thought you maybe could give a little bit of an outlook on how you think that prices could go this year, if it’s going to be more of the same, or do you think maybe by the end of the year we could start to see some upward tilt on those prices?
Yes, it’s a great question, Brian, and I appreciate the color. Let me tell you how we’re thinking about it. And we do think there’s some potential for some pricing traction in 2018, and let me tell you why. Number one, it all comes down to housing demand, as I said, continues to grow. And we’re quite optimistic that housing will continue to grow and we’re especially encouraged about what we’ve seen in terms of the millennials finally starting to show up in the market and frankly, that’s what’s been missing.
We also expect a strong year from repair remodeling and are projecting that to be up roughly 7.5%. Maybe even more importantly than that is that, there is a lot of capacity being added in the South, as you know. It seems like every week, there’s an announcement of new capacity that’s being added, or at least being considered.
In terms of the numbers, about 1 billion board feet of new sawmill capacity came online in 2017. There’s another 2 billion board feet slated to come online in 2018 and 2019, and another 1 billion board feet on top of that, that’s currently under consideration. Just to put that in perspective that’s on a base of about 20 billion board feet in the South, so that’s a big increase. And to your point, we already are starting to see some benefits in certain markets, where additional capacity has come online.
The third part of this is, of course, on the supply side and there is less lumber coming in from Canada, I think, that’s going to continue either as a result of the final duties, or negotiated agreements. Just to put that in perspective, that number went down from 33% in 2016, down to 30% in 2017. And as you look at just absolute lumber shipments from Canada, those were down over 5% in 2017 versus 2016.
And then finally, as I mentioned earlier, we’re very encouraged by development of Southern export markets. We’re going to ship three times as much in 2018 as 2017, and as I mentioned, that should be equivalent to a small mill. So I think, all of those things are going to start to come together, and we are hopeful that we will start to see some pricing improvement as we move through 2018.
Okay. I’ll leave it there. Thanks, again.
Thank you.
Your next question is from the line of Steven Chercover with D. A. Davidson. Please go ahead.
Thanks, and good morning.
Good morning, Steve.
So you gave us a little update on your views on Southern log pricing. And I just wanted to understand, if you could – for your specific projects that Arkansas, Mississippi and Alabama, how they’re going to kind of ramp up over the course of next year? So what’s the timeframe?
Yes, great question. So if you look at the two projects – our two big projects, let me start off by saying, just overall the capital that we’re spending in our lumber operation should increase our productivity 2% to 3% a year. On top of that, the two projects, number one is Dirk’s, Arkansas, that will start up this summer and as an additional 80 million board feet of capacity. And then our Millport mill, which we’re rebuilding will start up in early 2019, and that’s an additional 215 million board feet of capacity. So that’s on top of the 2% to 3% that we’re getting through the additional capital that we’re spending.
Okay, great. And then one on the softwood lumber file. The recent – I – and then I recognize the big difference between airplanes and lumber. But does the ITC ruling between Bombardier and Boeing have any impact on softwood lumber file, because I mean, the Canadians are certainly trying to link it in the NAFTA talks?
Yes. So we don’t think that has any impact on the discussions. We, as I said earlier, remain hopeful. We’ll be able to reach a quota-based agreement. And frankly, negotiations are temporary sidelined due to the focus on NAFTA. But we would believe those negotiations will remain separate from the overall NAFTA discussions.
So I don’t recall if you’ve ever specified what the actual volume limit would be with 30 billion board feet, or 20 billion board feet from Canada?
In terms of the limit based on what Steve? I’m sorry, I don’t understand your point.
Sorry. Well, I guess, if there’s a quota that it’s a volume limit as opposed to a market share limit so?
Now the quota that we have been discussing and again, it’s still being negotiated would be a percentage, whatever it’d be 25, 27, 29, whatever the number may be, that’s the way the discussions have gone. It’s not a hard limit on volume, it’s a percentage quota.
Okay. Thanks, Doyle.
Thank you.
Your next question is from the line of Mark Weintraub with Buckingham Research. Please go ahead.
Thank you. First, just wanted to follow-up on the color you’re giving, particularly on the lumber capacity in the U.S. I thought that was very interesting and helpful. You had mentioned 2 billion board feet in 2018 and 2019, I assume that was in each year, just wanted to clarify that?
That was the total for 2018 and 2019. And then on top of that, Mark, we’re not factoring in the, as you know, there’s a lot that’s been saying, okay, we’re going to do this, but the ground has not been broken and that’s another 1 billion. So if you look at total 2018, 2019, it could be up to 3 billion.
Okay, okay. So I think, you said another 1 billion in 2020, and that was what you’re referring to?
What I meant to say, Mark – yes, here is what I meant to say is 1 billion in 2017, 2 billion total in 2018/2019 with the chance that there could be another 1 billion on top of the 2 billion in 2018/2019 and that’s to your point would probably show up in 2019, maybe some of that in 2020.
Okay, great. Thank you. And in curiosity, do you have handy a view on outside of the U.S. South? What net capacity change in North America over that timeframe might be?
Mark, I don’t have those numbers here in front of us. I think, there will continue to be potential capacity that could happen in the West. In Canada, as we all know, I think, if anything their capacity going to shrink because of the lack of fiber due to the pine beetle situation.
Okay, great. And then shifting gears to real estate, two question. So you provided $250 million EBITDA estimates for 2018. I was hoping to get any preliminary indication on likely cost basis. And maybe just any color around that as well, given that that’s only a little bit higher than this year and maybe I misremember. But I had thought the expectation was that that number would likely be going up, as you had finished some of the reviews during 2017?
Yes. So let’s talk about that. So what happened in 2017 is and we came in a little lower than 250 guidance, is there ended up being no federal dollars that were allocated for conservation projects. This is the first time in many, many years, where no money has been provided to the various federal agencies for conservation projects.
And just to give you a sense of the magnitude, that directly impacted two deals, that would have generated approximately $40 million of EBITDA in 2017. As we move into 2018, we’ll see – we’re hopeful that that happens. But our guidance is based on there being little to no federal dollars that are put in place. So that’s the fundamental shift as we look forward into 2018 chance, there’s some upside there, but that’s the number that we’re comfortable with assuming no federal dollars. In terms of the…
Yes, Mark, this is Russell. As far as bases, we’re guiding to about 40% to 50%.
Okay, great. And just, Russell, just one clarification. I assume, when you had talked about there being a couple things in the pipeline on Timberland side that was an,industry or was that a Weyerhaeuser specific comment?
No, it’s industry.
Okay. Thank you.
Thank you for that clarification, Mark.
Your next question is from the line of Mark Connelly with Stephens. Please go ahead.
Thank you, Doyle. Some of our…
Good morning, Mark.
Good morning. Some of our clients tell us that they see hurricane rebuilds taking away from overall construction activity, because too much of the available labor in those markets is shifting away. Can you give us your thoughts on that and what do you see – how you see that the sort of labor construction thing playing out this year, because you’ve got a bigger [Multiple Speakers] assumption?
Yes, there’s no doubt that labor is the constraint. And as we talked to all of our customers, that’s the one thing we hear over and over. I think in some of the select markets, as you had indicated, some of the labor that would normally be used for new housing is being used for, call it, repair and remodeling as a result of the hurricane.
So I think that will put a little bit of a damper on housing in those markets, maybe in the near-term. Longer-term, there’s a number of houses, as you know, that were completely destroyed. So those will end up in new housing. So I think, limited impact from hurricanes in terms of new housing starts in the short-term. Long-term, as we know, it always takes longer to rebuild from these things. But net-net, I think, that’s just going to be another positive for housing as we move forward.
Absolutely. Just one more question. On the operational excellence thing, I’m sorry to keep coming back to it. But the shift to bottoms-up opportunities, is this sort of a new leg of opportunity there? Are you going to start to tell us the operation excellence as targets are going up again? I just wonder if you could give us…?
Yes, it’s a great question. As I said, if you look at over the last four years started off very top down driven low-hanging fruit. Now it’s moving more into the things that are tougher but it’s being bottoms-up driven, because frankly, I’m not smart enough to figure out what the new things are that we can do, but our folks are.
So, in terms of the size of the opportunity, we’ll continue to identify those on an annual basis. I don’t think, they’ll be going up substantially. My best guess is, they’ll remain at these levels for at least the next couple of years and then we’ll go from there.
It’s a good problem to have. Thank you.
Thank you.
Your next question is from the line of Gail Glazerman with Roe Equity Research. Please go ahead.
Hi, good morning.
Good morning, Gail.
Hi, Gail.
Can you give some color on where your Lumber and OSB prices are currently versus the fourth quarter average? And was there anything kind of mix, or timing-related that helped drive your pricing up not necessarily to it is relative to in the months trend?
Yes. So what I would tell you is, on the current and these are quarter-to-date realizations versus fourth quarter, Gail. Just to give you a sense, Lumber is about $10 higher, OSB is about $50 lower, because as we know, we had a big run off. I would say, both Lumber and OSB are trending in the right way. And as we move towards the building season, as I mentioned in response to an earlier question, we anticipate that trend will continue.
In terms of OSB pricing, Gail, and I think you’re talking about the fourth quarter. I would tell you, there’s a couple of things. Number one is, as you look at it versus the indexes, there is a lag that we have. And so, when things are going down, ours don’t fall as quickly, so that’s part of it. And then just, as you also know, we have some premium flowing product, which helps skew it in a positive way as well. So I would say, those are big – two big things.
Okay. Thank you. And on the Southern log exports, can you just remind us to what extent the destination markets overlap with where you’re shipping from the last?
Yes. The good news is there, they don’t overlap at all. Now, let me clarify that. We’re sending to China and India. So of course, we do send out the West Coast to China, but these are going to different ports and for different uses than our Western log.
So there’s no the term I use cannibalization of logs that are coming from the South into China versus the West. So some of them are to new customers in China, some of them are to existing customers, but that are either going into different ports, or and all of it is for different uses than the Western logs are being used for.
Okay, helpful. And just one last one. In terms of Western log market, do you have any perspective how much extreme weather, both in terms of the winter last year with all the snow and rain, as well as the dry summer might have supported pricing, and if we got kind of more normal weather as we move through the summer, what your outlook might be?
Gail, there’s no doubt that the weather in 2017 was kind of a catalyst to get prices – well, prices are moving for the weather, but for prices to continue. I will tell you though, weather has stabilized. And as I mentioned earlier, we continue to be very encouraged by what we see in the West and that’s primarily from a demand perspective. Japan continues to be solid. China is strong.
In domestic markets, primarily driven by California, and as you know, California was slower to recover now. California is going permits, they are up 15% in California and we think that trend is going to continue. So, whether it’s going to cause some volatility. But if you just look at overall supply and demand, I feel it’s pretty good in the West.
Okay. Thank you.
Thank you.
Your next question is from the line of Chip Dillon with Vertical Research Partners. Please go ahead.
Yes. Good morning, Doyle.
Good morning, Chip.
Thanks for all the information. One sort of couple of big picture questions. One is, could you just tell us, in your view, as you look at OSB and plywood, there has been decades of substitution out of plywood into OSB. And I guess, have we reached a point where there’s very little substitution, meaning that all the use of plywood is basically in specialty areas, or in extreme cases, do you think several points of those markets could switch back and forth?
And then I had a second question, if you could just talk a little bit about with the obvious high margins that lumber mills, I believe, are making in the South, in particular, and again that might get crimped in some point in the future, as you mentioned, as demand goes up for logs. Would it ever make sense for Weyerhaeuser to consider acquiring sawmills, just given that you would own them immediately and maybe it would be cheaper than building?
So Chip, on the OSB plywood substitution, you’re right, I mean, we’ve seen that trend over, over many years. I think, it’s kind of in balance now. Now that doesn’t mean that there won’t be some temporary shift. But overall, I don’t see any fundamental shifts back and forth between OSB and plywood.
In terms of lumber mills in the South, as you said and you’re exactly right, very high margins there. As we have consistently said, we would look at growing our Wood Products business on a go-forward basis. We think our bigger opportunity is in Timberland, but we will look at growing Wood Products business. I think, lumber would be a business that we would be interested in growing, especially if it tied in with our overall strategic footprint from a Timberland perspective.
In terms of how we would grow, number one is, doing projects like Dirk’s and Millport. And then secondly, would be exactly what you said in finding acquisition opportunities, where at a value, where we think we – at a price where we think we could create shareholder value.
Going and building greenfield mills is probably not a step that we’re going to take. But we would be very interested in sawmills to acquire assuming again, we could do it at a price where we could create value over the cycle. You can assume that the margins that are currently in place are going to stay that way forever.
Gotcha. And we hear a lot about the overgrown situation in the South, too much inventory, and you’re giving some reasons why that could be alleviated in the near-term. But every county in the Southeast isn’t the same. And could you maybe point out where you – where we should look for early indications of return in sawlogs, maybe particular states or parts of states that you kind of look for?
Yes, I’ll just give you one example. There’s a couple of new mills that have started up kind of along the Arkansas, Louisiana border. And as I mentioned earlier, we are starting to see some benefit in some of those areas, where you’ve seen some of this new capacity startup.
So that’s an example of where we are starting to see some benefit and some potential pricing tension in that market, and there’s a lot of markets like that across the South. The good thing about Weyerhaeuser, as you know, we’re just about in every markets. So as that starts to happen, we will participate in that pricing tension.
Understood. Thank you.
Today’s final question will come from the line of Paul Quinn with RBC Capital Markets. Please go ahead.
Great. Thanks. Good morning, Doyle and Russell.
Good morning, Paul.
Good morning, Paul.
Just had a couple of quick questions. One on the labor issue side, whether you’re seeing contractor inflation. Your contractors coming back to you and asking you for significantly more money, because they’re having issues with getting labor on their side of the – harvesting – on the timber side?
We are starting to see a little bit of that. It’s much more prevalent on the transportation side than on the actual logging side. But we are seeing – starting to see a little bit of pressure on their logging side, as well as we move forward. And as I said, I think, inflation, there’s labor inflation or truck inflation, it’s going to be a headwind for us as we move into 2018. And we’ll just kind of work really hard to offset that through our operational excellence efforts.
Okay And then just turning to. U.S. South exports, what are your, and I might have missed this, but what are you looking at the Indian market and how do you view that market going forward?
Yes. The Indian market is – so as I mentioned, we are focused on two markets, China and India. India is currently the smaller of those markets. Unlike China, where we had a presence, this is a new presence, but we’re spending a lot of time on the ground there. And we’re encouraged by the opportunity that we see, and I’ll tell you there’s a lot of interest in that market. So, we’re still in the early stages, but encouraged and think that’s a market that has real opportunity to grow as we move into 2018 and beyond.
Great. That’s all I had. Best of luck, guys.
Thank you.
Thank you.
As I understand it, that was our final question. Let me end by thanking, everybody, for joining us this morning. And as always, thank you for your interest in Weyerhaeuser.
Ladies and gentlemen, that does conclude the Weyerhaeuser fourth quarter 2017 earnings conference call. Thank you for your participation. You may now disconnect.