Weyerhaeuser Co
NYSE:WY
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
27.05
35.93
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Weyerhaeuser Co
You don't have any saved screeners yet
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 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.
Thank you, Dennis. Good morning everyone, and thank you for joining us today to discuss Weyerhaeuser's fourth quarter 2018 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our Web site.
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 Web site.
On the call this morning are Devin Stockfish, Chief Executive Officer; and Russell Hagen, Chief Financial Officer.
I will now turn the call over to Devin Stockfish.
All right, thanks, Beth. Good morning everyone, and thank you for joining us today. As most of you know, this is my first earnings call as Weyerhaeuser CEO. I'm surely honored to be taking on the leadership of this great company.
I'm going to open this morning with a discussion of our financial results, then Russell will talk about outlook, and I will wrap up with a few comments on the vision and strategy going forward, and my focus area is for 2019.
This morning Weyerhaeuser reported full-year net earnings of $748 million or $0.99 per diluted share on net sales of $7.5 billion. Excluding special items, we earned $891 million or a $1.18 per share, an improvement of 2% compared with 2017. Adjusted EBITDA was similar to last year at slightly over $2 billion.
For fourth quarter, we reported a GAAP loss of $93 million, or $0.12 per diluted share. This loss was driven by a previously-announced non-cash charge following completion of a lump sum offer that reduced our U.S. pension liabilities by over $660 million. Excluding special items, we earned $70 million or $0.10 per diluted share for the quarter. I'm proud of the fourth quarter and full-year performance as our teams delivered strong results through a full range of market conditions, capitalizing on the upside and effectively managing the downside.
In 2018, we generated over $2 billion of EBITDA, including $1 billion of Wood Products EBITDA for the second year in a row. We grew EBITDA from our real estate, energy, and natural resources business by nearly 10%. We captured over $40 million of OpEx improvements in our Timberlands business. We delivered a 65% premium to timber value from real estate sales, significantly exceeding our 30% target. We return nearly $1.4 billion at cash to shareholders through dividends and share repurchases, and we initiated a series of actions that reduced our pension liabilities by over $2 billion. This includes the annuity purchase transaction that we announced earlier this week.
In a moment I will dive into our business results, but first, let me set the stage with some brief comments on the housing market. Much has been written about the slowdown or pause in U.S. housing during the second-half of 2018, and what it make signal for the year ahead. As interest rates and home prices continue to increase in the back-half of the year, it became apparent that many potential buyers were staying on the sidelines due to concerns about affordability. This dynamic persisted through the fourth quarter, exacerbated by increased volatility in financial markets, the threat of a government shutdown, and extremely wet weather that limited construction activity in parts of the U.S. south.
However, notwithstanding a slower back-half of the year, we again experienced year-over-year growth in the U.S. housing market in 2018. Through November, single-family and total starts were up 4% to 5% compared with 2017. Expenditures for repair and remodeling, which comprises about 40% of lumber demand are up over 7%.
Looking forward to 2019, fundamental economic data remains very supportive for U.S. housing. Real wages are increasing, employment continues to rise with unemployment at the lowest level since 1969, and job growth in key housing markets continues to be strong. These trends plus favorable demographics are driving the highest levels of household formation in 15 years. For 2018, household formations are expected to total approximately 1.5 million.
On balance, housing remains affordable by historical standards. Mortgage rates have decreased approximately 50 basis points since early November, and builders are actively adjusting amenities and floor plans to target a more affordable price point. Additionally, are current inventory of homes for sales is low. All of this, points to continued growth in U.S. housing. For 2019, we anticipate total starts of approximately 1.3 million, with the improvement driven primarily by increased single-family activity.
Turning now to our fourth quarter business results, I'll begin the discussion with Timberlands, charts five through seven. Timberlands contributed $107 million in the fourth quarter earnings and $188 to adjusted EBITDA. This is lower than the previous quarter and the fourth quarter of 2017, primarily due to lower realization for Western logs. Western Timberlands EBITDA declined $27 million compared with the third quarter, as seasonal increase in our fee harvest volumes was more than offset by a 10% decrease in average logs sales realizations. Road cost increased slightly as we took advantage of favorable weather to complete road building activities deferred earlier in 2018.
In the Western domestic market, average realizations declined as lumber mills entered the fourth quarter with high log inventories and a number of mills took extended holiday downtime or temporarily curtailed operations in response to low lumber prices. As the quarter progressed, log supplies across the system declined seasonally, and supply has come back into balance with demand.
In our export markets, Chinese construction and infrastructure activity remains strong. Log inventories at Chinese ports declined by over 20% during the quarter, and ended the year below normal at 209 million cubic meters. Our export log volumes increased as customer demand normalized after China implemented a 5% tariff on our Hemlock and Douglas fir export logs in the third quarter. Average realizations declined slightly.
In Japan, post-and-beam housing starts ended 2018 essentially flat with the year ago, and demand for our customer's products and our logs remains solid. Our export log sales volumes to Japan increased compared with the third quarter due to timing of shipments, and average log sales realizations declined moderately. Overall, our fourth quarter export revenue was comparable to last year, with slightly higher sales volumes in both Japan and China, offset by slightly lower average realizations.
Moving to the South, Southern Timberlands EBITDA increased $9 million compared with the third quarter. Fourth quarter weather was very wet across our southern ownership. This limited log supplies resulting in lean mill inventories and slightly improved log pricing. Our average southern log realizations decreased slightly compared with the third quarter due to mix as we harvested a smaller average fee size during the quarter. Fee harvest volume increased due to additional stumpage sales. Although stumpage is a small portion of our sales volume, we look to capitalize on opportunities when we can capture a premium over delivered log margins.
Forestry expense was also slightly lower as we deferred some activity due to wet weather. On the export side, southern log export volumes decreased due to a full quarter of China export tariffs. Average realizations for southern export logs were roughly flat. Demand has been stable since the tariffs were imposed in late August and our southern pine logs continue to be assessed at a 25% rate. On a full-year basis, our southern export log volumes increased nearly 50% compared with 2017, despite a partial year of tariffs. Although the tariff significantly reduced the amount of volume coming out of our southern export business, we look forward to growth there as trade tension ease eventually. Comparing overall Southern Timberlands results with the year-ago quarter, EBITDA declined due to lower harvest volumes and slightly higher harvest in whole cost.
In 2018, we harvested a smaller portion of our volume during the fourth quarter. Northern Timberlands EBITDA was $2 million more than the third quarter and $3 million less than the same period a year ago. Fee harvest volumes increased seasonally in most areas. Average realizations decreased modestly due to mix as we harvested a smaller proportion of hardwood grade logs in West Virginia due to extremely wet weather.
Real estate, Energy, and Natural Resources, charts eight and nine. Real estate and ENR contributed $44 million to the fourth quarter earnings and $90 million to adjusted EBITDA. EBITDA was $4 million higher than the third quarter and $3 million higher than a year ago. For the full-year, the segment generated $264 million of EBITDA, up $23 million from 2017. The number of acres sold in the fourth quarter decreased significantly compared to the third quarter that was comparable to a year ago. Average price breaker was much higher than the third quarter, and also higher than a year ago, due to the geographic mix of property sold.
Approximately 85% of the acres sold in the fourth quarter were located in the West and the South, whereas in the third quarter, over half of the acres sold were in Montana, where timberland prices are regionally lower. Average land basis as a percentage of real estate sales was lower than third quarter, but higher than fourth quarter 2017. As a result, the segment's fourth quarter contribution to earnings was $8 million more than the third quarter, but $6 million lower than a year ago.
Wood Products, charts 10 and 11; Wood Products contributed $26 million in the fourth quarter earnings and $66 million to adjusted EBITDA. Earnings and EBITDA were significantly lower than third quarter in the same period last year due to lower realization for lumber and OSB. EBITDA for lumber decreases $112 million compared with third quarter. This was almost entirely attributable to lower average realizations. Lumber prices declined through the month of October, stabilized in November, and remained largely flat through year-end, as the pause in housing activity and early winter weather in the East reinforced the normal seasonal reduction in lumber demand.
The framing lumber composite averaged 26% lower in the fourth quarter compared with the third, and our average realizations decreased $103 per 1000 board fee or 21%. Our lumber sales volumes decreased 7% compared with the third quarter as we took some downtime for completion of capital projects and operated at a reduced shift posture at certain mills around the holidays.
Although our cash cost for Western and Canadian logs declined during the fourth quarter, there was a minimal benefit from these lower log costs in fourth quarter financial results due to cost accounting. Much of the lumber we sold in the fourth quarter was manufactured using logs purchased in the third quarter and early fourth quarter when log prices were higher. As a result, our cost of sales mostly reflects these higher log costs. We expect to realize most of the benefits from lower fourth quarter log costs in our first quarter results.
Fourth quarter EBITDA includes $4 million of charges for countervailing and antidumping duties on Canadian softwood lumber. Comparing our fourth quarter results with the year-ago quarter, average sales realizations for lumber was significantly lower. Log costs were higher, and manufacturing costs increased slightly.
OSB EBITDA decreased $46 million compared with the third quarter due to lower average realizations. Fourth quarter OSB pricing generally mirrored that of lumber, and our average realization declined $69 per 1,000 square feet or 21%. Fourth quarter sales volumes were comparable to our lower-than-normal third quarter as our third quarter sales volumes were limited by a scheduled outage to replace the press at our Grayling Michigan mill. The outage extended for mid-July through late-October, and the mill returned to full production by year-end. Comparing our fourth quarter results to the year-ago quarter, average sales realizations for OSB decreased 25% and sales volumes decreased 5%. Fiber costs were slightly higher, and manufacturing costs increased slightly due to additional outage days.
Engineered wood product's EBITDA decreased $22 million compared with the third quarter. Sales volumes for both solid section and I joist decreased seasonally as construction activity softened and dealers and builders start to minimize year-end inventories. Unit manufacturing costs increased due to lower operating rates. Average sales realizations for I joist increased by 2%, as we captured the final portion of our 2018 price increase. Average realizations for solid section products decreased by 3% due to mix, as we sold a greater proportion of industrial products.
Compared with the year-ago quarter, higher average realizations were more than offset by lower sales volumes and slightly higher manufacturing costs. Distribution EBITDA decreased $1 million compared with the third quarter. Sales volumes declined seasonally. This was mostly offset by slightly lower warehouse and delivery costs and a small insurance reimbursement related to the previous wild wire damage at our Redding, California facility. Compared with the year-ago, EBITDA decreased slightly due to lower sales volumes.
I would like to now turn to operational excellence. Collectively, our Timberlands and Wood Products businesses achieved $44 million of operational excellence improvements in 2018. This brings us to over $540 million of total improvement since we began this program five years ago. Timberlands achieved its $40 million to $50 million target capturing $42 million of improvements in 2018, for a cumulative total of $214 million. In 2018, the majority of OpEx improvements in timberlands were attributable to initiatives to reduce logging and hauling costs, and improved log merchandizing and marketing to maximize the revenue from every log we harvest.
In Wood Products, we had some challenges with OpEx this year. Although the business has captured $329 million of cumulative improvements, it delivered only $2 million of OpEx in 2018. On our third quarter call, we noted that the business had a lot of work to do to get to its 2018 OpEx target. And unfortunately we were not able to make up ground in the fourth quarter. The business did made good progress on improving fiber recovery, but we were not able to capture as much benefit as we had hoped from our other three focus areas.
Our initiatives to increase mill reliability were hampered by an unusual amount of downtime for severe weather through the year. We did not capture enough cost reduction opportunities in light of the inflationary headwinds during the year, and we weren't able to realize the benefits from capital projects completed later in the year as ramped up several of those projects more slowly than planned.
Obviously, we are disappointed by these results. We need to execute against our OpEx initiatives regardless of markets or weather conditions. So, no excuses. The good news is that we know the improvement opportunities are out there. We have a strong track record of achieving OpEx improvements in this business, and we have solid plans in place to capture these opportunities next year.
In 2019, we are targeting $80 million to $100 million of additional OpEx improvements. This includes $40 million to $50 million from Timberlands, and $40 million to $50 million in Wood Products. I'm confident that we have the focus, tools, and expertise to achieve these targets, and I know there are significant opportunities beyond that to continue improving our relative performance in each of our business.
I will now turn it over to Russell to discuss some financial items and our first quarter outlook.
Thanks, Devin, and good morning. The outlook for the first quarter and the full-year 2019 are presented in charts 14 and 15 of the earnings slides. In Timberlands business, we expect our first quarter earnings and adjusted EBITDA will be approximately 10% lower than the fourth quarter. This reflects normal seasonal variations in harvest volumes as well as the effect of the decline in Western log prices that occurred in the fourth quarter.
In our Western Timberland operations, we expect first quarter average sales realizations for domestic and export logs will be moderately below the fourth quarter average and harvest volumes will be lower. This will be mostly offset by a significant reduction in road and forestry spending and seasonally lower log and haul costs. As we move to lower elevations in the winter months.
Domestic log supply has come into balance with demand in the West. The log deck inventories are at more normal levels. Japanese export log sales volumes are expected to decline due to the timing of shipments, we're seeing continue to strength in the Japanese housing market, particularly in the higher end post-and-beam construction and favorable demand for logs from our Japanese customers.
Average sales realizations for Chinese export logs are expected to be comparable to the fourth quarter and volumes to be lower on seasonally softer demand due to the Lunar New Year. In the South, we anticipate seasonally lower
fee harvest volumes. Average sales realizations in the first quarter are expected to be similar to the fourth quarter. In the North, we anticipate average sales realizations for the first quarter will be higher while harvest volumes will be seasonally lower.
Turning to the full-year 2019, we expect total company harvest volumes will be comparable to 2018 at approximately 38 million tons. We expect first quarter earnings and adjusted for our real-estate and energy and natural Resources segment will be approximately 10 million higher than the fourth quarter driven by our real-estate operations. Our buyer traffic typically slows during the winter months we saw a very strong real-estate activity in the fourth quarter, which allowed us to pursue a handful of additional transactions that we will close in the first quarter.
Combined with continued strong interest in the west and the south, we're anticipating first quarter earnings that will be stronger than we would normally see for this time of year. We speak land basis as a percentage of real-estate sales will be approximately 50% for the first quarter. In our energy and natural resources operations, we anticipate that royalties will be seasonally lower in the first quarter.
For the full-year 2019, we expect approximately $260 million of adjusted for real-estate Energy and Natural Resources segment, land basis as a percentage of real-estate sales to be between 40% and 55% for the full-year 2019.
Wood Products, we expect first quarter earnings and adjusted EBITDA will be significantly higher than the fourth quarter. Market prices for lumbers stabilized late in the fourth quarter and it began to rise. Sale orders are improving as we entered the spring building season. Current and first quarter to-date average sales realizations are $10 lower than the fourth quarter average. However, prices are approving and market dynamics are favorable. Our builder customers are expressing optimism about the spring selling season.
As a reminder, every $10 change in lumber realizations is approximately $11 million of EBITDA on a quarterly basis. As Devin mentioned earlier, we anticipate a substantial improvement in western and Canadian log cost in the first quarter. Unit manufacturing costs are expected to improve with higher production volumes as we move into the spring building season. Our newly expanded dirt sawmill was commissioned in mid-October. The mill's capacity is 80 million board feet larger and will continue ramping up for full production throughout 2019.
For oriented strand board market price is stabilized late in the fourth quarter and current first quarter to-date realizations are approximately $30 lower than the fourth quarter average. As a reminder, every $10 change in OSB realizations is approximately $8 million of EBITDA on a quarterly basis. We will have full quarter of production at our grayling Michigan mill after completing our plan, press replacement and start.
In the first quarter, we anticipate seasonally higher sales volumes and operating rates for oriented strand board. Sales volumes for engineered Wood Products are also expected to increase in the first quarter. We anticipate unit manufacturing costs will be lower than the fourth quarter.
Chart 12, outlines the major components of our unallocated items. Excluding special items, net contribution to earnings improved by $35 million. This was primarily due to a non-cash benefit from elimination of inter-segment profit in inventory and LIFO resulting from reduced log inventories. Year-end adjustments for lower employee benefits expense and foreign exchange gains were also favorable compared to the third quarter.
Fourth quarter pretax special items include the $200 million non-cash pension settlement charge and a $13 million gain on the sale of a non-strategic asset. For our pension and postretirement plans, the year-end 2018 funded status improved by $1 billion compared to 2017 driven primarily by a higher discount rates and a $300 million voluntary cash contribution in the third quarter.
Discount rates increased approximately 70 basis points for the U.S. plans and approximately 20 basis points for the Canadian plants. Cash paid for pension and postretirement plans in 2018 was $381 million, which includes the $300 million voluntary contribution to our U.S. qualified plan.
In 2019, we do not anticipate any cash contributions to our U.S. qualified plan. Our required cash payments for all other plans will be approximately $50 million including the fourth quarter settlement charge our non-cash, non-operating pension and postretirement expense was $72 million in 2018. We expect to record approximately $60 million of expense in 2019.
As we announced earlier this week, we purchased a group annuity contract to transfer approximately $1.5 billion of Weyerhaeuser's U.S. pension assets and liabilities to an insurance carrier. The purchase was funded with assets from our U.S. pension plan. In connection with this transaction, we expect to recognize non-cash, pre-tax pension settlement charge of approximately $450 million in the first quarter of 2019.
Now I like to update you on our key financial items, which are summarized on chart 13, we ended the year with the cash balance at $334 million. Cash from operations during the fourth quarter is $292 million. For the full-year 2018, cash from operations was $1.1 billion. As we think about funds available for distribution. It's important to consider that in 2018 cash from operations included the $300 million voluntary cash pension contribution and approximately $100 million net spend for product remediation.
Capital expenditures for the fourth quarter totaled a $144 million and the full-year total for 2018 was $427 million. We expect total CapEx for 2019 will be approximately $400 million, $120 million for Timberlands inclusive of forestry reforestation costs and $270 million for Wood Products and $10 billion for plan corporate IT system investments.
Turning to financing activities, we repurchased 11 million shares of common stock in 2018, including 2.8 million shares or $75 million in the fourth quarter. At year-end, we had $135 million remaining on our share repurchase authorization. We'll use this on an opportunistic basis in conjunction with our overall capital allocation strategy, we will report on our progress each quarter.
Moving on to debt, we have one scheduled maturity in October 2019 for $500 million of 7 and 3-8s notes, which we plan to refinance. In the fourth quarter, we paid $209 million to extinguish the debt of a variable interest entity that was established as part of a timber installment sale in the early 2000s. We will receive $253 million cash in the first quarter when the related financial investment matures. We did the quarter with approximately $6.3 billion of debt outstanding. This includes a balance on our line of credit, the portion of which was used to bridge the temporary cash outflows associated with the variable interest entity, debt maturity.
During 2018, we've reduced our cash balance as part of an intentional transition to move to a more efficient cash management strategy. Going forward, we expect to use a revolving credit facility to support temporary working capital needs. In the fourth quarter, interest expense was $97 million. We expect interest expense will be approximately $360 million for the full-year 2019.
Moving on to taxes in the first quarter and full-year 2019, we expect the tax rate will be between 14% and 16%, excluding special items.
Now, I'll turn the call back to Devin. I look forward to your questions.
All right, thanks, Russell. Over the past few months, the main question I've had as I've talked with our employees, our customers, and our investors is what can we expect under your leadership? For those of you that know me, you know that I worked closely with Doyle for a number of years. I believe strongly in the fundamental strategy we have in place and that framework will remain the same. We will continue to drive value for shareholders by focusing on portfolio, performance, and disciplined capital allocation. We do need to continue to evolve how we implement that strategy to ensure that Weyerhaeuser maintains a competitive advantage and delivers superior returns for investors. We remain focused on improving our operational performance, our financial performance, and our ability to attract and retain talent.
So, as we think about near-term priorities, my 2019 focus areas will be as follows: first, driving OpEx, with a particular focus on reliability and cost. As I mentioned we're targeting $80 million to $100 million of improvements across the company this year.
In Timberlands, we're continuing to focus on reducing cost and driving efficiencies across our entire harvesting, hauling and road building, operations, and maximizing the value of every log that we harvest and sell. In Wood Products, we're bringing all of our manufacturing expertise together in a unified effort to take our reliability to the next level, which is the single biggest opportunity across our manufacturing portfolio. And in both businesses, and across the organization, we're driving a focus on our customers to serve them better and identify further OpEx opportunities in the supply chain. My second priority is around culture.
We've made incredible progress on our journey to create a culture of urgency, accountability, courage, simplicity, and innovation, but driving lasting culture change is an ongoing effort, and we can't let up. So I'll be focused on continuing to reinforce and improve on the cultural progress that we've made. In particular, we'll be placing some additional emphasis on discipline focused innovation, which I strongly believe is a key to Weyerhaeuser's long-term success. My third area of focus is people development.
People are our most important asset, and we need to accelerate our efforts on development and building bench strength across all levels of the company. I strongly believe that this will be a competitive advantage for our company in the years to come. And my final area of focus is disciplined capital allocation, which remains critical to driving value for our shareholders. Our priorities for capital allocation have not changed. First, is returning cash to shareholders, this will occur primarily through a dividend that is sustainable and grows over time as well as through opportunistic share repurchases as appropriate. Second, we will continue to invest in our businesses.
In Timberlands, that means primarily civil culture and roads. And in Wood Products, it's high return projects that drive down cost and improve reliability. We'll continue to evaluate growth opportunities primarily in Timberlands, but we'll be very disciplined as we evaluate options in this regard. As you know given our significant land base, we're not compelled to grow and we will only pursue opportunities that clearly drive value for our shareholders. And our third capital allocation priority is maintaining an appropriate capital structure including a strong balance sheet and an investment grade credit rating.
As you can see Weyerhaeuser's priorities and positioning are not significantly changing. My near-term focus remains on executing on our strategy in building on Weyerhaeuser's strong foundation. This is an incredibly exciting time to be assuming the leadership of Weyerhaeuser. It's a strong company with outstanding people and terrific assets. Our fundamental strategy is in place, and we will continue to improve the company by focusing on our portfolio, our performance, and disciplined capital allocation. I'm really excited about the opportunities that we have to take this company to the next level and deliver long-term value for our shareholders.
And with that, I'd like to open the floor to questions.
[Operator Instructions] Your first question is from the line of George Staphos with Bank of America.
Hi, everyone, good morning. Devin, congratulations and welcome to the call, thanks for taking my question and for all the details. First question I had is on Wood Products, and I recognize it's real hard, especially, in an environment like the current one and the one we've been in the last few months to put a finer point on significantly increased EBIT or EBITDA for this segment, and 1Q versus 4Q, but if you could give us some parameters on it, it would be great. If you can't, could you tell us what's already sort of baked in to the sequential improvement from things that are under your control or should be there from you know, lower log costs, any inefficiency that hits you from Grayling being out of the mix, those sorts of things as we think about 1Q versus 4Q?
Yes, George, and as you know it's really hard to quantify overall EBITDA at this point just because of the volatility that we've seen in pricing primarily on lumber and OSB. So hard to quantify there, but as we think about rolling into Q1, there are a few things that I think are really going to be tailwinds for us. So first of all, when you think about what happened in Q4 on the lumber side, you know, we saw lumber prices come down a lot faster than log prices. And so for the majority of the quarter, we were really working through higher cost inventory from logs that we purchased in Q3 and early Q4 and so it takes time for you to work those through the system.
So heading into Q1, we'll be operating off of a lower log cost. So that's one thing. Second thing is just around operating rates. You know, those did come down a bit in Q4 and so we would expect those to be better in Q1. We'll have the full Grayling for full Q1. So that will be a benefit as well. And so overall -- and we do think we have some good tailwinds just on those things that are within our control. Additionally, although it's hard to quantify on the pricing side as you're probably aware, we have seen a pickup in lumber prices here just over the last several weeks and so feel like we're getting some momentum on that front as well.
Okay. But on the things that are tailwinds, is there any way to size the effect of the inventory benefit from logs or the Grayling startup in terms of 1Q just to have some sort of building block, and if you can't that's fine but I figured I'd try one more time.
Yes, so I'd say in the log cost, that's probably $10 million to $15 million, and Grayling's about $4 million.
Okay. Thank you for that. Second question I had is, you know, there was some ticking down in EWP pricing, and you went through the reasons there. It's not like most of that was a mix in terms of industrial and solid section. We had heard in the trade that there was some private-label business that maybe shifted away from you. Was any of that in your mix or pricing effect, or is that -- if you buy the premise of that comment, was that sort of immaterial? And then my last question, I'll turn it over. In the South, there's a fair amount of storm wood, obviously from the third quarter storms, a lot of that is in Florida, does that have any kind of effect on when you expect Southern prices to lift or is it immaterial at this juncture? Thank you, and good luck on the quarter.
Yes, thanks George. So with respect to the EWP question, you have customers move around from time to time in the overall mix, that's not really material for Q4 for us. We have a strong customer base so not terribly impactful for us. With respect to the storm damaged wood, I think when you talk about the local geographies where you had some of the damage, there may be some downward pressure here over the spring time period as they salvage some that wood. Those are geographies that we don't have a significant amount of ownership in those areas, so I don't think it'll impact us terribly. But you will see some increase in volume coming into those local markets as they salvage that damaged wood.
Okay, thank you very much.
Your next question is from the line of Mark Wilde with BMO Capital Markets. Please go ahead.
Good morning, Devin, congratulations on taking over.
Thanks, Mark, morning.
Good morning. I wondered, just to start off, from your own distribution operations, what is your sense for kind of building products inventory in the channel right now?
Yes, when you look across the system, our view is that inventories are pretty light. You know, you'll have pockets where it might be a little over in certain geographies, but on balance, really across the system, we think that the inventory channels are lower than normal.
Okay. And then on the OpEx, you called out Timberland, you called out Wood Products, you didn't call out kind of real estate or the distribution business, I wondered if you can give us any color there?
Yes, Mark, so a couple of things, on the real estate business, really, we measure OpEx slightly differently there. And so for us OpEx in real estate is really about generating value over and above the timber value at the acre. And so our target is generally around 30%. In 2018, we delivered well in excess of that. So that's how we measure OpEx in the real estate business. And for distribution, We Put That in with Wood Products, so that's included in all commentary around Wood Products OpEx.
Okay. All right. And then, is it possible going forward, that we could maybe get a little more color on where the real estate land sales take place and sort of value that you achieve there? It just seems like it's an important piece of the puzzle, right now. And just in terms of helping us understand what's going on in the markets, I think a little more granularity would be helpful.
Hey, Mark, this is Russell. I think as you're well aware there's not a lot of real estate sales happening up in the north right now, and so those markets tend to be very quiet until things thawed out and we really get into the late spring and summer season. So as you noted in the third quarter we had a large transaction coming out of Montana, and that's usually when we see transactions coming out of those northern properties in that third and fourth quarter.
Coming into the first quarter, we're going to see more transactions out of the South, and then the west. And those markets are actually still -- you know, have been pretty active. They were really strong coming out of the fourth quarter, and we'll pick up some additional transactions in the first quarter.
Okay. All right, very good. I'll turn it over, thank you.
Thanks.
Your next question is from the line of Anthony Pettinari with Citi. Please go ahead.
Good morning, Anthony.
Good morning. Just following up on George's question about the sequential earnings improvement from 4Q to 1Q in Wood Products you know, understanding your OpEx performance in this segment was below expectations last year, is there any reason to think that that $40 million to $50 million in OpEx in Wood Products might be a little front-end loaded or is that just kind of redistributed throughout the course of the year. And then just switching gears a little bit, a lot of your public competitors were taking pretty significant market downtime in 4Q, just wondering if you could talk generally about operating rates in the quarter, and if you took sort of similar moves or slowbacks?
Yes, with respect to OpEx, I wouldn't say that that's going to be frontloaded to the first-half of the year. Really, we look at that 40 to 50 over the course of the full-year and are very optimistic that that's achievable, and we'll get that value.
With respect to downtime, you know, as you know our primary strategy in Wood Products is to have low-cost operations. And that positions us to run when it may not make sense for others. And if you think about Q4 in particular, when you see the lumber prices coming down much faster than log prices, that does create some noise while you're working through some of that higher cost inventory, but I think as we have got that log price down to a more normalized level coming out at Q4, I think, we're well-positioned. We did take a little bit of downtime primarily just for capital projects in Q4 and adjusted shift postures in a few locations around the holiday time. But generally speaking, we were running in Q4.
Okay, that's helpful. And then just on Timberlands, I was wondering if you could talk about what you're seeing in terms of transactions, both in terms of just kind of land available, demand, evaluations. It seemed like last year, we saw one kind of big transaction in the South it came in a little bit of a lower dollar per acre, maybe skewed kind of the average prices a little bit lower. Have you seen any kind of meaningful changes in terms of valuations of Southern Timberlands and again, availability and demand?
Yes, so, this is Russell. First, I'll talk about kind of the transactions, then I'll talk about the valuations. As far as the transactions, you know, 2018, we saw about $4.5 billion of transactions, and there were two large transactions, the southern transaction you talked about, that's Cato [ph] transaction, then we had the PotlatchDeltic deal. And so if you removed those we had about $2 billion of transactions kind of coming through the system. And that's probably kind of an average year anywhere from $2 billion to 3 billion, and then once in a while you get a larger transaction to skew that a little bit.
So the overall transaction flow is still pretty strong. As far as valuations are concerned, again, it's difficult to do a comparable analysis, unless you really understand kind of what are some of the constraints on the lands you know, fiber supply agreements can cause some constraints and then also stocking levels, location to markets, et cetera. And so, looking at the values, it really is important to understand what are those impediments to value relative to what we'd consider a prime plantation or a strong industrial Timberland value.
Okay. Very helpful, I'll turn it over.
Your next question comes from the line of Mark Connelly with Stephens. Please go ahead.
Thank you. Just two things, you mentioned that builders are making adjustments. The one thing that we didn't see a lot of in the last big housing downturn was big changes in square footage to affect price points. Do you see any indication that builders are doing any of that or changes that might affect the -- even the engineered lumber component in a house?
Yes, you know, I think it's a little earlier for us to have a definitive view on that, it's really just anecdotal. I think it's logical to assume that you may see some small reduction in square footage as people go after those lower affordability price points. But I think on balance from an overall wood usage perspective, it's much better to have more building to hit those affordability price points, so that you can get housing starts up to where the demand level sets.
Make sense. Okay, and just one more question we've all been sort of watching the sawmill capacity in the U.S. South. Do you see that getting pushed back now that things are a little more uncertain?
I really don't and when you look at the available wood baskets across North America, the South is really the low-cost wood basket and so I think as we continue to see some challenges up in BC around fiber supply, I think we're going to continue to see that capital get put into the U.S. South because that will continue to be the low-cost wood basket for the foreseeable future.
That's helpful. Thank you.
Your next question is from the line of Chip Dillon with Vertical Research. Please go ahead.
Yes. Good morning, and welcome to the call Devin.
Thanks. Good morning.
Yes. First question is, as you think about the, OpEx improvements beyond '19 and normalized capital spending. I know that as part of the culture change, you've seen the headquarters shift in the last five years, you've completed the transformation of getting the business where you want, and importantly, you all were doing quite a bit of work to get to zero, I guess breakeven at the bottom and a lot of that's already been done, so my question is, as we go out beyond '19. And we look at '20 and '21. I know it's early days. What are your thoughts about what you normally can get, is it 80 to 100 in an OpEx improvement, and does CapEx need to stay at that $400 million level to get there?
Yes, so let me have -- I'll answer the capital question first as we've said, our plan has been, we've been spinning $300 million a year, the last several years, we're dropping that down to $270 million this year in Wood Products, it'll probably be comfortable next year. And as we work our way down to a more normalized call it $250 million level, so that sort of what we think is kind of a long-term run rate for capital spend in the Wood Products business.
With respect to OpEx, we're certainly going to go after the 80 to 100 this year. It's a little early for me to try to quantify the exact amount beyond that but I am very confident that we'll get through 2019, we will get these OpEx numbers and there's still plenty to get as we continue to focus on cost and reliability throughout the system. So
I wouldn't want anyone to take the belief that after 2019, we're done with OpEx. It's really become cultural on the organization. So I would anticipate us continuing to drive OpEx improvement well into the future.
Okay, that's helpful. And you gave us some numbers before about how log inventory specific -- particularly in China, I think you said they felt 20% in the fourth quarter and are below normalized levels. Do you see any signs that they are coming back to market I know just about everything they buy, they just stopped buying it in October and they're certainly find that they're running out of things hoping one example where local market prices have moved up a little bit? I just didn't know if you'd seen any return to the market from China?
Yes, it's hard to say at this particular time of year just because as you head into the Lunar New Year, the demand dynamics change just a little bit in terms of takeaway. I'll tell you our expectation, just given what we hear on the ground is that, coming out of the Lunar New Year, we're going to see continued strong demand. And so, we would expect starting from the lower inventories, you're going to see a good demand pole as we get into the spring season.
Okay, that's helpful. Thank you.
Your next question is from the line of Collin Mings with Raymond James. Please go ahead.
Thanks. Good morning, Devin. Good morning Russell.
Good morning.
First question from me, just on the $500 million of debt maturing this year just can you update us on how you're thinking about the term and potential pricing as it relates to the refinancing?
Yes, as I mentioned, that matures in October, that's 738 debt, so it's a little higher coupon rate, I would say we're pleased with kind of where interest rates are at and we'll be looking at all kind of options as we take that and
go to the market to refinance that but I think we'll have a clearly a more favorable coupon rate than what we are retiring.
Okay. And then, just moving on to the guidance as far as the 1Q guidance for the Timberland, on a year-over-year basis, I mean, is the expected drop in adjusted EBITDA, just driven primarily by the decline in western market prices, or is there some other factors just when trying to compare that against the I think the 268 that you posted in 1Q '18?
Yes, it's primarily log prices.
Okay. And then, just sticking kind of with Timberland on that front, on the west coast, it sounds like on balance, you believe kind of log pricing in the region is bottoming, Is that fair? And then, just specifically related to the Japan market in the prepared remarks, you referenced just kind of the decline on pricing for those logs? Does that just reflect less favorable supply demand dynamics in the region overall, or is there something else in particular as it relates to the Japan market you're seeing?
Yes. So with respect to your first question, yes, I think that is fair, we've seen that bottom out, would expect to see some upward momentum as we get into the spring building season. With respect to Japan, that trades at some premium to domestic prices. And so, those two are correlated and, not necessarily always one-to-one, but there is a correlation. So when you see domestic pricing come down in the West, you'll typically see that the realizations for the Japan logs comedown as well. So it's really just more tied to the domestic market pricing than it is to demand in Japan.
Okay, very helpful. One last one here from me, just any update on insurance recoveries related to the Flak Jacket product issue?
Yes, this is Russell, we completed the remediation of that last year and we're very confident, we'll get recoveries under the insurance and we're working with our insurance carriers.
Okay. Thanks, guys. I'll turn it over.
Thanks.
Do we have another question?
Yes, sir. Next question comes from a line of Kurt Yinger with D.A. Davidson. Please go ahead.
Yes. Good morning, and thanks for taking my questions.
Good morning, Kurt.
I wanted to jump back to the Timberland's guidance. You know, obviously you have a tough comp there from a log pricing standpoint in the West. And it should be tough again in the second quarter. It looks like but I mean, how do those sort of dynamics play out on a full-year basis? Do you think just given the big year-on-year decline in the first quarter?
Yes, so again, it's hard to fully predict what log prices are going to do over the course of the year. What I would say is when you think about the Western System, it's a very tension wood basket. And so, as we see prices rising in the spring with lumber and we see the building season pickup, our expectation is that you're going to see log prices follow. And so, we would anticipate if we have another good year in U.S. housing, which we fully expect and you're going to see log pricing continue to trend up over the course of the year, but again, hard to quantify.
Okay. And then, my second question was, you reference some of the regional cost differences for sawmills, could you maybe talk a bit about your own margin differential for mills in the South versus, maybe the U.S. Western Canada?
Yes, so I don't know that we necessarily quantify that in specifics, but I can just tell you directionally, clearly with the South, the log costs are lower than they are in the Western Canada. And so, the margins in the Southern business are going to be better than they are in the Western in the Canadian lumber business.
All right, thanks.
Yes. Thank you.
Your next question is from the line of Mark Weintraub with Seaport Global. Please go ahead.
Thank you. One, I was just trying to flush out a little bit more. So it sounds like west coast log pricing is largely going to be a function you're thinking of what happens to U.S. housing or how important our developments in Asia do you think to what transpires to the West coast log pricing?
Yes, so obviously in the west, the export business is a much bigger portion of our overall sales than it is in the south. And so, it's really multiple things it's what happens with U.S. housing and how does that impact lumber but also the demand out of Japan and China and to a smaller extent Korea. So, all of those things go into the overall demand signal in the West. And it's, a as I said, a very tension wood basket. So when you get increased demand in any of those, it can pull pricing up across the system.
And if I understood correctly, Japan really hasn't been an issue on the demand side. China, it sounds there seems to have been -- what you believed there was that draw down of inventory. But I think you referenced that you thought that Chinese construction and infrastructure activity was still strong which I thought was interesting because there certainly been other commentary maybe not quite as bullish on that. So lot similar color there. But that sort of made it seem that it was the U.S. housing market that had been the biggest delta of life, but correct me if I am wrong.
Yes. So couple of things, so on the Japan side, the demand has been solid. We are still seeing solid demand from the Japanese market for a higher quality Japan logs. The pricing and that was the comment earlier -- the pricing came down just a little bit. But that was really more driven by there is a correlation to domestic pricing. In China, what I would say is that we are seeing solid construction activity and good demand pull.
When you think about over the last half of 2018, we did see a bit of a dip when the tariffs were originally put in place. That had largely normalized at least from a demand and volume perspective off of the West Coast for us as we got into the fourth quarter. And so, we are still expecting the overall volume to China to be comparable to prior quarters in that business at this tariff level still seems to be solid.
Okay, great. And then shifting gears, looking at your timberland operation, it's notable that the northern timberlands don't contribute a whole lot of EBITDA especially relative to if one were to look at comp valuations et cetera kind of the implied valuation of the business would have been. And so kind of the question is, is that a good fit for a publicly-traded timber REIT where it's not generating a whole lot of cash flow at least relevant to what would based on comp be potential valuations?
Yes. What I would say that is we are always looking for ways to optimize and improve our timberland portfolio. That's true really across all regions and all geographies. And so to the extent that we can find opportunities to improve the overall value of our timberland assets and drive better returns that's something that we are always looking at. And so that's work that has been going on, and work that will continue to go on into the future really just around -- trying to optimize and improve the overall timberland's portfolio.
Okay, thank you.
Thank you.
And today's final question will come from the line of Paul Quinn with RBC Capital Markets. Please go ahead.
Yes, thanks very much. Morning, Devin. Morning, Russell.
Good morning.
Good morning.
Hey, I was a little surprised over the drop in Wood Products EBITDA, especially on the lumbar side down $112 million especially given that you've got over 55% of your capacity in the U.S. South and prices there it didn't drop as much as other places. Maybe you can give us some color as what you saw on the West specifically with Doug fir and Whitewood? And then what are you seeing in the recovery because I have definitely seen in Canada, but it seems to be more muted elsewhere over the last couple of weeks?
Yes. I think if you look at the lumbar business, a helpful comp is Q4 2017 because we had overall similar volumes. And really when you look year-over-year, the vast majority of the drop in EBITDA is related to price. So remember for every $10 per MBS that's about a $11 million of EBITDA. And when you think about particularly in the West as you saw lumbar prices come down pretty quickly, log prices come down at a much slower rate. And so, what that creates is a bit of a noise in the system as the log prices catch up to lumbar prices and you have to chew through some of that higher cost inventory. And so, that's really a big driver of what you saw happened in Q4 2018. If you normalize and you kind of go back to that Q4 log cost of Q4 2017, the profitability would have been similar.
Okay, then we have seen a pick-up in lumbar prices, what's holding back OSB?
Yes, I mean as you know the lumbar market and the OSB from a supply-demand dynamic are just a little different. You'll see lumber come on a come off a little bit more quickly in response to demand signals. OSB is a little bit more lumpy. What we would expect is that over the course of the year, you're seeing some additional OSB capacity coming online and we believe that over the course of 2019 the demand will catch up to that, and will be more or less on balance, but probably come up a little bit more slowly than you're seeing lumber prices come up.
All right, that's all I have. Thanks a lot, guys.
All right, thank you.
All right. I believe that was the last question. So, thank you everyone for joining the call today, and thank you for your interest in Weyerhaeuser.
Ladies and gentlemen, thank you for joining the Weyerhaeuser fourth quarter 2018 earnings conference call. You may now disconnect.