WY
#Thank you, Beth, and welcome, everyone
This morning, Weyerhaeuser reported first quarter net earnings of $157 million or $0.21 per diluted share on net sales of $1.7 billion
Excluding after-tax special items of $10 million for merger-related cost, we earned $167 million or $0.22 per diluted share
This is over 2.5 times of earnings from continuing operations we reported in the fourth quarter and one year ago
Adjusted EBITDA totaled $454 million, an improvement of 14% compared with the fourth quarter and 35% compared with the first quarter of 2016. I am very pleased with our first quarter performance as we illustrated the power of leveraging internal improvements across improving markets
Our employees did an outstanding job of capitalizing on operational excellence initiatives, merger-related synergies and strengthening market conditions to achieve outstanding operating and financial results in the quarter, while also fully delivering on our increased $125 million merger cost synergy target
One year into our merger with Plum Creek, I'm proud of what our teams have accomplished and the dedication and focus they continue to display as we work together to be the world's premier timber, land and forest products company
Before turning to our business results, let me make a few brief comments regarding the housing market
Housing activity began 2017 on a very solid trajectory
Total housing starts averaged over $1.25 million for the first quarter, an improvement of 8% compared with last year despite some unusually wet West Coast weather
Single-family starts rose 9% in the month of March and are up 6% year-to-date
Leading market indicators are also favorable
Single-family permits are up 13% compared with first quarter of last year and builder confidence remains near record highs
Employment and wages are rising, consumer confidence has surpassed pre-recession levels, and interest rates, although increasing, remain historically low
Our customers are reporting robust demand with strong activity in California as winter weather has mitigated and signs that an increasing number of millennials are entering the home-buying market
Labor and lot availability remain the most active constraints, but builders are motivated to manage through these challenges and capture the benefit of favorable market conditions
The spring selling season appears to be off to a robust start and we continue to expect between $1.25 million and $1.3 million total housing starts for 2017. Let me now turn to our business segments
I will begin the discussion with Timberlands, charts 3 to 5. Timberlands contributed $148 million to first quarter earnings, $25 million more than the fourth quarter
Adjusted EBITDA rose to $242 million
Western Timberlands delivered $133 million of first quarter EBITDA, an improvement of over 30% compared with the fourth quarter and 13% more than a year ago
The market for Western domestic logs was stronger than expected during the quarter as the combination of solid building activity and low mill inventories drove demand, while unusually wet and snowy winter weather reduced the available log supply
Our Western team did an exceptional job of taking full advantage of our scale and operability, flexing harvest settings to some lower elevation tracks and leveraging our strong road system as they directed additional volume into the most tensioned domestic markets
Domestic log sales volumes and realizations increased compared with the fourth quarter and unit logging and road costs decreased due to lower logging elevations, continued operational excellence improvements and deferrals from silviculture, and road maintenance activities due to wet weather
Turning now to our export markets, in Japan, housing activity remained solid with year-to-date start-up of approximately 5% through February and demand for our logs has remained steady
Although Japanese construction activity typically moderates in the first quarter due to winter weather, log sales volumes were up slightly and average realizations increased compared with the fourth quarter
In China, log sales volumes declined compared with fourth quarter due to timing of shipment and our intentional decision to flex volume into this strong domestic market
Average log realizations improved and market conditions remained favorable
Log inventories at Chinese ports remain within a normalized range, having risen early in the first quarter before declining in March as construction activity resumed following the Lunar New Year holiday
Moving to the South, Southern Timberlands contributed $96 million to first quarter EBITDA, lower than the fourth quarter due to seasonally lower harvest volumes and slightly lower average realizations
Southern markets remain flat as log availability was plentiful due to favorable weather and mills are holding adequate inventory
Fee harvest volumes declined seasonally compared with the fourth quarter and average log realizations were slightly lower due to a higher proportion of pulpwood sales
Although pulpwood log realizations weakened during the quarter as seasonal maintenance and other mill shutdowns reduced demand, realizations for our delivered saw logs were comparable
Northern Timberlands contributed $8 million to EBITDA, an improvement of $1 million compared with fourth quarter as the region benefited from OpEx initiatives to reduce contract logging costs
Fee harvest declined seasonally and average realizations were comparable
The Timberlands business made good progress on its operational excellence and synergy initiatives in the first quarter
Regional teams continue to identify and roll out best practices for optimizing spending and value creation for our silviculture activities and improving wood flows to further reduce cost and maximize the realization we capture from every log
The business is on track to achieve its $40 million to $50 million OpEx target for 2017. The strategic review of our Uruguay operations continues to proceed well with strong interest from multiple parties
We look forward to providing further information when the review is complete
Real Estate, Energy & Natural Resources, charts 6 and 7. Real Estate and E&R contributed $26 million to first quarter earnings and $43 million to adjusted EBITDA
Adjusted EBITDA declined by $47 million compared with the fourth quarter but improved $9 million compared with the first quarter of last year
Fourth quarter is typically our seasonally strongest quarter, while first quarter typically reflects the lowest level of transaction activity
Earnings were comparable to fourth quarter earnings before special items as first quarter had a lower average land basis on the mix of property sold
Average price per acre improved by $500 due to mix
Approximately three-fourth of our first quarter acreage sales were located in the U.S
South with the remainder predominantly in the Pacific Northwest
In contrast, fourth quarter included a large transaction in Montana where timberland prices are regionally lower
Our team continues to make excellent progress applying the asset value optimization process to our Western Timberland and I remain very confident we will meet our target of completing this work by mid-year
Wood Products, charts 8 and 9. Wood Products contributed $172 million to first quarter earnings, an increase of nearly 75% compared with the fourth quarter
Adjusted EBITDA improved $75 million to $207 million
EBITDA for lumber totaled $99 million, $42 million more than the fourth quarter, primarily due to a 5% increase in average realizations
Lumber sales volumes increased 6%
Operating rates and manufacturing costs improved due to strong operating performance and reduced downtime for maintenance and capital projects, although several Western mills did lose small amounts of production due to weather
EBITDA for OSB totaled $66 million, $20 million more than the fourth quarter and more than double the first quarter of 2016. Average sales realizations increased 3% and sales volumes increased 21%
All of our OSB mills ran extremely well in the quarter and unit manufacturing costs declined due to higher operating rate and strong OpEx progress on controllable manufacturing cost
Engineered wood products contributed $37 million to EBITDA, an improvement of $11 million compared with the fourth quarter
Sales volumes for solid section increased 11% and I-joist volumes were up slightly
Operating rates rose seasonally and unit manufacturing costs improved due to less planned maintenance and holiday downtime
Average realizations for solid section and I-joist declined slightly due to mix as first quarter typically includes a greater proportion of commodity and industrial products
Distribution EBITDA totaled $8 million, an increase of $3 million compared with the fourth quarter and double the EBITDA of one year ago
This business continues to make progress by improving product margins and tightly managing warehouse, delivery, and selling costs across increased sales volumes
Each of the Wood Products' businesses made good progress on their respective OpEx initiatives during the quarter with OSB and distribution demonstrating particularly strong results
We continue to expect collective OpEx benefits of $55 million to $75 million from this segment in 2017. I will wrap up the Wood Products discussion with a few comments on the Softwood Lumber Agreement
On April 24, the Department of Commerce announced preliminary countervailing duties on Canadian lumber producers
For most producers, the duty will be approximately 20%
These duties will become effective upon publication in the Federal Register
For some producers, the duties will also be imposed retroactively effective 90 days prior to publication
The Department of Commerce continues to evaluate the coalition's petition for antidumping duties, which would be additive to the countervailing duties announced earlier this week
We expect a preliminary decision on the antidumping duties to be reached on June 23. We appreciate the action the U.S
government has taken to address the unfair trade practices that are harming U.S
lumber producers
The government will continue its investigation throughout of 2017 as the Department of Commerce and International Trade Commission collect and evaluate additional information in support of final determinations on both the duties and material injury to U.S
producers
These determinations are expected in early November and late December, respectively
We continue to prefer the certainty of a negotiated agreement
Formal discussions remain on hold, pending confirmation of the U.S
Trade representative
In the meantime, the coalition is working closely with both the Office of the USTR and the Department of Commerce
We look forward to resuming formal negotiations and are hopeful we will be able to reach a quota-based agreement
I will close this morning with a couple of comments on merger cost synergies and other cost reductions
As I mentioned earlier, we are very pleased to achieve our merger cost synergies ahead of schedule and at levels that exceeded our initial expectations
We captured our original $100 million run rate target at the end of 2016, several months earlier than anticipated, and have now exceeded that by 25%, fully delivering on increase of $125 million run rate target by year one deadline
Approximately 80% of these costs have been achieved through reductions in controllable SG&A, while the remainder have come from cost of sales
We remain on track to eliminate the $35 million of cost formerly allocated to our sale of Fibers business no later than 2017 year-end
I will now turn it over to <UNK> to discuss some financial items and our second quarter outlook
Thank you, <UNK>
I noted at the beginning of today's call that internal improvements and strengthening market conditions can create a powerful combination
Our first quarter results demonstrate this
And with a solid improving housing trajectory, favorable dynamics across our Wood Products businesses and continued leverage from operational excellence and merger synergies, we are well-positioned to deliver continued strong results
Although markets are improving, we will not lose focus on the factors under our control
We remain committed to fully capturing the benefits of our merger with Plum Creek, achieving industry-leading performance and demonstrating disciplined capital allocation to drive superior value for our shareholders
And now, I'd like to open the floor for questions
Question-and-Answer Session
Good morning, <UNK>
So, <UNK>, as we have consistently talked about, we are focused on investing capital to drive down our cost in our overall Wood Products operation
For last year, this year and for probably the next couple of years, we will be investing at approximately $300 million level in our Wood Products operation overall
We would not anticipate investing more than that during the timeframe
And, in fact, after investing at the $300 million level for the next couple of years, we would anticipate going back down to what I would call a more normalized level of between $200 million and $250 million
We are very encouraged by the initial returns on the capital that we have spent
And that part of the capital in our lumber operations – specifically again the focus is to drive down cost to low risk, high-return project
But we also will be increasing capacity modestly as we rebuild a mill in Dierks and that will be coming on later this year and also a mill in Millport
So, net-net that will add about another 300 million board feet of capacity but again, the focus is on driving down our cost
We agree with you, <UNK>
We think it would be helpful from that perspective and we're doing a lot of work on identifying and promoting export activity out of the South
We've had some initial successes still at a very small level but spending a lot of time talking to potential customers and starting to develop those markets and frankly are pretty optimistic about it
It's still early, still small volumes but we think there's a real opportunity to expand Southern export markets as we move forward
So, in terms of operating rates, <UNK>, in the quarter, lumber was in the low-90s
As we mentioned, our OSB operation ran very well
It was in the high-90s and ELP was in the mid-80s
You're always looking for opportunities to increase reliability and, therefore, increase production
Our mills are running well
There's always, what I call, creep in terms of being able to increase production but there's not big steps other than what we've already talked about in response to <UNK>'s question of what we're doing on the lumber side to increase significantly incremental capacity
So, what we're focused on is running reliably and at the lowest cost as possible
Other than creep, I would agree with you
We are almost maxed out in OSB and don't believe we necessarily grew share
We've been running at pretty high levels in OSB other than taking some maintenance downtime and those type of things
So, we just ran extremely well in OSB in the quarter and demand for the product was very good despite the fact that the first quarter is normally a slower seasonal period
What I would tell you is that we were encouraged by the process so far in the West
As you also said, we'll be talking more about that when we wrap it up
With that said, as we very consistently have said, we're looking for a premium of 30%
And I would anticipate that we will achieve that premium or more in the West just as we have in the South
<UNK>, really good question, and glad to be able to clarify
You're right
A big part of the pickup in first quarter versus fourth quarter was due to the fact that Sutton was running for the full quarter
My comments were more due the fact that in OSB in the first quarter we ran in the high-90s, as I indicated, but quarter-to-quarter you're exactly right
Again, thanks for clarifying
That was a specific comment regarding Wood Products and that range is due to the fact that we don't know exactly what prices are going to do from this point forward
If prices stayed where they are today or moved up, it would be at higher end of the – towards the 30%
If they rolled or turned down from this point, it would be closer to the 20%
So that's the reason for the range
With that said, <UNK>, that comment was very specific to Wood Products
You're right, <UNK>
We don't know exactly, but I would be – I am hopeful that we could be in a situation where we could enter into a negotiated agreement – a quota-based agreement sometime this year
Well, those duties go to the U.S
Treasury and are held by the U.S
Not necessarily
That was a negotiated agreement, as you will recall, after many months back and forth
Some of it went back to U.S
Some of it went back to the Canadian producers
So, that was part of the negotiations
So, I don't think – we'll just have to see how this plays out as we move forward
Good morning, <UNK>
So, as I said in the comments, <UNK>, we were very pleased with our ability to leverage our scale operability, get roads during the quarter to capitalize on the tight markets
What I would tell you as we moved into the second quarter we continue to be encouraged by what we see in the West, continued strong demand
To your point, the mill inventories remained thin, especially in Oregon
They're better than they were at some points in the first quarter
But mill inventories continue to be thin
And I would tell you overall, as <UNK> indicated, we anticipate prices in the West to be up slightly in the second quarter
So, weather has improved
We are able to move up into the higher elevation in the second quarter
But we're very pleased with our ability to capitalize on what happened during the first quarter
<UNK>, as you know, it's hard to determine how much, if any, impact the overhang from the waiting for the quarters to come out had on pricing
What I will tell you is I think key drivers to the pricing improvement were the fact that inventories were very lean going into the first quarter and demand was better than expected
I think all you have to do is look at OSB which didn't have the whole tariff situation and those prices ran as well
So, I'm not going to tell you that the SLA didn't have an impact on pricing in the first quarter because I'm sure that it did
But I think it was more – had more to do with the volatility in pricing that we saw
I think underplaying supply and demand was the biggest driver of the improvement in lumber pricing that we've seen year-to-date
I think there was a lot of speculation as you very well know, <UNK>, on what those rates would be
What I will tell you is they came in about where we expected that it would
And I think now we'll wait and see what happens in the antidumping and what the overall number is as we move forward
So, what I would tell you is we continue to be encouraged by what we see in the West overall, including the key export markets which, of course, for us are Japan and China
In terms of Japan, Japan housing market remains solid
2017 total starts are up almost 5% year-over-year through February
Demand and pricing per logs, as we said, was solid in the first quarter and we anticipate that's going to continue into the second quarter
In terms of China, inventories there are in good shape which as you know is a real key
And in March, it's roughly 3.8 million cubic meters
We anticipate that inventories are going to remain at reasonable levels through 2017. And in the second quarter, we anticipate volumes are going to rise and we'll have log prices that are comparable to the first quarter levels
And we anticipate as we move through the balance of the year continued strong demand and pricing to be up slightly for the remainder of the year in China
I do not see any big moves in terms of competitors kind of maxed out in terms of the infrastructure challenges that we have
So, we did see an increase in U.S
exports to China so far in the first quarter of 2017 and that number is up pretty significantly versus first quarter of 2016.
Good morning, <UNK>
So, what I would tell you is, at this point, <UNK>, we don't expect any – let me start about what we've seen in saw log pricing
So, if you go back and look at the last four quarters in terms of just saw log pricing, it's been very flat
You've seen some pressure on pulpwood pricing, but saw log prices has been very flat over the past four quarters
As we look into the second quarter, we don't expect any significant improvement in saw log pricing
We do continue to believe there is some potential for, maybe, some minor pricing traction in late 2017 as demand continues to grow and the Canadian (38:04) markets decline, whether it's due to duties or, hopefully, as I mentioned, earlier in negotiated agreement
Now, longer-term, as we've talked about, we're very optimistic that due to the additional housing demands, the incremental capacity that's coming online in the U.S
South and right now that's at least 12 million tons of additional demand that's in the process of coming on line and then again less lumber from Canada
We think all of those things are going to add up to provide us with the opportunity for much better pricing on Southern saw logs as we move into 2018 and beyond
Yeah
So, we're optimistic about OSB pricing for the year of 2017. We talked about that it was up nicely in the first quarter
But as you look at where it is in the second quarter, current prices are up probably 10% versus the first quarter average
And we think based again on the strong housing demand that we've seen and the current supply, that OSB pricing should be good for the year 2017. As we move into 2018, as you highlighted, there will be some incremental capacity that comes online
But we're going to frankly need some of that as housing continues to grow
And the other observation I would make is it takes a while for a new capacity to get up and be fully running
So, we'll see how that plays out, but we're hopeful that supply and demand continue to be in good shape as we move forward
So, what I would tell you is in Timberlands, as we talked about, we're right on track for the $40 million to $50 million
So, I would say in the quarter, we got about what you would expect if you just do it on a quarterly basis
In terms of our Wood Products operation, <UNK>, as we said, we had particularly good quarters from a OpEx perspective in OSB and distribution
So, I would tell you at least for – and it's just one quarter out of four but through the first quarter we're ahead of schedule in both of those businesses and I would stay right in line with our other two businesses which are lumber and EWP
Thank you
No
Steve, not surprisingly, we don't have any comment on negotiations that go on between the U.S
and the Canadian governments
Well, clearly, the two countries need one another
And, as I said, we are very hopeful of a negotiated agreement between the U.S
and Canada as we move forward
So, what I would say – I'm sorry
There are in fact initiatives to raise prices and we have announced a 7% to 10% price increase and are encouraged by the progress we're making on that
Of that 7% to 10%, we should realize that by the end of the third quarter with maybe 25%, 30% of that in the second quarter and most of the balance of that to be realized in the third quarter
To your first comment, the reason prices were down slightly was primarily due to mix and the fact that the first quarter typically includes a greater mix of commodity and industrial products, which carry a lower price
So, just as you indicated, positive lumber pricing good for EWP and we anticipate EWP prices moving up for the balance of the year
Thank you
No, <UNK>, we haven't seen that at all
What I would tell you is demand for high-quality, well-managed timberland remains very strong
As investors continue to view timberland as an attractive part of their portfolio, timberland valuations remain steady
We're participants to all the major deals that come to market and have not observed any changes in the valuation trends overall
As you very well know, there was a big transaction that happened this quarter by one of our competitors
That was at a nice level in terms of value per acre
So, we continue to see strong interest from a diverse group of investors in every deal that comes along, again, for high quality, well-managed timberland
<UNK>, that is ongoing – or those will be ongoing discussions between the Canadian and U.S
And, again, hopefully, we can reach a agreement that works for all involved by the end of this year
Thank you
So, what we've said is currently our priorities number one, two and three are making sure we successfully merge Plum Creek and get to the bottom-line all the benefits from that merger
And as we indicated earlier, we made a lot of progress, but still have more to do
So, that is our primary focus
As we move forward, we will look for opportunities to grow our company
We think our biggest opportunities will probably be in Timberlands
With that said, if we can find appropriate acquisitions in Wood Products, especially if it's close to our timber base, those are opportunities we would look at from a bolt-on perspective
And we'll continue to identify opportunities for that as we move forward
I'm not sure I understood your question
Say that again?
Well, we would factor in everything in terms of potential bolt-on acquisitions
It would probably be more attractive if it was close to our Timberland
But would we' necessary rule it out if it wasn't near our Timberland? Probably not
But, again, our Timberland base most sawmills, for example, would be more than likely aligned with our Timberland base
Thank you
Good morning
Yeah
So, there clearly is a lag and especially in strong markets like we had in the first quarter
With extended order files the lag tends to be maybe, if anything, a little longer than normal
But what I would tell you as we've moved into the second quarter, prices have continued to improve
As I indicated earlier, current prices for OSB more than 10% – ARC (50:19) realizations are up more than 10% versus the first quarter average
And we've also seen a nice improvement in lumber prices with quarter to-date lumber prices up roughly $30 versus the first quarter average
So, you're exactly right
There is a lag, but it is ultimately realized and the lag is a little longer when you're at the situation where you have extended order files, which is a good thing
I think that may have been a small factor
I think it was more driven by what we've seen on the housing front, <UNK>, but I can't tell you there wasn't any pre-buying
But as we move through the second and third quarters I indicated earlier, we will fully capture the 7% to 10% price increase that's being put in place
Sure
So, as we've consistently said, we are committed to a growing and sustainable dividend
With 90% of our assets in Timberlands and a significantly improved cost structure for Wood Products
Our go-forward cash flow will be much more stable than it's been historically
We continue to work with our board on the appropriate payout ratio and the timing for increasing the dividend going forward
And as you would expect the board factors in many things when considering the appropriate dividend level, including the pace of improvement in housing, Southern saw logs and Wood Products as well as the benefits from our internal initiatives for operational excellence and operational synergies
So, that's how we're currently thinking about it
We have no specific cadence in terms of our dividend review
As I understand, that was our final question
And I just like to close by thanking everybody for joining us this morning
And, as always, thank you for your interest in Weyerhaeuser
