WY
#Thank you <UNK> and welcome everyone
2016 was a transformational year for Weyerhaeuser
Through our merger with Plum Creek and a $2.5 billion divestiture of our Cellulose Fibers business we became a focused timberland and forest products company and nearly doubled the size of our timberland holdings
In the midst of executing these portfolio changes, we maintained our relentless focus on performance
In 2016, we increased full-year EBITDA by almost 55% to nearly $1.6 billion
We delivered the highest annual wood products earnings in over a decade
We captured merger cost synergies faster than expected and raised our 12 month run rate target by 25% and we achieved over $100 million in operational excellence improvements
Finally, we returned $2 billion of cash to shareholders through the repurchase of common shares
For the full-year 2016, Weyerhaeuser reported net earnings of just over $1 billion or $1.39 per diluted share or net sales of $6.4 billion
These results include the solid fourth quarter performance I will highlight this morning
Our fourth quarter net earnings were $551 million or $0.73 per diluted share on net sales of $1.6 billion
This includes after tax earnings of $489 million from discontinued operations, primarily the gain on divestiture of our pulp mills and after-tax special charges of $44 million for a tax adjustment associated with repatriation of Canadian earnings following our Cellulose Fibers divestiture, merger related expenses, and some non-cash real estate impairments
Excluding these items, we earned $106 million or $0.14 per diluted share
Adjusted EBITDA for the fourth quarter totaled $400 million
This is an improvement of over 60% compared with a year ago and represents substantial increases in each of our operating businesses
Before discussing our business results in more detail, I will make a few comments on the housing market
Single family housing activity continued a steady improvement in the fourth quarter
Single family starts rose 10% compared with the third quarter and ended up the year up 9% compared with 2015. Total U.S
housing starts finished the year at nearly 1.17 million, a 5% improvement from 2015. As expected, the single family share of activity increased during the year and multi-family activity remained volatile
For 2017, we expect single family housing starts to increase by over 10% and we anticipate total housing starts of approximately 1.25 million to 1.3 million
Economic fundamentals support a trajectory of continued steady housing growth
Employment and wages are rising
Consumer confidence is strong, mortgage rates remain historically favorable, and public surveys indicate that builder confidence remained near historic highs
Although builders are managing through some constraints such as availability of skilled labor, stringent permitting requirements, and land and construction cost inflation, our customers echo the optimism seen in builder surveys and feel confident that housing market will maintain solid upward momentum
Let me now turn to our business segments
I will begin the discussion with timberlands
Chart 4 to 6, timberlands contributed 123 million to fourth quarter earnings, 1 million more than the third quarter and 223 million to adjusted EBITDA
Western timberlands contributed $101 million to fourth quarter EBITDA compared with 109 million in the third quarter
Export log volumes declined due to seasonally slower construction activity and timing of shipments
Average realizations, however, improved moderately across all export markets as market dynamics remained favorable
In Japan, housing activity remained solid with wooden housing start up 8% for the full year
Japanese lumber inventories which were elevated for much of 2016 after a delay in the consumption tax increase continued to decline to the seasonally slower construction period and are now at more normal levels
This created favorable supply demand dynamics and supported improved pricing in the quarter
Pricing for our Chinese export logs improved also
Fourth quarter log inventory to Chinese ports were largely flat with third quarter levels and we experienced continued strong takeaway throughout the quarter
In the Western domestic market, sales volumes were lower as mills took holiday downtime but average realizations improved slightly
Low mill inventories drove demand particularly in Southern Oregon market
Our Western crews did a good job adjusting harvest plans to adapt to record October rainfall
Our fourth quarter harvest lines were unaffected by weather and we had no infrastructure damage
However, per unit logging cost and road spending increased compared with the third quarter due to the wetter weather
Moving to the South, Southern timberlands contributed 112 million to fourth quarter EBITDA, up 4 million compared with the third quarter
Southern markets remained flat as mills had adequate inventory, and average log realizations were largely comparable to the third quarter
The harvest volumes increased modestly as fourth quarter typically included a higher volume of stumpage sales
As in the West, our crew successfully flexed target settings to adjust to November severe weather and we had no material damage to our timberland
Silviculture expenses declined as fourth quarter typically includes fewer site preparation and hardwood management activities
EBITDA for Northern timberlands totaled $7 million
This was unchanged from the third quarter on comparable prices and volumes
The strategic review of our Uruguay operations is proceeding well
We continue to see strong interest and look forward to providing further information when the review is complete
Real estate, energy, and natural resources, chart 7 and 8. Real estate and ENR contributed $13 million to fourth quarter earnings
Excluding special items, the segment earned $27 million, $12 million more than the third quarter
EBITDA increased nearly two thirds ---+ let me start over, EBITDA increased nearly two and a half times to $90 million
Our average price per acre declined due to mix as fourth quarter included a large transaction in Montana where timberland prices are regionally lower
For the full-year 2016, we sold approximately 83,000 acres or roughly 0.6% of our land base
Fourth quarter special items included $14 million of non-cash impairments
These resulted from a change in strategy for several small legacy real estate projects that were formerly targeted for development
The asset value optimization work continues to proceed well
As we indicated during our December Investor Day, we have finished applying the AVO process across our Southern ownership and are in the process of listings in the 500,000 newly identified acres
Our focus has now turned to the West where we are evaluating our Washington and Oregon acres
This work is going very well and remains on track for completion by mid-year 2017. Wood products, charts 9 and 10. Wood products contributed $99 million to fourth quarter earnings
The business delivered full-year 2016 earnings of $512 million, the strongest annual earnings since 2005. Fourth quarter adjusted EBITDA totaled $132 million, $71 million lower than the third quarter primarily due to seasonally lower sales volumes and operating rates
Lumber contributed $57 million to EBITDA, $28 million lower than the third quarter
Sales volumes declined 12%, average lumber realizations decreased 2%, and Western log costs increased
Operating rates were lower and unit manufacturing cost increased due to planned downtime for installation of capital projects at several of our Southern mills
Heavy rains and regional flooding resulted in modest weather related downtime in some of our Western and Southern locations and higher manufacturing costs for our Canadian mills
EBITDA for OSB totaled $46 million, $17 million lower than the third quarter
Sales volumes declined 18% and average sales realizations were comparable to the third quarter
Operating rates declined due to downtime for planned maintenance as well as repairs to our Sutton, West Virginia mill
As we previously disclosed, the Sutton mill experienced a fire on November 1st
This was an insured event
Repair activities progressed rapidly and successfully and the mill resumed full production around year-end
The net fourth quarter financial impact of this fire on OSB business was approximately $5 million, the amount of our deductible as we brought the mill up and received insurance reimbursements faster than expected
We anticipate no net financial impact from this event in the first quarter as modest repair expenses should be offset by reimbursements received within the quarter
Engineered Wood Products contributed $26 million to EBITDA, $17 million lower than the third quarter
Sales volumes for Solid Section and I-Joists declined approximately 10% and operating rates were lower due to planned maintenance and holiday downtime
Average realizations increased modestly
EBITDA for distribution totaled $5 million, slightly lower than the third quarter
By focusing on improving product margins and tightly managing cost, the business performed well in what is typically a seasonally challenging quarter
I will now turn to discontinued operations chart 12. We closed the sale of our pulp mills and printing papers business on December 1st and November 1st respectively
This completed the divestiture of our Cellulose Fibers segment
Net after tax earnings from discontinued operations of 489 million are primarily comprised of the gain on these two divestitures
Chart 13 operational excellence, as I mentioned in my opening remarks I'm proud that each of our businesses maintained its relentless focus on improving relative performance and delivered strong 2016 operating results throughout the merger integration process
Each of our business has met or exceeded its 2016 operational excellence target
Timberland has delivered 42 million of operational excellence improvements primarily from merger related operational synergies
In Wood Products OPEX improvements included $16 million in lumber, $21 million in OSB, $12 million in Engineered Wood Products, and $15 million of EBITDA improvement for distribution
The benefits of these improvements are clearly visible on our bottom line
In total wood product EBITDA improved by almost $270 million in 2016 compared with 2015. A $41 per thousand square feet year-over-year improvement in our OSB realizations created a tailwind of $120 million and an $11 per thousand feet improvement in our lumber realizations provided a tailwind of approximately $50 million
The remaining $100 million improvement was largely attributable to nearly 65 million of wood products OPEX and the addition of the Plum Creek wood products mills
For 2017 we are targeting additional operational excellence improvements of $95 million to $125 million across our businesses
This includes $40 million to $50 million in timberlands, [Indiscernible], $20 million to $25 million in OSB, $10 million to $15 million in Engineered Wood Products, and $5 million to $10 million in distribution
I will now touch briefly on our merger cost synergies
We have been achieving our targeted cost synergies faster than anticipated
And as we mentioned in December the scope of opportunity has exceeded our initial expectations
We raised our cost synergy target by 25% to $125 million and remain highly confident we will achieve this full amount on a run rate basis by the end of first quarter 2017. We also 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'll close this morning with a few comments on the softwood lumber agreement
Although discussions between U.S
and Canadian negotiators continued through the end of 2016 we have been unsuccessful in reaching an agreement
With the change in administration, negotiations are currently on hold while U.S
trade representative and Department of Commerce appointees are confirmed and take office
In the meantime the U.S
International Trade Commission and Department of Commerce have continued to evaluate the petition for countervailing and anti dumping duties filed by the U.S
Coalition at the end of November
On January 6th the ITC unanimously determined that there is a reasonable indication that the U.S
has been materially injured by imports of softwood lumber products from Canada
Department of Commerce is currently conducting an investigation that will result in a determination regarding preliminary duties
We expect the announcement regarding preliminary countervailing duties in late April with an anti dumping determination following in late June
Our preference remains for a negotiated agreement
coalition continues to work closely with the Office of the U.S
Trade Representative and we look forward to resuming negotiations
I will now turn it over to <UNK> to discuss some financial items and our first quarter outlook
Thank you <UNK>
I am proud of our 2016 achievements
We have transformed our portfolio, delivered strong operating performance, and taken substantial strides towards a successful and value creating merger integration
And in 2017 I'm very optimistic about the opportunities in front of us
We remain strongly committed to driving industry leading performance, capturing merger synergies, fully capitalizing on improving markets, 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 let me start with your second question regarding the anti-dumping duties and we are not taking any steps to rebalance, <UNK>
As we've talked about previously, if you look at our Canadian operation, about a third of our Canadian operation is sold ---+ of our production is sold in Canada, a third is sold in export markets outside the United States, and a third comes into the U.S
Overall, our Canadian lumber operations is roughly 20% of our overall lumber operations, so you take that 20% times a third it's not a big part of the driver for our lumber operation
In terms of CAPEX <UNK>, the $300 million is in line with what we've done over the last couple of years, and our primary focus in our CAPEX in our Wood Products operation is low risk, high return projects that drive down our overall cost structure and that's been a key part of accomplishing our OPEX
With that said, some of those projects do in fact result in debottlenecking and additional capacity, and as we've also stated we are in the process of rebuilding two of our mills Dirk's and Millport, which have been really good mills for us historically
But, in order to significantly dive down the cost structure of those mills, we essentially needed to rebuild them in place and that will result in some additional capacity as well
But again, the primary focus is on the cost side where we will be increasing capacity as a result of some of the projects that we've put in place
<UNK>, in terms of operating rates, we are optimistic about demand as we move into 2017 for all of our products
So I would tell you there will be some seasonality as there always is, but I would anticipate lumber operating in the low to mid 90's, OSB operating in the low to mid 90's, ELP normally operates about 10% lower than that, so I would anticipate that being in mid 80's type range
But as I said, we are encouraged by what we're seeing in terms of demand
And as we talk to our customers, they are bullish on housing and increasing demand for all of our products in 2017. In terms of the coordination between engineered wood and distribution, that's something that’s here where we also have done a lot of work on
And I would tell you those two operations are working more closely together than they ever have historically
And that's been very beneficial in driving improvements in both our EWP and our distribution business and I think there will continue to be further opportunities for that coordination as we move forward
In terms of G&A I would tell you that the slight increase in fourth quarter versus third quarter is just timing
We are if you look at where these companies were before we combine them in 2015 versus where we're going up in 2017, we're highly confident that we're going to meet or exceed our $125 million target by the end of the first quarter of 2017. And as I said earlier we are at a basically $100 million run rate through the fourth quarter of 2016. So in really good shape on our G&A and as I mentioned earlier the $125 million is 25% higher than what we originally factored in when we announced the merger
In terms of the engineered wood products and distribution coordination and quantifying that <UNK>, as you would expect that is difficult to quantify but that is part of the OPEX improvements that we've highlighted in 2017. And there maybe some upside as these two operations continue to work closer together and figure out a way to drive value for customers and improve bottom line profitability
You know <UNK> it's hard to tell yet
I mean we're only into the ---+ through the month of January and as you know the look back will be roughly 90 days
So, hard to determine yet if there's been a significant change in the Canadian activity
As you know Canadian activity was up significantly in 2016 and we'll be watching how that plays in 2017. A lot of rumors floating around as to what may or may not happen but too early to tell what changes if any the Canadians maybe taking as we move into 2017 in the potential look back period
Well <UNK> what I would tell you is as we continue to learn more about our real estate operation and what the opportunity is there, we continue to be encouraged by the AVO process and what that is unveiling
So we are confident that, that number will be over $250 million for 2017.
So <UNK> we continue to be encouraged about what we see in the export markets
Let's start with Japan as you know that's our biggest market
So as we said earlier prices were up in fact in the fourth quarter which was encouraging
Volumes were down but that was due to seasonality and frankly some of the timing of our shipments and how the ships played out that were going to Japan
In the first quarter in line with your point we do anticipate volumes will be up
And our best guess right now is flat pricing but we continue to be encouraged by what we see out of Japan
Housing market activity was up 8% roughly through the month of November which is the last data point that we have
As we look to China encouraging there as well
As you know log inventories continued to be at normal levels, pricing was in fact up in the fourth quarter
Volume again was down seasonally and as we move into the first quarter continuing to anticipate good demand out of China and we anticipate volumes up in the first quarter versus the fourth quarter
Yes, I would say customer log inventories in the West are kind of towards the low end of normal as we as we move into the year
And I would say in the South they are kind of at normalized levels in terms of where you would have seen log inventories historically
You know our take is the first and second quarter we would anticipate pricing to be essentially flat
We do think there's the possibility of slight improvements in pricing as we move to the second half of the year and then as we look further out than that we continue to be quite optimistic about the improvement in Southern log prices
As housing continues to improve that will drive demand
As you also know there are significant projects that are being built and will be coming online in 2017 and 2018 type timeframe that we think that's going to drive 12 million to 13 million green tons of additional demand
And then of course a big component of this will be what happens with Canada and we think either as a result of hopefully a negotiated agreement which will result in a quota or the duties that that will have an impact on the amount of lumber that is coming in from Canada which will result in more demand on Southern saw logs
So all those factors we are encouraged by what we see there and like I said are hopeful that we'll see some slight improvement in the second half of this year but more importantly as we move into 2018 and beyond
We think we're going to see some pricing power as a result
Thank you
But a lot of these changes to the markets we're doing a lot of work on it but it's still too early to know exactly how these will play out under this administration
But a lot of moving parts that could have frankly potential benefits for our company going forward
At this point that is generally fair
More work to be done and more specifics to be learned but I think to your point if anything it should be a net positive for our company and the U.S
Thank you
Good morning <UNK>
And so it's good question, <UNK>
So, what we ---+ when we started this process as you were recalling as you highlighted two or three years ago, a lot of the improvements were non-capital improvements because our take was show ---+ these mills needed to show that they could make operational excellence improvements without capital
And then if they could do that then they earned the right to capital to further drive down the cost structure
So we initially said okay let's do this without capital
Once you show that and you earn the right to capital which will further drive down the overall structure of our mills set
So as you said we've made good progress
There's still more work to be done but we now have confidence <UNK> as we put in this capital that we will in fact continue to deliver on these OPEX improvements and more importantly than that continue to drive down the overall cost structure of our mail system where we will in the current upturn that we're in outperform the competition
And when things do eventually roll over, which we think was many years from now we will be back at the bottom
Now with that said <UNK> I don't want to give you the sense that this $300 million of capital is going to be the level forever
We think there's a couple more years of spending at this level to get our mills fully positioned to where they need to be from a cost perspective and then you would see capital fall off to a more normalized level in the $200 million to $250 million range
<UNK>, what I would tell you ---+ I think timberland markets do continue to be strong and we see that over and over especially for high quality timberland there's a lot of interest in its investment class and for high quality timberlands there's a lot of interested buyers both domestic buyers and frankly international buyers starting to show up
So as these TMOs do mature and that is happening some of them you see being extended due to performance
Some of them you see trading back and forth but a lot of interest in continued in this asset class and like I said any process that is being run and there are some being run and we participate in just about all of those
There are a number of interested parties who are part of that
Yeah <UNK>, so as we mentioned at our Investor Day kind of over 90% of our business assets is in timberlands and as you have just highlighted a significantly improved cost structure for wood products
Our go forward cash flow will be much more stable and that's intentional
We're in the process of discussing the payout ratio with our Board and we will update you when those conversations are complete
But we think there is the opportunity to increase the payout ratio as we look forward
In terms of a dividend increase, as we have consistently said for the past few years we are committed to a sustainable and growing dividend
As we look into 2017 we're clearly going to benefit from cost and operational synergies, continued OPEX improvements, and as we've talked about this morning stronger housing markets
So, all those things will be factored in as we work with our Board on decisions regarding our dividend
Thank you
So, on the second part of your question, clearly higher natural gas and oil prices will benefit our Energy and Natural Resources segment
We have a lot more leverage to natural gas and forever rough numbers just to give you a sense, every dollar improvement in natural gas, $5 million to our bottom line all else being equal
But as you would also anticipate when pricing increases that also gives you the opportunity to go lease more
Don’t have quite that type of leverage to oil but as oil prices continue to improve there will be more opportunity from a leasing perspective
In terms of commodity price push we're starting to see a little bit of that not big numbers at this point but that ---+ turning to that, that is why OPEX is so important as we are at some point going to see some cost push and a big part of our operational excellence efforts are to make sure we are doing things that offset that or frankly more than offset that so that the benefits we see from our increased pricing and volume fall directly to the bottom line
Yeah, as you said the strong U.S
dollar continues to be a headwind for us
All other currencies that are important to us weaken versus the U.S
dollar after the election
Some of them has strengthened slightly this December but they overall net-net remain weaker than where they were at the end of the third quarter
In Japan as you said the risk there is the strong U.S
dollar pressures
Prices our customers products compete with lower cost lumber imports from Europe but as I said earlier despite all that we continued to have good demand for our logs into Japan and we actually saw some fall off in the imports that were coming in from Europe during that time period
So net-net while it's not positive we work through that and continue to have good demand from our Japanese customers and part of that is built on the long-term relationship and unique relationship we have with our customer base in Japan
I would say the biggest difference in timberlands versus where we were the first two or three years are the additional opportunities that have been presented as a result of combining
Weyerhaeuser and Plum Creek
So a portion of the $42 million that we got in 2016 was due to those operational synergies, the ability to rebalance wood flows, to minimize cost, and increase realization, optimize the silviculture practice cost based on our larger scale
And then frankly just best practices in harvesting and transportation both again as a result of scale but maybe even more importantly learning from each other
There were some things that Weyerhaeuser and when we got in there looked at it did better and lower costs than Plum Creek and there were some things that Plum Creek did
So as we move forward while we're confident in having what I would say were a fairly significant targets 40 million to 50 million in 2017 and I would anticipate a similar number in 2018 are because of the opportunities that have been created by combining these two companies taking best practices, taking advantage of the larger scale both from ability to service customers, rebalance wood flows, and drive down the overall cost structure of our timberlands operations
So really excited about that and I can tell our folks are really excited about it as they almost on a daily basis find additional opportunities for OPEX as a result of the combination
So as I mentioned earlier in my comments, the first and second quarter are pretty kind of low volume of sales and so we're guiding for lower amount in fourth quarter
Real estate sales can be a little lumpy, it depends on the character of the transactions and so it's a little difficult to predict
And then the second half we'll see it will pick up
So, that's pretty much the pattern we would expect pretty low in the first and second quarter and then picking up in the third quarter and then a lot of closings really occurring in the fourth quarter
Good morning <UNK>
You know <UNK>, I’ll tell you that right now our focus, what I like to say number one, two, and three is continuing to make sure we fully capitalize on the value that we can create by combining Weyerhaeuser and Plum Creek and driving the synergies and other benefits to the bottom line
So that's what we are primarily focused on
As we continue to work through that, and as I like to say earn the right to continue to grow we will be looking at Timberland acquisitions to potentially grow our company
With that said with the scale we have and diversity of geography we have we don't have to grow so we can be very disciplined as we move forward
In terms of South versus the West we're basically like both of those markets and would look so it's not a waiting more to one than the other
We both ---+ we like both the South and the West and would look to potentially growing both of those as we move forward
Good question <UNK> and there are a lot of various regulations, potential regulations regarding that
I can tell you we’re doing an immense amount of work on that front
We've got a really good technology group that is looking for different applications that you can put on engineered wood products that will in fact extend what's called the burn through test, extend that and as a result of that meet any additional requirements that may be put forth from that
So again a lot of work being done on that, very encouraged about what we've seen so far in the test that we're running and think we will be well positioned as we go forward in EWP
No, it's clearly state by state that's the way these things work
Again a lot of uncertainty regarding exactly what that may look like and what the timing may be
But we've been on top of it and feel good about the opportunities to deal with this on a go forward basis
Yeah <UNK>, I do think there is the opportunity for price improvement in EWP as we move through 2017.
Alright, thank you
Yeah, I think it's going to take a little bit of time <UNK> to get the appointments in place and approved and get up to speed
So I can't tell you exactly when negotiations will start again
But it's going to take a little bit of time
In terms of the U.S
coalition a lot of work continues to be done just to ---+ so we don't lose any momentum during this period of time
I think the U.S
coalition are all on the same page and like I said are hopeful of a negotiated settlement as we move forward
Alright, thank you
So as I understand it that was our final question
I would like to thank everybody for joining us this morning
And as always really appreciate your interest in Weyerhaeuser
Take care
