威爾豪瑟 (WY) 2013 Q3 法說會逐字稿

Good morning. My name is Natalia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser Q3 2013 earnings call.

(Operator Instructions)

Thank you. I will now turn the call over to Ms. Katherine McAuley, Vice President, Investor Relations. You may begin.

Thank you, Natalia. Good morning, thank you for joining us on Weyerhaeuser's third-quarter 2013 earnings conference call. This call is being webcast at www.weyerhaeuser.com. Please review the statements -- the warning statements on 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. On the call, we will discuss non-GAAP financial measures. A GAAP reconciliation can be found in the earnings materials which are on our website.

Discussing third-quarter 2013 this morning are Doyle Simons, Chief Executive Officer, and Patty Bedient, Chief Financial Officer. I will now turn the call over to Doyle. Doyle?

Thank you, Kathy. Good morning, everyone, and thanks for joining us today. It has been a busy almost three months since I joined Weyerhaeuser. And as I have said before, I am excited to be here. This morning, I am pleased to report solid third-quarter earnings of $157 million or $0.27 per diluted share on net sales of $2.2 billion. This is a 34% increase in earnings compared with third-quarter 2012, and a 28% increase in adjusted EBITDA compared with year ago levels.

Let me now turn to our business segments, starting with Timberlands, charts 2 to 4. Timberlands contributed $118 million to earnings in the quarter, up $4 million from second quarter 2013, as the contribution from a partial quarter from the Longview Timberland acquisition mostly offset a smaller than expected seasonal decline in earnings from the Company's legacy Western operations. In addition, non-strategic timberlands dispositions were up modestly in the quarter.

In the West, log sale realizations were down in both domestic and export markets. Fee harvest from legacy Western lands was seasonally lower, and as expected road and silviculture expenses increased in the quarter. In the South, log sale realizations in the third quarter were flat compared to the second quarter, and fee harvest volumes were up modestly.

We continue to be excited about our acquisition of the Longview Timberland, and are fully engaged in leveraging our silviculture, logistics, and marketing expertise to realize the full potential of this outstanding asset. This transaction closed on July 23, and contributed $16 million in earnings and $26 million in EBITDA in the quarter. Going forward, we will be focused on maximizing the earnings and cash flow from all of our Timberlands.

Wood Products, charts 5 and 6. Wood Products contributed $79 million to earnings in the quarter, down from $136 million in the second quarter, but above the $59 million of earnings from third-quarter 2012. Average sales realizations for OSB declined 26% in third quarter 2013, compared with second quarter 2013, and realizations for lumber fell by approximately 7%. The effect of these lower prices was somewhat offset by higher sales volumes across all product lines, and lower log cost in the West.

Adjusted EBITDA in the quarter was $110 million. In lumber, EBITDA was down $26 million in the third quarter compared with the second, as lower prices were partially offset by higher volumes and lower log cost, especially in the West. In our lumber operations, we are focused on continuing to drive down our cost structure and improve our margins.

In OSB, EBITDA was down by approximately $42 million in the quarter compared to second quarter, as significantly lower prices were partially offset by higher volumes and lower fiber costs. We continue to be focused on lowering manufacturing cost, and delivering high-margin products to our growing customer base in this business.

Engineered Wood Products generated EBITDA of $16 million in the quarter, compared with $7 million in the second quarter of 2013. This improvement was due to higher prices and volumes and lower cost. We are committed to continuing to improve the operating performance of this business.

The distribution business remained challenged in the quarter, as they worked through higher priced commodity inventory. We expect improved results from this business in the fourth quarter, due to our performance improvement initiatives.

Cellulose Fibers, charts 7 and 8. Cellulose fibers contributed $47 million in the quarter, down from second quarter 2013 as higher anticipated costs associated with a scheduled shutdown of the liquid packaging board facility, higher fiber costs associated with wet weather in the South, higher chemical costs in the quarter more than offset slightly higher pulp realizations due to mix.

We are focused on three priorities in this business. First, we will continue to drive down our costs through operational excellence. Second, we will focus on developing new specialty products to improve our margins. And finally, we will continue to support our growing global customer base. Our ramp-up of our new modified fiber facility in Gdansk, Poland is going well.

Real Estate, charts 9 through 11. WRECO reported solid results as real estate contributed $33 million of earnings in the quarter, more than double the contribution during the second quarter. Single-family closings increased seasonally by nearly 21% over the second quarter, and margins improved to 22.3%, as margins increased due to previously implemented price increases.

As Patty will share with you in more detail in just a moment, we expect a very strong quarter in this fourth -- we expect a very strong fourth-quarter in this business, with closing volume increasing nearly 50% in the fourth quarter, compared with the third quarter. In a moment, I will come back with some general comments on markets. But let me now turn it over to Patty, to specifically address our fourth-quarter outlook.

Thanks, Doyle, and good morning, everybody. The outlook for our fourth-quarter earnings is summarized on chart 13. And I will begin the outlook discussion with Timberlands.

In the West, export realizations are expected to be comparable to the third quarter on higher sales volume, primarily as a result of including a full quarter's operations of the Longview acquisition. Domestic realizations are expected to increase slightly. Lower sales volumes from our legacy Western ownership will be offset by increases from the Longview acquisition. Fee harvest in the West is expected to increase by about 10%, and Longview accounts for most of this increase. Costs are anticipated to be lower in the West due to decreased silviculture spending.

In the South, realizations are expected to be slightly lower due to mix. Fee harvest is expected to increase on a seasonal basis. Logging costs are anticipated to increase due to a slightly longer hauling distance this quarter. Silviculture costs will also increased due to the timing of treatments. Sales of non-strategic timberlands are anticipated to be modestly lower. Overall earnings in the Timberland segment are expected to be comparable to the results in the third quarter.

In Wood Products, the fourth quarter is traditionally one of the weakest earnings quarters of the year, as we close out the building season, and mills prepare to perform minor maintenance and capital projects during the slower holiday season. As a result, we expect to see lower sales volumes across most product lines, and flat to potentially softening prices as we progress through the quarter.

We continue to focus on controlling inventories and matching supply with demand, while driving further operational improvements. We anticipate that log cost will increase, in both lumber and oriented strand board. Earnings in the wood product segment are expected to be lower in the fourth quarter compared to the third quarter, but still above the $38 million we earned in the fourth quarter of last year.

In Cellulose Fibers, pulp realizations are continuing to move up, and shipment volumes are also expected to increase modestly. Worldwide inventories of soft wood pulp are well-balanced and exchange rates are favorable. Maintenance expense should be lower, as we have fewer days planned for maintenance outages. We anticipate higher productivity and decreased chemical costs during the quarter. We expect that earnings in the cellulose fiber segment will increase significantly during the fourth quarter compared to the third.

In real estate, we opened eight new communities in the third quarter, and we expect to end the year with a community count in the mid 80s, which compares to 62 communities at the end of last year. At the end of the third quarter of this year, our backlog of homes sold, but not closed, was 1,435, an increase of 36% compared to a year ago.

Although we have seen some weakness in consumer confidence driven by the current uncertainty of governmental actions, we continue to believe that we will see improved result of housing recovers. During the fourth quarter, we expect to close over 1,100 homes, or approximately 35% higher than the fourth quarter a year ago.

The average price per closing is projected to be higher than the third quarter, with gross margins between 21% to 22%. Selling costs will increase as a result of the additional closings. We also expect earnings from land and lot sales to be comparable to the third quarter. Overall, fourth-quarter earnings in our real estate segment is expected to increase significantly, compared to the third quarter.

I would like to touch on unallocated items, and unallocated items are shown on chart 12. During the third quarter, we had a very large, positive adjustment for the elimination of inter-segment profit in inventory and LIFO. This was a result of reductions in inventory, primarily in Wood Products. We do not expect the fourth-quarter adjustment to be of the same magnitude.

Now, I will wrap up with some overall financial comments. I will be referencing members on chart 14 for these comments. We ended the quarter with a cash balance of approximately $900 million comparable to the second quarter, excluding cash associated with the financing of the Longview Timberland acquisition. In July, we purchased the equity of Longview Timber for $1.58 billion in cash, and assumed debt of approximately $1.1 billion.

During September, we issued $500 million of new debt. And earlier this month, we borrowed an additional $550 million under a term loan which, together with cash on hand, were used to repay the debt assumed in the acquisition. As a result of the early repayment of the assumed debt, we will have a charge for early extinguishment of approximately $24 million in the fourth quarter.

Debt repayments for the third quarter exclusive of acquisition totaled $163 million. Fourth-quarter maturities are approximately $69 million. After the fourth quarter, we have minimal maturities until 2017. In addition, during the third quarter we replaced our existing revolving credit agreement with a new $1 billion agreement that does not expire until 2018. There are no borrowings outstanding under this agreement.

Capital expenditures, including reforestation for the third quarter were $76 million, bringing our year-to-date expenditures to $179 million. We still anticipate spending for the full year to approximate $300 million. Now, I will turn the call over back to Doyle, and I look forward to your questions

Thank you, Patty. In terms of markets, and specifically housing market, we continue to be encouraged as long-term favorable housing fundamentals remain in place. With that said, the housing recovery appears to have taken a slight pause due to higher home prices, higher interest rates although still very low by historical standards, slowing job growth, and the antics of our government.

However, we continue to believe we are in the early stages of a longer-term return to trend levels of housing starts. Forecasters now [expect] that there will be approximately 950,000 US housing starts in 2013, and somewhere between 1.1 million and 1.2 million starts in 2014. The housing starts long-term average is north of 1.5 million units, so there is still a lots of runway in front of us.

We are focused on driving ROI and cash flow to capitalize on the upturn, as well as appropriately positioning our sales for the future. On that note, we will host an investor meeting in New York on December 17. In that meeting, we will address where Weyerhaeuser is today, where we are going, and what we are doing to make this a truly great Company for our shareholders. We look forward to sharing are thoughts and plans with you at that time. Later this morning, we will put out a notice containing the details of the meeting.

Finally, regarding our previously announced process to explore a range of strategic alternatives for WRECO, we are fully engaged in the process, continue to be encouraged by the interest in this business, and we will be back to you when the process is completed. Until then, as I am sure you will understand and appreciate, we will not have any further comment on the strategic review.

With that, we will now open it up for questions. Operator?

(Operator Instructions)

We have a question from the line of George Staphos with Bank America, Merrill Lynch.

Congratulations on the progress thus far this year. Doyle, a couple of bigger picture questions maybe to start. You mentioned driving cash flow and ROI within Weyerhaeuser in the years ahead. Are these going to be the primary metrics that you focus your team on? Are there any other metrics that we should be aware that you can discuss at this juncture, that you will be using to gauge the progress of the Company? And then, you mentioned a couple times, certainly within Wood Products and I think also within cell fibers, that you are focused on lowering manufacturing costs to paraphrase at this juncture to the point, to the extent that you can comment, where do you see the opportunities to do that?

Good morning, George, and thanks for the question. I would say, in terms of your first question, clearly ROI and cash flow will be key metrics for our Company going forward. But I wouldn't say they will be the sole metric, but clearly those will be key metrics for our Company going forward. We look forward to our conversation on December 17, at which time we will provide hopefully a lot more clarity on again, where we are, where we are going, how we are going to get there, and how we will measure our progress along the way. In terms of Wood Products, one of the things we are focused on throughout Company will be to continue to drive down our cost, and specifically our manufacturing cost. Where, what we are looking forward to doing, is delivering high-quality products to our customers, products that our customers want and are willing to pay for, and doing that at the lowest possible cost. So that will clearly, continue to be a focus for Weyerhaeuser going forward

Doyle, maybe to follow on, and I will turn it over. Do you to see the opportunity more driven by process? Or by needing to maybe put in more investment, or some other factors as well? And then just quickly and I'll turn it over, should we expect that your overall operating profit in WRECO in 4Q is up, versus last year's level? Thank you.

Yes I will address the first question, and then I will ask Patty to address your second question, George. But in terms of opportunity, I think it is all the things you listed. I mean, it will be process, it will be -- we will look at opportunities to drive down costs across the board. Again, what we are focused on is producing high-quality new products for our customers, and in doing that at the lowest possible cost. So we will be looking for opportunities to do that. Some of those opportunities will require some capital, some of those will not. With that, let me ask Patty to address your second question.

So George, your second question I think was profit in WRECO this quarter, compared to a year ago, fourth-quarter compared to a years ago?

Correct.

Yes, I think that the thing that swings from quarter to quarter is that -- and I don't remember fourth quarter a year ago, how much we had in terms of land sales and lot sales in the fourth quarter. Our single-family home building business will be very strong in the fourth quarter of 2013, compared to 2012.

Okay.

And I think as I mentioned in the comments that, at this point we would expect a comparable amount of lands and lots sales, although as you know they are quite lumpy, but comparable to the third quarter which I think was about $9 million

Okay. Thank you very much.

Your next question is from the line of Gail Glazerman with UBS.

Good morning.

Good morning, Gail

I guess, just starting on the longer -- the nearer term outlook for housing. When you talk about consensus numbers of 1.1 million to 1.2 million next year and kind of what you are seeing from the market and hearing from your customers, how much confidence do have that consensus has it right?

Yes, and that is -- as you know, predicting housing numbers is always a little difficult, Gail. I would tell you that when you step back and look at the long-term fundamentals, I continue -- we continue to be very bullish on housing. As I mentioned there has been a slight pause here due to a lot of factors. But clearly in my mind, we have -- we will continue to have an upward trend in housing as we start to approach the 1.5 to 1.6 average over the next few years. And I don't know exactly what the slope of that line is going to be. I think it has flattened a little bit, just because of the issues that I raised, but we will see how it plays out. But I think in my opinion, the 1.2 -- 1.1 to 1.2 is a pretty good guess at this point in time

Okay. And in the pause that you are seeing, I mean how significant was it? I mean, it looks like WRECO buyer traffic was down pretty significantly. Was that seasonal, or was that reflective of the uncertainty that we saw a rise with interest rates coming up in DC?

I think it was a combination of both, Gail. I think clearly, again this, as we had the shutdown from the government, as we had prices go up in houses and some other factors, we saw a pause. But again, I think pause is the right term. I don't want to overstate the pause. And again, if you look at the underlying fundamentals, they continue to be strong and in place, and I think will drive housing going forward

Okay. And just a quick question on Engineered Wood. Given what has been going on in terms of input costs, do you see the recovery as sustainable? Or at some point, would you expect to see some price pressure emerge, as customers kind of start pressuring you, given some of the cost relief of lumber in OSB pricing?

I think in that business, as we mentioned we saw a nice improvement in the quarter, Gail. Now there will still be seasonal factors that will have an impact, and as Patty outlined, fourth quarter is a slow seasonal quarter. But longer-term, that is a business that we are encouraged by what we have seen on the pricing front, it will probably need additional pricing going forward. But more importantly, we are focused on our operations, and making sure that we provide on a cost-effective basis the products that our customers need

Okay, thank you.

Thank you.

Your next question is from the line of Anthony Pettinari with Citibank

Good morning.

Hi, Anthony

In Wood Products, you talked about your expectation for improved distribution performance in 4Q. And I was wondering if you could give us any color on the performance improvement initiatives that are driving that improvement? And then maybe, what is the magnitude of earnings improvement you are expecting versus the loss this quarter? And how much of that is really driven by the performance initiatives, versus just sort of working through inventory?

Yes, good question, Anthony. And the improvement that we anticipate in the fourth quarter, as you just highlighted will be driven primarily by two factors. One is the fact that we will have worked through most of the high-priced inventory in the fourth quarter. And then secondly, as I mentioned we have some very specific profit improvement initiatives, including a real focus on operational excellence. And again, making sure we have the right cost structure in that business. That we also have a very focused effort regarding growing specific product lines that we need to continue to grow in that business to make it a profitable business going forward. So back to your original question, two key drivers for the fourth quarter, one, we will have worked through the high-priced product. And secondly, we have a very focused profit improvement effort in place in that business, and I think we will see the impact from both of those in the fourth quarter.

Okay. But is it safe to say, that may be more of the benefit of the performance improvement initiatives are -- will be seen in 2014? Or just in terms of the timeframe of completing some of those initiative?

Sure, Anthony. Yes, we will see the initial -- I mean, we have been working on it, but we will see like I said, some of them in the fourth quarter. But it is not just solely in the fourth quarter, as we will continue to build those into 2014 and beyond. So these aren't one-time initiatives. This is an ongoing effort to improve operations of our distribution business.

Okay, that's helpful. And then just switching to Timberlands, do you think that this quarter's EBITDA contribution from Longview, adjusting for the fact you only had two months is representative of what the business could do over the next few quarters? And do you have any updated view on synergies of the timeframe to realize those synergies?

Sure. In terms of Longview like I said, we are excited about that acquisition, and are pleased with the results in the third quarter. To your specific question, I think the third quarter adjusted for the things you just said is generally representative. The other thing I would say, as you know third-quarter in the West tends to be seasonally a weak quarter, so you should factor that in as you think about this acquisition going forward as well. In terms of synergies, as we have previously stated, we anticipate synergies, achieving synergies savings of approximately $20 million. And I would tell you, we are on track to achieve those synergies by the end of 2014 at a run rate.

Okay, that's helpful. I will turn it over

Thank you.

Your next question is from the line of [Mark Willoughby] with Deutsche Bank.

I want to come back to distribution again, because you have now got another publicly-traded peer out there with a distribution business. They have made $21 million in the last 2 quarters. You have lost $27 million. I mean, how much of this you think is maybe just a different treatment from an inventory standpoint? And what are the other issues here, because it is a huge delta?

Yes, Mark, we understand the delta that is in place. I can tell you I think part of it does have to do with -- my guess is, and it's only a guess, because I don't know what our competitors do, but I think part of it may have to do, at least in the third quarter with the treatment of inventory. As I mentioned earlier, though we understand the gap and the opportunities and challenges that we have in that business, and we are focused on improving that business every day

Okay. Do you regard that business as somehow kind of intertwined with your Engineered Wood business that, such that you have to be in distribution to be successful in Engineered wood or not?

Mark, we look at each of our businesses individually, and we expect each of our businesses to achieve above cost of capital returns over a cycle.

Okay. And just in Wood Products, you talked a lot about improving costs and things are you doing anything just to kind of rethink maybe how Weyerhaeuser has approached markets from a commercial side? In other words, thinking about how you sell, how you go to market, whether you are really kind of getting the best dollar you can for everything you produce?

Sure, Mark. As I mentioned in my initial comments on Wood Products, one of our key focus is, is delivering products that our customers want and are willing to pay for. And a big part of that is, who are customer base is, how we go to market. As you know we have very -- we produce very high quality products here at Weyerhaeuser, and I think our customers appreciate that. And we just need to make sure we got the right customer base in place, and that we are delivering quality products that our customers want, and are willing to pay for.

Right. And then last question I have is just on the Timberland side. Your log prices were down quite a bit quarter to quarter, but I noticed that your export mix is skewed to China. I know they typically buy a lower price log, So I just wondered whether kind of a mix shift in where you were selling contributed to that $10 drop in log -- average log prices.

Well, as we talked about on the quarter outlook for the third quarter on our last call, pricing was projected to be weaker in the third quarter, because of the seasonality. And we did see that, and now we are starting to see those prices move up again. In terms of the mix, we do have a higher percentage of the total mix going to China. Part of that is because of the Longview acquisition, of just exporting more into China overall. So I think from a mix perspective, China does impact that a little bit. But we did say that pricing would come down somewhat in the third quarter, as it does on a seasonal basis.

Great, thanks, Patty. Good luck in the fourth quarter

Thank you

Your next question is from the line of Chip Dillon with Vertical Research.

Good morning

Good morning, Chip.

First question, as we look at your -- the Company's last couple years, capital spending has been quite a bit below the depreciation. And that is understandable, because of the purchase accounting, and some of it is at least in depletion. But I mean, Doyle, as you look at things, do you think something down in the sub [$250 million] range is something that is sustainable? Or could there possibly be opportunities, either in the Wood Products business or maybe a requirement for a boiler rebuild or something in the cellulose business, that we should keep an eye out? In other words, should we see CapEx remain at about half the depreciation?

Chip, we are, as I mentioned earlier, we, I have been spending a lot of time with our senior management team over the past few weeks, and we are right in the middle of that process regarding capital. That something that we will share with you on the December 17, at the December 17 meeting, and probably even get more specific when we release fourth-quarter earnings. I can tell you generally, Chip, in terms of our financial priorities going forward, first of foremost, is going to be to return cash to shareholders primarily through a growing and sustainable dividend. But also, it is appropriate timed share repurchase. Second, will be to invest in our businesses through high return projects, and look for opportunistic growth opportunities. And then, finally making sure we maintain the appropriate capital structure for our shareholders going forward. So that is generally how we think about it, but again, we will be back to you with much more detail in a couple of months.

Okay. Just a quick follow-up. I know that in the couple years ago, the Company changed the way they did maintenance in the cellulose business, and found a way I believe to cut costs by shifting from annual to I guess, every 18 months. And I don't know that something you felt was good and likely to be sustained? Or if you think that there could be some tweaking to the way you look at the costs, especially for maintenance in the cellulose business?

I think, Chip, thanks for the question. I think that is something that is good, and will continue. As you know we are in the process of phasing that in. And I think we will start to really see the benefits of that in 2014 and 2015, but I think that is the right approach. It ultimately over time, will lower your maintenance expense, and also keeping a bit of that, of course, you improve your productivity, because you are not going down as often in your mill system

Thank you

Thank you.

Your next question is from the line of Alex Ovshey with Goldman Sachs.

Thank you. Good morning, Bill and Patty.

Morning.

Morning.

First question is, can you give us an update on the restart of the Alabama Engineered Wood Products facility? How much capital do you think you will need to put in to get that up and going? And how do you see the trajectory of the volumes out of that facility going into the market?

Sure, Alex. Thanks. I think the important thing to keep in mind about our Evergreen mill in Alabama, is that we announced that we would be restarting it. But the actual restart is not projected to take place until late spring of 2014, probably around -- in the May timeframe before we are actually producing significant product at that location. Anytime you are starting up a mill that has been down for more than a year, it certainly takes time to put a workforce in place. And so, we are very focused on doing that. From a capital perspective, we will need to put some capital into that mill because it has been down for some period of time, but it is not a huge increment of capital. So, I think that as the market continues to recover especially for Engineered wood, we are really looking forward to bringing that capacity online, at a time that the market will really need it.

Got it. And then on lumber, as I look at your shipment numbers quarterly, relative to what you state as your capacity number for lumber in the 10-K. It seems like you are essentially running at capacity, even though housing is well below normal levels. As you think about the medium-term, do you expect you will be able to grow your lumber shipments with the market, without having to put significant capital into your system? Or will you have to put in significant capital to be able to do that, given you are essentially running at capacity based on numbers that are reported?

Alex, I would say we are running somewhere in the low to mid 90%s, in terms of operating rates in our lumber operation. And what we are focused on everyday is improving our reliability in our lumber operations, in doing things to get additional production where it makes sense to do that. So that is the focus of our lumber operation going forward.

Thank you. And just one more question on pulp. Softwood inventories are in excellent shape. Prices are moving up, while on the other hand, hardwood inventories are elevated and prices are moving lower, and there seems to be a significant amount of hardware inventory that -- hardwood capacity that will be coming online over the next 12 months. As you talk to your customers, what kind of impact do you think all this new hardwood capacity that is entering the market, what kind of impact do think it may have on softwood pricing and your softwood business?

Well, Alex, it is difficult to know exactly what the impact will be, but our products from a fluff perspective, are really focused more in the softwood grades. And in addition to fluff, we have a number of specialty proprietary products in the fluff grade spectrum. So our focus really is, as Doyle said, to continue to drive down costs, which is always a good thing. And then really in our product mix, in addition to our products today, to developing new products in the priorities for the business that Doyle spoke to in his comments. Number two priority was innovation around specialty products, things like the product that we announced which we call Thrive, which is a cellulose-based product. That has some promise for us going forward, in terms of the automotive industry and others. So we are working on all fronts. But difficult to know exactly what that hardwood capacity will be, but it doesn't substitute directly for fluff today

That's helpful. Thanks, Patty

Yes.

Your next question is from the line of Mark Connelly with CLSA.

Two questions. How much of the improvement in Engineered Wood was attributable to the lower OSB prices? And second, you commented a little bit on the increased sales from Longview to China. China for you has been relatively low margin. Is there an opportunity to move some of that Longview capacity into higher-margin markets? Or is this just going to be a shift, a little bit down in the overall mix?

Mark, I will try to address your first question, and I will ask Patty to address your second question. In terms of the improvement in ELP in the quarter, I don't know exactly how much of that was attributable to the lower OSB cost. But as I mentioned, it is a -- the improvement was a combination of lower cost and improved revenues in that business.

So Mark, as you think about the Longview acquisition, one of the things that you are not seeing as much of an impact, in terms of the overall revenue, and that chart is a revenue chart that is in the web slides, is that we actually did purchase, through third-party purchases from Longview some logs to go to Japan to round out our inventory needs for Japan, as we do on the marketplace. So that is why, you don't see the significant change there. It's not that Longview logs are not going to Japan. They are now going as Weyerhaeuser logs.

The other thing that I would say is, as the white wood market becomes stronger, we will take advantage of shipping white wood, off to the extent that we have it off the coastal lands of Longview, to take advantage of both the China market, as well as the Korea market. So the mix will move around, but we will ship the appropriate log to the appropriate market to get the best margin out of that. One of the opportunities for us in terms of driving synergies from that acquisition, is that even though we were purchasing logs from Longview, we now have the trees, and we have the opportunity to merchandise the cutting of the tree into logs, to get that -- pull the highest grade to the highest market for that. So, we, as Doyle said, really, are very pleased with what we have seen so far

Terrific. Thank you.

Yes.

Your next question is from the line of Paul Quinn with RBC Capital Markets

Yes, thanks, for a nice morning.

Good morning.

A quick question on Japan, how should we look at the effect of the consumption tax increase next April? And how do you expect that to flow through in terms of timing on export logs sales to that country, and the magnitude of the drop-off once that tax is in?

Sure, Paul. Difficult to know, because the consumption tax is just one of the factors that affect the demand. Right now, we are seeing very strong demand. There is projected to be a small move up in the consumption tax, but the Japanese government has also proven to be very accommodative to housing financing. So I think that, if that consumption tax does go up as it is projected, that we will also likely see some potential benefit to the overall housing economy in Japan, so difficult to know. But our own view at this point, would be that demand will continue to be strong in 2014. It may have some slight impact from the consumption tax, but it is something we are monitoring pretty closely.

Okay. And then I just have a follow-up question for Doyle. Just -- you been there almost three months now. What has most impressed you at Weyerhaeuser? Where do you see your biggest challenge?

Thank you for the question. And I would tell you, when I showed up at Weyerhaeuser, I spent the first few weeks going around to our facilities, meeting our people, and really listening, learning and listening a lot. Over the past few weeks as I think I mentioned earlier, I have been spending a lot of time with our senior management team, kind of distilling everything that I learned when I was out visiting our facilities. Kind of figuring out where we are, where we need to go, and how we are going to get there. And that will be the focus of our investor meeting on December 17. And at that point in time, we will spend a lot of time highlighting, like I said, where we are and what are biggest -- what our biggest strengths are, and what are biggest opportunities are as we move this Company going forward. So I look forward -- we look forward to sharing those thoughts with you on December 17.

Okay, fair enough. Best of luck

Thank you

Your next question is from the line of Evan Wingren with D.A. Davidson

Yes, thank you. Good morning. Given that a lot of your competitors have seen sort of log prices in the South up a little bit this quarter. I noticed that yours were flat. Was that surprising to you, kind of given what we have heard about the wet weather in the South as well?

Our log prices in the South as you mentioned, we did not see much of a movement. There were, in various regions impacts because of the significant wet weather. I think that is a portion of what you have seen in some of the competitors. Also there may be some different inventory situations for various competitors as well. What I am encouraged about is, I think when you step back and look at it overall, I believe our pine saw timber prices this year will be up probably 4% to 5% versus last year. When all is said and done, and probably more encouragingly as we continue to see housing rebound, demand continues to grow. We see the impacts of the Canadian situation. I am convinced that we will see saw timber -- pine saw timber prices in the South start to -- continue to increase, maybe even more rapidly as we move into 2014 and beyond.

Great, thank you. And kind of moving to cellulose. The additional six days of maintenance you took, could you maybe just give a little more color on that? And maybe how much did that cost you in the quarter, if you could provide that as well?

Yes, part of the impact in the quarter was due to the additional downtime that we took. And above and beyond the downtime that was scheduled, we had a couple of additional downtimes at our liquid packaging operation that were a result of not coming up quite as well as we had planned in that operation. So that had an impact on the third quarter versus the second quarter as well. Now the good news is the liquid packaging operation is back up and running, and running well, and there will be no impact from that shut down in the fourth quarter.

All right, fair enough. And then, on EWP again, do you have a range that you could provide, of maybe of what you think your utilization rate was in that business during the quarter?

Yes, overall -- and there is a lot of different products, as you know in that business. But overall, the operating rates were in the mid 60%s for ELP in the quarter.

And on the pricing side of that, are you seeing momentum sort of heading into the back half of the year? Or maybe just sort of what are the trends you are seeing there on pricing, this moving forward? Yes. As we indicated, prices were up in the third quarter versus the second quarter in ELP. And I think clearly, the trend is for favorable pricing going forward. Now we have got to factor in the seasonality, and as Patty properly highlighted and as you very well know, the fourth quarter tends to be a slower seasonal period for wood products, including ELP. But I think we will see favorable trends in pricing in ELP going forward All right. Thanks for that. And just one more, kind of housekeeping. I sort of missed the extinguishment of debt costs, $24 million. Can you just bring that back real quick?

Sure. So when we acquired Longview Timberland, that acquisition, we assumed debt in that acquisition, and we repaid that debt early in October. And as a result of repaying it early, there was some prepayment costs associated with that. And we expect that there will be about $24 million of loss from early extinguishment of debt. That will be in the fourth quarter numbers. And I just want to make sure that you all have that number, as you think about putting together your fourth-quarter estimate. All right. Thanks both of you for taking my questions, and good luck in the quarter Thank you

Thank you

Your next question is from the line of Mark Weintraub with Buckingham Research

Good morning.

Hi, Mark.

In the past, Weyerhaeuser has indicated their intent over the cycle to pay out roughly 75% of free cash flow in dividends. If as -- through actions that you take, an increasing proportion of your cash generation in the future is coming from the more stable timber business, does that lend an upward bias to that 75% number?

Mark, as I mentioned earlier in terms of our financial priorities first and foremost, is returning cash to shareholders, primarily through a growing and sustainable dividend. So, and one of the things that we will be continuing to monitor going forward, is just exactly what the right payout ratio is, in terms of our [FAD] contribution. So that is something we will be looking at, but we understand and are committed to a -- we understand the importance of, and are committed to a growing and sustainable dividend going forward.

Thank you.

Thank you Okay. As I understand it, there are no additional questions. So let me just close with a couple comments. Let me start by thanking everybody for joining us this morning, and for your continued interest in our Company. And also I just want to say, I look forward to seeing everybody on December 17 in the -- at the meeting that we will be hosting in New York. And as I mentioned earlier, we will be sending out details for that meeting later today. Thank you very much.

This concludes today's earnings call. You may now disconnect.