威爾豪瑟 (WY) 2014 Q2 法說會逐字稿

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser second quarter 2014 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Denise Merle, Senior VP of Human Resources and Investor Relations. Please go ahead, ma'am.

Thank you, Brent. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's second quarter 2014 earnings. This call is being webcast at Weyerhaeuser.com.

Our earning release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website.

On the call with me this morning are Doyle Simons, Chief Executive Officer; Patty Bedient Chief Financial Officer; and Beth Vaughn, Director of Investor Relations. I will now the turn call over to Doyle Simmons.

Thank you, Denise and good morning everyone. Weyerhaeuser delivered solid earnings performance in the second quarter, driven by very strong results in each of our businesses and reflecting our employees relentless focus on operational excellence. This morning, we reported second quarter net earnings of $280 million or $0.47 per diluted share on net sales from continuing operations of $2 billion.

Excluding discontinued operations and special items, we earned $234 million or $0.40 per diluted share. This is an increase of nearly 65% compared with the first quarter and almost 30% compared with one year ago. Special items included an ongoing gain from a change to a post retirement health plan and restructuring charges associated with SG&A cost reductions.

Earnings associated with Weyerhaeuser Real Estate Company, WRECO, are being reported as discontinued operations, as a result of the divestiture of that business on July 7. I would like to thank the Weyerhaeuser and WRECO employees for their hard work in completing this transaction.

As part of the WRECO transaction, we retired nearly 59 million common shares worth over $1.9 billion. These retirements, which will be reflected in our third quarter share count, more than offset the common shares issued in conjunction with last year's Longview Timber acquisition.

I will begin the discussion of our business results with some brief comments about market conditions. Severe winter weather earlier this year dampened the start of the spring building season and the US housing market recovery remains sluggish with total housing starts up only 6% in the first half of 2014 compared with 2013.

Rising employment and strong consumer confidence support our expectation of further housing market improvements. However, we have lowered our 2014 housing outlook, as a result of the weaker market during the first half of the year and are planning for 1 million to 1.1 million starts. The bottom line is we believe that residential housing markets will continue to improve, but at a slower rate that had been previously anticipated.

Let me now turn to business segments starting with Timberlands, charts 3 to 5. Timberlands posted another outstanding quarter contributing $170 million to earnings.

In the West, we experienced steady demand in our domestic markets but realization for western domestic logs declined. Although overall Chinese demand softened somewhat during the quarter as a result of elevated inventories at the ports, our sales volumes to our customers increased compared with the first quarter and our pricing remained comparable.

As anticipated, Japanese demand weakened in the second quarter due to the effect of the increased consumption tax. Western logging and road cost increased seasonally, as we log our higher elevations in the summer months when snow is not present.

We remain extremely pleased with the performance of the Longview Timber acquisition, which contributed $51 million of EBITDA in the quarter. In the South, fee harvest volumes declined due to wet weather and log prices rose by approximately 1% compared with the first quarter.

Second quarter also included $24 million from dispositions of non-strategic Timberlands, an increase of $20 million compared with the first quarter. The Timberlands segment continues to benefit from operational excellence initiatives, including a reduction in stump to customer logging cost and increased extraction of export quality logs.

Wood Products, chart 6 and 7. Wood Products earned $102 million in the second quarter, an improvement of nearly 60% compared with the first quarter. Adjusted EBITDA increased to $132 million compared with $93 million in the first quarter as sales volumes increased seasonally across all of the product lines.

In Lumber, EBITDA improved by $9 million, as higher sales volumes due to improved weather and seasonality were partially offset by lower average price realizations. Lumber manufacturing costs continued to decline as a result of our operational excellence initiatives, which are focused on lowering our cost net of logs.

In OSB, EBITDA was flat as lower realizations were offset by growth in enhanced products and improved productivity. Results for engineered wood products improved significantly compared with first quarter as EBITDA increased nearly four fold to $30 million.

Sales volumes increased more than 25% for solid section products and nearly 40% for TGI joists and average realizations for both products rose slightly. The business also benefited from lower manufacturing costs compared with the prior quarter as a result of operational excellence initiatives and the successful ramp up of the Evergreen, Alabama mill.

Our distribution business reported EBITDA of $3 million in the second quarter, an improvement of $8 million. The business remains focused on lowering costs and improving sales and margins. We are extremely pleased with the progress that our engineer wood products and distribution business made against their operational excellent targets in the quarter.

Cellulose Fibers, charts 8 and 9. Cellulose Fibers earned $91 million, a substantial increase compared with $54 million in the first quarter. Fluff realizations were strong and maintenance costs declined due to fewer scheduled maintenance outage days. The business had another excellent quarter operationally and set a year to date record for productivity.

Discontinued operations, chart 11. As I indicated in my opening remarks, results from our real estate business are now reported as discontinued operations. Second quarter results include after tax earnings of $22 million from discontinued operations compared with $10 million in the first quarter. The improvement was primarily due to a seasonal increase in home closings.

At the end of the second quarter, we clearly identified all planned cost reductions associated with our SG&A initiative. Implementation is on going and we incurred an additional $6 million of restructuring charges in the quarter relating to this initiative, I am highly confident we will reach our $75 million run rate reduction target by the end of the year.

I will now turn it over to Patty to discuss our third quarter outlook.

Thanks, Doyle. Good morning, everybody.

The housing recovery thus far in 2014 has been slower than anticipated. However, this week's better than expected forecast on GDP growth for the remainder of the year was welcome news. The outlook for the third quarter earning is summarized on chart 12 and I will begin my comments with Timberlands.

In the West, export log realizations and volumes are expected to decline as a result of normal seasonal softening. The Japan market is normally weaker during the summer months as a result of rainy weather.

In addition to the normal seasonality, the Japanese lumber market has been adversely affected by the implementation of the consumption tax increase. High log inventories at Chinese ports will also likely result in lower demand and prices.

Domestic log markets are anticipated to be weaker as well during the third quarter. Softer export markets combined with the increased supply of logs that typically come to market during the third quarter from the smaller, non-industrial private land owners, who do not have adequate road systems to harvest on year-round basis, are expected to exert downward pressure on prices.

As a result, in anticipation of the softer markets in the third quarter, we intentionally accelerated harvest into the first half of this year. For these reasons, we anticipate a lower fee harvest in the West in the third quarter compared to the second. Supply constraints as a result of fire related logging restrictions could result in some upward price pressure in certain markets, especially in Oregon.

In the third quarter, we also expect seasonal increases in western road costs. In the South, we expect that fee harvest will increase as some harvest in the second quarter was delayed due to wet weather.

In addition, we typically perform more of our thinning activity in the third quarter, which increases volumes and lowers the average realizations due to mix. We are also anticipating higher costs due to seasonal increase in sivicultural activity.

Earnings from non-strategic land sales should decrease compared to the higher level of the second quarter. We expect that overall earnings in our Timberlands segment will be significantly lower in the third quarter compared to the second, but comparable to the third quarter of last year.

In Wood Products, we expect that sales realizations will be down slightly for both lumber and OSB, with relatively consistent volumes. Sales realizations for engineered lumber will be up as a result of price increases that were effective as of the beginning of the quarter. Engineered lumber volumes could be somewhat lower due to orders that may have been pulled forward into the second quarter as a result of the announced price increase.

Log costs in the West should decrease in the quarter and also in Canada to a lesser extent. Housing demand has been more muted than expected. However, our inventories continue to be in great shape across our system and our continued focus on cost reduction and operating efficiencies continues to benefit all businesses.

We expect that earnings in the third quarter in the Wood Products segment will be comparable to the second quarter. In Cellulose Fibers, global soft wood inventories at the beginning of this quarter were in good shape at a couple of days below normal. We do see some softening in paper grade, especially into China and we expect that inventory levels will return to normal during the quarter.

Fluff demand globally remains healthy and our order books are full. The most significant change in our Cellulose Fibers business in the third quarter, will be an extended planned outage our Longview liquid packaging operation.

We will be completing a number of capital improvements that have been planned for some time. These include upgrades to the press section, evaporators, digester and head box. The improvements will lower energy and fiber costs and increase the quality of the board and product mix.

Although the outage will result in increased maintenance cost, our sales volumes will only somewhat lower as we have been building inventory in anticipation of this outage. And we have had excellent year to date operating reliability.

In addition to the liquid packaging outage, we will also have increased planned maintenance in our pulp mill system compared to the second quarter. Overall, we expect that earnings in our Cellulose Fibers segment will be significantly lower in the third quarter compared to the second quarter and more comparable to the first quarter of this year.

Our Real Estate results have been restated for all periods to show WRECO operations as discontinued. At the end of the second quarter, our balance sheet was grossed up for funds WRECO borrowed in anticipation of the transaction.

Both the cash and the debt are included in discontinued operations as of June 30 and were eliminated after the end of the quarter when the divestiture was completed. As previously announced, we closed the divestiture on July 7. As a result, our share count was reduced by approximately 59 million shares, bringing our current share count to just under 530 million shares.

In addition, we received over $700 million in cash. Our third quarter results will show a gain on the divestiture of approximately $1 billion.

Chart 10 summarizes the unallocated items for the second quarter. In the third quarter, we expect that we will once again have a special item for the pretax gain of approximately $45 million related to an earlier post-retirement health plan amendment, which we are amortizing ratably over the year. Other ongoing unallocated items are difficult to forecast as they are driven by changes in foreign exchange, share price, and inventory levels.

Chart 13 summarizes certain financial items. We ended the quarter with a cash balance of $845 million, an increase of almost $70 million. There was no change to our long-term debt of just under $4.9 billion, and we have no maturities until 2017.

As of the end of the second quarter, we had year to date capital expenditures, including reforestation, of $159 million. We still expect the total for the year to approximate $400 million.

Now, I will turn the call back to Doyle and I look forward to your questions.

Thank you, Patty.

Through the WRECO divestiture and Longview Timber acquisition, we have positioned Weyerhaeuser as a focused forest products Company with a productive asset base and significant runway for earnings growth and cash generation. Our strong second quarter results reflect our employees commitment to operational excellence. We remain focused on driving superior returns from our assets to generate value for our shareholders.

Thank you and now I would like to open the call to questions.

(Operator Instructions)

Your first question coming from the line of Anthony Pettinari with Citi. Please go ahead with your question.

Good morning.

Morning, Anthony.

I had a couple of questions in Wood Products. In engineered wood products it looks like you've got $20 million of EBITDA improvement year-to-date. And I believe that you had the $30 million to $40 million target for the year.

And given the progress thus far, do you feel like maybe you'll be at the top end of that range? Is there maybe potential upside to that target? And then, also for the three main businesses within wood products, I was wondering if can you share what your operating rates were in the quarter?

Sure, let's start with your first question. In our ELP business, Anthony, we were very encouraged by the progress we made in quarter. As you referenced we went from $8 million of EBITDA to $30 million -- from $8 million of EBITDA in first quarter to $30 million of EBITDA in the second quarter.

Also, as you referenced, our commitment was to improve EBITDA in that business by $30 million to $40 million in 2014 versus 2013. And we think we're well on the way to doing that -- that's the commitment. We're going to work to get as much earnings out of that business as we can in 2014. And like I said, we're very encouraged about the progress we made to-date.

In terms of operating rates, we'll start with lumber. Lumber operating rates were in the low 90%. OSB was approximately 90% and then ELP overall, and as you know, that's mixture of products, was in the mid 70% in terms of operating rates for that business.

Okay. That's very helpful. And then just a follow up maybe on Cellulose Fibers. The project in liquid packaging board, is that going to result in a material increase in capacity, or is it just a cost measure?

Anthony, the most important part of that project is cost reduction and quality improvement. We will get some increased capacity maybe around the 10% range, but that project really was done to lower our energy and our fiber costs and, as I said, improve the product quality.

Okay. That's helpful. I'll turn it over.

You next question comes from the line of Mark Weintraub with Buckingham Research. Please go ahead with your question.

Thank you. Just following up a little bit on the liquid packaging and the Cellulose Fibers. Can you give us a sense as to roughly how much the outages are going to impact the third quarter relative to the second quarter?

Sure, Mark, as we indicated in the comments, we anticipate our earnings will be lower in the third quarter versus the second quarter in Cellulose Fiber. And that is primarily if not wholly driven by the outages.

Just to quantify it a little bit, we think Longview liquid packaging will result in roughly $30 million of impact. And as we also said, we'll have additional outages compared to the prior quarter in our pulp mills. And that'll be another $5 million to $10 million impact on the third quarter versus the second quarter.

Is it fair to say that when you come out of it though, the other end, you not only get that back but presumably from the project, particularly in the liquid packaging, you hopefully have even higher earnings power, assuming pricing and markets are similar? Anyway to give us a feel for the type of returns or earning enhancement that you might get from the project?

Well, as Patty alluded to, Mark, the project will do three things. Improve quality, lower costs, and then have roughly a 10% -- it'll take a little time to get there, but 10% improvement in production. So, all of those things will factor in.

We won't provide a specific number, but clearly the reason for doing that project is to drive additional earnings and cash out of our liquid packaging board operation.

Okay. Thank you and congratulations for the evidence of continued operational improvement.

Thank you, Mark.

Your next question comes from the line of Chip Dillon with Vertical Research Partners. Please go ahead with your question.

Congratulations on a great quarter.

Thanks, Chip.

I wanted to ask you about distribution. I know that it seemed like in the first quarter hadn't really turned much of a corner but on the numbers I see here it looks like you went from something like a $16 million EBITDA loss in the first half of 2013 to a $2 million loss in the first half of 2014.

It may not be -- it may not have arrived yet, but it looks like the needle is moving in the right direction. Do you still think you'll get to your goals for the year? And have your feelings about the business changed any in last three to six months?

We're encouraged about the progress we've made in distribution, Chip. And as you will recall, the objective there is to improve earnings by $30 million to $40 million in that business versus 2013. We think we're absolutely on track to do that.

I can tell you there's a real focus on continuing to grow profitable share. Making sure our costs are at the targeted levels.

And I'll tell you, we're encouraged as now more than half of the sites are profitable. And we see more and more of those becoming profitable as we move forward. Again, lots of work to do as you mentioned, but very encouraged by the progress that's been made over the past couple of quarters.

Okay. On the $1 billion gain on WRECO, is there any tax impact on that, that we should anticipate on the third quarter?

No, Chip. That transaction as we talked about was done in a Reverse Morris Trust structure. And that is one of the benefits of that structure is there is not a tax on that gain.

I see. Then lastly, just on the dividend at this point. I would imagine with a 700 plus coming in from WRECO and with the strong results and I know the third quarter is not going to be quite a repeat. But with the lower share count, is that something that you guys are thinking about in near term in terms of [raising]?

So Chip, as we previously disclosed, we're going to be visiting with our Board in mid August regarding the dividend. Potential uses of cash proceeds and those types of things.

Just to remind you and everybody else, as we think about capital allocation and that our financial priorities are, as you know, first and foremost, is returning cash to shareholders, primarily through a growing dividend. But also by share repurchase, where appropriate.

Second is investing our business through high return projects, that just as you heard on Cellulose Fiber this morning that improved cost structure and our margin. Of course we'll also look for opportunities to grow our business through value creating acquisitions Again, an example there would be Longview.

Finally, and making sure we maintain the appropriate capital structure. And as you know, we're in good shape on that front. That's the way we think about it and again we'll be back to you in mid August.

Your next question comes from the line of Gail Glazerman with UBS. Please go ahead with your question.

Good morning.

Morning, Gail.

Maybe going back to engineered wood for a little bit. the volume growth that you had relative to the comments about housing maybe not picking up as quickly as you thought and given how much engineered wood is driven by housing.

What do you think drove your volumes? Were you picking up share, was there an inventory build, or do you think that volume has actually been used?

I couple of things were happening -- I'm guessing there were a couple of things that were happening there. I think first as we mentioned, Gail, there's a price increase going into effect the first of the third quarter. There might be been some pull forward in terms of buying in the second quarter versus the third quarter. I think that's part of the equation.

I will also tell you, as I mentioned earlier we've had a very focused sales effort in that business and I am encouraged by the progress we're making there. So I think our sales folks did a really good job of growing profitable share in that business in the second quarter as well.

And Gail, as Doyle referenced in his remarks, we did bring up the Evergreen, Alabama facility. All of our engineered wood products facilities now are operating. That came up, started shipping product in May, so we'll have it for the full quarter in the third quarter.

Okay. And going -- looking at Cellulose Fiber, was there anything in the second quarter result this you wouldn't view as sustainable? I mean it was one of -- it was your best quarter since 2011, yet pricing for pulp at least didn't move dramatically. I'm just wondering kind of what you think drove that upside?

Probably the thing that drove the upside the most just outstanding operational performance across the Cellulose Fibers system. And I think that all of the hard work that they've been doing is paying off. And I would look to that being sustainable and repeatable as we go forward.

And looking at the Japanese mark, what trends did you see moving through the quarter? Obviously, the tax went up at the start of the quarter, were things still getting worse, or are they stable? How you to see that market?

Are you talking primarily on --

Logs. The logs market, yes.

Yes. So, we had thought that it would be impacted. We started to see some impact in the second quarter and that continued into the third quarter. It's difficult to tell for sure because as I mentioned, the third quarter is normally seasonally weaker.

But I think the latest news that we heard just earlier this week was that the Japanese Government is thinking that the impact of the consumption tax -- now this is broadly, was not as significant as many once thought. And that it is starting to come up. And they see more activity toward the second half of the year, but we'll have to see. But certainly it is softer in the third quarter.

One last question. Your Timberlands guidance for the quarter, can you give a sense of what type of land sale activity might be incorporated in that?

Sure. It's about -- it will be lower than the second quarter, as we mentioned. It'll probably be somewhere around $8 million to $10 million lower than the second quarter.

Your next question comes from the line of Alex Ovshey with Goldman Sachs. Please go ahead with your question.

Thank you. Good morning everyone. A couple of questions starting off. In engineered wood products, can you put a little bit of more meat around how much you think pre-buy may have contributed to the volume number in the second quarter?

I guess we're not through July, kind of looking at how the volume trends were in EWP in July, does that give you any incremental insight into how much pre-buy there was in the second quarter?

No, Alex, it's always difficult to assess pre-buy. I will tell you our activity in the month of July continued to be good. So I would tell you there's some -- clearly there was some pre-buy in the month -- or in the second quarter, but we didn't see just a dramatic fall off in July. We continue to be encouraged by those markets and our sales efforts in those markets.

That's very helpful. When you talk about share, taking share in EWP, is that against just traditional lumber or would that against other players in the EWP market?

Again it's hard to know exactly what happens on shares because we don't see all of the different information. Really what we're talking about when we talk about profitable growth is just growing the ELP business overall.

Is there some coming out of sell logs, maybe. But that's not specifically what we're talking about when I say -- I didn't mean sell logs. Is some of it coming out of lumber? Possibly, but that's not what we're referring to.

Ok, understood. One last one, Patty, on the corporate line, just from a modeling perspective. So it's really just zero to five, zero to minus five and then everything else is noise around, like you said, currency and inventories and some of the other things that flow through that line?

Yes, Alex, it is difficult to forecast. That's one reason why when we put this information together we started putting the chart10 together for you, just so you can see what it looks like a the number of things that move around.

For us, the foreign exchange really is a function of the Canadian exchange rate. As that moves our share base comp certainly you can track that with the stock price. And then there's just a whole lot of other stuff that goes in there.

This quarter and as we go forward, the other thing that we are focused on is lowering our G&A. But we will have some costs on a go forward basis that were historically allocated to the WRECO business and we are focused on making those costs lower as well. But you may see some choppiness as a result of that as we work through the G&A cost.

Okay, thank you very much. I appreciate it.

You bet.

Your next question comes from the line of Mark Wilde with BMO Capital. Please go ahead with your question.

Good morning, Doyle, good morning, Patty.

Morning, Mark.

Good morning, Mark. Good to hear you.

Good to be here. I wondered if you guys could talk a little bit about just this shift that we've seen over the last year and where your log exports are going? Because it's been a pretty marked drop off in the proportion of the volume that goes to Japan and about a 20% to 40% in terms of the growth in what's going to China.

Sure, Mark. It really is a function of not Japan getting smaller, but the China market growing. So as you think about the percentage of the pie to those markets, it moves around.

What we're really focused on is growing the pie. And Japan continues to be an extremely good market and an important market to us. But what's moving that really is more growth in the China market in terms of incremental growth.

Patty, does that -- should that change sort of your average just realization in your export log prices? Because my understanding is always that China doesn't buy as high priced of log as what goes into the Japanese market.

Yes, that's fair, Mark. From a mix perspective, you will see the average realization come down. But you will still see a spread between the specific China log compared to the Japanese log.

How would you think about that spread right now?

It's closing a little bit, but they're both -- both of them have come down in the quarter as we talked about. So I don't know that spread is changing all that much.

Okay. Just a couple of other quick ones. Doyle can you talk a little bit about how you would think about both investments and/or acquisitions outside of Timberlands, say in the Wood Products area? And then can you give us a little color on that joint venture you announced with Pioneer?

Okay. In terms of the way we look at acquisition opportunities in Wood Products, Mark. We will as we've said, we would be interested in potentially growing our Wood Products, but we're going to be disciplined.

We're not going to grow those businesses just for sake of growing and if we find one off opportunities, that's something that we would consider. But our primary focus in our Wood Products business is, as we said, just running what we have better. And that's what we're focused on doing everyday.

Yes, Mark, I think you're referencing the licensing that we did on some of our technology IP, international -- intellectual property. And I think it's an important recognition of the importance and the strength of our intellectual property, but I will tell you that it's not a meaningful increase in terms of our quarterly results.

Okay. Very good. That's helpful. Good luck in the second half of the year.

Your next question comes from line of Mark Connelly with CLSA. Please go ahead with your question.

Thank you. To follow on Mark's question, so the market in Asia for logs is moving in the direction that you said last quarter you thought it would. Does that change the way you think about your Timberland mix?

Over the years, obviously Weyerhaeuser bulked up on higher value species and got rid of a lot of the lower value, Hemlock and other lower value stuff. So, are we likely to see Weyerhaeuser maybe attempt to move that shift back to owning or being more willing to own lower value species in the Pacific Northwest?

Well, Mark, we are focused primarily focus on douglas fir. That is what most of our lands are best suited to grow. We do have some white woods as well. As you know, not every acre grows best the same species.

So, I would say we will continue to have a focus on douglas fir, but our white woods inventory will be important as well. Although it does come at a lower price point based on the quality.

Okay. Then a second question, you've said that you have catch up investing to do, particularly in Wood Products. When do you think you will have caught up?

Will that happen this year or next? And what do you think of as normal spending in manufacturing and maintenance, once that catch up is done?

Mark, we're spending a lot of time working on capital issues currently. We will, as always, once we make some decisions for next year, either late this year or early next year, we will be passing those on to you.

It will take more than one year period to get our -- to make the investments in some of our Wood Products operations that we need to get our cost structure to where we want it to be. And as you know, that's the real focus of the investment.

We're going to make going forward is to continue to drive down our cost structure in order to fully accomplish the OpEx initiatives that we laid out. So, that's how we're thinking about it and as we develop more detail, we will be sharing that with you.

Thank you. That's very helpful.

Thank you.

Your next question comes from the line of George Staphos with Bank of America. Please go ahead with your question.

Thanks for all the details. I guess my first question, I wanted to go back to distribution. And Doyle recognizing there were a number of factors that you had mentioned in past, that you were focused on in terms of improving the profitability.

Were there one or two key things that you did this quarter better as a business than you did first quarter or second quarter last year that drove the swing in profitability? And could you comment to those things?

Sure, George. And it really is when you step back and look at it, it's getting the focus where it needs to be and just doing the blocking and tackling better.

But just a couple of things that I would highlight is we set very specific targeted cost levels that we needed to accomplish in our distribution business to start to get earnings where they needed to be. And we made significant progress toward those targeted levels in the second quarter.

And the other thing I would say is, while we've been successful in driving the top line in that business, as I've referred to, we haven't always had a focus on driving, what I call a profitable share. And I think our folks did a really nice job of growing business that added profit to the bottom line in the quarter.

So those are the two specific things that I would highlight occurred in the quarter. Again, more work to do, but really encouraged about the progress that we're making in distribution and our folks are doing a lot of really good work in that business.

In terms of the runway, is it going to be more on the cost side or is it going to be more on what you've got on the racks and can sell? I mean where do you get the further uplift from here, if you had to pick between those two?

Normally, I'm not ambiguous as you know, George. But I would tell you it's absolutely both. We have to pull both of those levers to get to where we need to get to.

So I think there's opportunities, both on the cost side and making sure we get the terms right, making sure we have the right products that our customers need. So lots of levers to pull in that business and we're going to need to pull every one of them and we are.

Okay. Thanks for that.

Doyle, in terms of the Longview board machine, I seem to remember that machine's maybe had some operating difficulties in the last couple of years. Now clearly you're going to improve productivity, you're going to improve cost and you need a little but of throughput out of this as well.

But how much of this was driven by the fact that maybe the machine had been a little bit less reliable in terms of quality over the last few years? And can you explain a little more in terms of what was behind that?

Let me give my viewpoint -- it'll probably be a little more short term and then I'll let Patty expand on it. I can just tell you this facility has run really well and Patty mentioned in her comments, has run really well over the past few quarters. Both from a quality perspective --

You're right, historically we've had some quality issues. The quality, we've made significant improvements in quality over the past few quarters. And just to be real straightforward about it, the operating rates and reliability of liquid packaging have been kind of off the charts the last few quarters.

Now, again we're excited about this, the outage and the capital that we're going to spend because we thinks that's going to allow us to take it to the next level. But this is not one where we go, oh we're having big, big problems, we've got to go spend this money. This is one that's really going to just further enhance what we've been able to do at this facility, at least over the past year.

Go ahead, Patty, I'm sorry.

No, I was just going to say George, that as we look at the spending that's being done at Longview, there is some spending for cleaners that will improve the quality. But as a percentage of the total dollars, it's a small amount of that.

The big piece as well in this project is that it will allow us to upgrade the product mix coming out of that operation. Today, the excess slush pulp goes into Wet Lap and so there's not a great market for that. So we'll be able to change the product mix a little bit. And then again the big piece will be just lowering the fiber cost and lowering the energy cost.

So it's not a place where as we look across our system that we would spend capital in any operation that we didn't think had the ability to run well and run reliably. And Longview has proven that and I think they have a really good package going forward as it relates to the return that we'll get from these products.

Last question and I'll turn it over. Would it be fair to say that in recognizing it is the Board's decision, that at this juncture, from your vantage point of the key metrics, either from a balance sheet standpoint or the operating fundamentals of the Company and the sectors that you're in, that you've checked the box, so to speak, in terms of being able to raise the dividend in the next several quarters? Thanks guys and good luck in the quarter.

I think, George, going back to the comments that I made in December at the investor meeting, we said that we would be looking forward to increasing the dividend in the future. But that would likely be after we closed the WRECO transaction. That is now closed and as Doyle said we'll be visiting on at that with the Board at their next Board meeting in mid August.

Thank you, Patty.

Your next question comes from Steve Chercover with D.A. Davidson. Please go ahead with your question.

Good morning, everyone.

Morning, Steve.

A couple that pertain to I guess the Wood Products segment. Starting with engineered wood products. I think you indicated that all of you facilities are now running and you're at around a 75% operating rate.

Let's -- if we call housing at $1 million, and potential $1.5 million, that's a 66% operating rate. Will you guys have sufficient engineered wood product when the housing actually hits mid cycle, particularly if EWP gains share versus solids on lumber?

So, as I said, we're running at 75% kind of on a blended average across the system. Some of our mills are running more than that. Some of our facilities are running less than that. So clearly in some products as housing continues to improvement, we may not have enough production to always meet our customers demands.

In others, we clearly do have, as Patty mentioned, we're just in the process of ramping up Evergreen. So we've clearly got more capacity there. So we feel pretty good about where we're positioned overall in engineered lumbar in order to continue to service our customers as we move forward.

But -- the capacity you have is the limit, right? Everything that has been de-commissioned has been demolished or is there any kind of temporarily or indefinitely idled capacity that still exists?

You're exactly right. The capacity that we have is what we have. So there's nothing sitting out there to go start back up. We're running what we have.

Thanks for that clarification. Just on distribution, great to see it turn the corner a little bit. Again looking towards mid cycle, can you give us a sense of the revenues and I guess EBITDA or margin are, please?

Again, it's hard to project exactly what revenues or earnings are going to be, but I'll just tell you as mentioned, our commitment this year is to improve by $30 million to $40 million in our distribution. But let's be clear about it, that doesn't get us to where we absolutely need to be.

We think as we do benchmarking versus our competition, we understand we are clearly not the leader. Our goal will be to be the leader in that business. And I'll just put it this way, Steve, I think there's still a lot of runway. Once we accomplish the $30 million to $40 million this year, there's still a lot of runway in front of us to continue to improve earnings and cash flow out of that business going forward?

Yes, I should think so. And so, therefore, would it be safe to say that your aspiration is to see 3%, perhaps 4% EBITDA margin once you're back at mid cycle potential?

Yes, I mean, our goal is to be, like I said, the leader in that business and those type of numbers are absolutely what we ought to be able to accomplish.

Thanks, Doyle.

Thank you.

Your next question comes from line of Paul Quinn with RBC Capital Markets. Please go ahead with your question.

Thanks very much. Morning, Doyle and Patty. Just a couple of easy questions.

Just trying to put in context on Cellulose Fibers, you mentioned the year to date record productivity. I know you've moved to 18 months maintenance schedules on some of your mills. Just if you could give us an update on where you are in that program? And then how the year-to-date productivity record balances with that?

Sure, Paul. As it relates to the 18 month cycle, now all mills will be on an 18 month cycle. The last one is really Longview, which was on 18 month and we took it down, it went down in 2013. It's coming down this quarter or this year in order for us to be able to put those capital improvements in.

But now they are on an 18 month cycle going forward. I don't have the specific how many mills in which year we will be in 2015 versus 2014 in front of me but they're all on that cycle.

In terms of the productivity, that really is, as we look at it how are we doing in terms of our up time and how are we doing in terms of our production per day? And all of our mills are really operating very strongly. And they are competing with each other as well, as one gets better, they benchmark each other and share best practices.

We're really pleased with the work that's being done by the folks in Cellulose Fibers. As I mentioned the third quarter earnings will be significantly lower, but that's because of the maintenance that we're doing, not because the mills aren't running well.

Great to hear. And Doyle, you mentioned that you'd be interested in growing the Wood Products business. Just curious as to which area within Wood Products is more highly sought after than other areas?

Yes, what I said on the Wood Products business is our primary focus is continuing to run what we have better and again making progress there. In terms of specific business. There's not a specific business, we feel compelled to grow at all.

We like our position in all of those -- in those businesses. Again we think our biggest opportunity is to run what we have better. With that said, if we find growth opportunities that we think can add additional value for our shareholders in that business, that's something we would consider.

Great thanks very much. Best of luck.

Thank you, Paul.

Your next question comes from line of Collin Mings with Raymond James. Please go ahead with your question.

Good morning, Patty and Doyle.

Good morning.

Congrats on the quarter. A couple of questions here. Can you guys discuss a little more about the trends you're seeing in the different wood baskets you operate in the US south?

I know we've heard kind of just generally out there that Arkansas and Mississippi is heavily lagged. Maybe as it relates to you guys the Carolinas. But put a little bit more color on what you're seeing, kind of your expectations there for the back half of the year?

Sure. So in terms of southern saw logs, we've -- if you step back and look at it over overall in the south and we can talk more regionally, but overall in south we saw log prices go up about 4% in 2013 versus 2012.

As we mentioned earlier we've seen saw log prices up modestly in the first half of 2014 versus 2013. And we think that trend will continue into the second half of 2014.

Yes, there are always some regional differences based on capacity based on weather, based on a lot of different things. So, yes, you do see some different things in mid south versus gulf versus Atlantic, whatever the case may be. But overall, we continue to anticipate slow, but continued improvement in saw log prices going forward.

Patty I don't know if maybe you guys can break out roughly how much of the EBIT during the quarter came from the south versus say the west?

I don't have that exact number in front of me. I would tell you that in the terms of looking forward in the third quarter most of the decrease in the EBIT will come in the west versus the south. Because of the export markets both in terms of what the export markets are doing in export. And then obviously that has an impact back to the domestic market as well.

Just following up from an earlier question, and again I know it's early. But as you think about really the step up in the run rate as far as the CapEx this year, is $400 million, is that even appropriate as we think about 2015? Or could there be another -- I guess I'm asking could there be another leg up in terms of CapEx dollars? Or do you feel like this was kind of the high watermark?

You know, Collin as we look at our capital expenditure, what will drive that is our ability to continue to have high quality projects, which we would focus on as driving our cost down.

So, as Doyle said, we're still looking at those numbers. I hope actually that, that number will go up a little bit because that means we do have good projects. But we're still working through that as we speak. And I think the other thing that we have really had to focus on is making sure that before we spend capital all of our operations are really operating well.

So we're not looking at growing capacity necessarily from additional capital spend. It is really focused on improving the cost position of our operations. But we'll be giving you more clarity on that as we get closer to the end of the year.

Okay. Again going back to just the capital allocation and still recognizing you're in the middle of that process right now. Can you maybe just put a little bit more detail on it?

How much time are you really actively spending right now looking at Timberland acquisitions and growing that part of the footprint? Or has it really just been trying to, again, determine where you want to put capital to work and still kind of integrating Longview?

We are always looking for opportunities to grow our Timberland base. There is, as you probably or I'm sure you know, there is some activity out there. There's been a pretty consistent flow.

We look at every opportunity that comes along. We take a disciplined approach to it and we will continue to do that.

So, no, we didn't -- Longview has been a fantastic acquisition for ours. We're well ahead of our synergy targets. We're on track to deliver the EBITDA that we indicated out of that acquisition.

But we didn't put other things on hold as we went through the process. We've continued to look. Again, we'll be very disciplined. But we think there will be opportunities to grow our Timberland base going forward and were focused on doing just that.

Okay, thanks. I'll turn it over.

Thank you. We've now reached the allotted time for questions. I'd like to turn the call back over to Doyle for closing remarks.

Thank you. And thanks everybody for joining this morning.

Before we sign off, one thing I would like to do, I would like to acknowledge Kathy McAuley, who actually retired, effective today. It's hard to express just how much Kathy as contributed to Weyerhaeuser during her 14 years with us. But Patty and I would like to offer our sincere thanks. And more importantly wish her all the best in her retirement.

As we have previously announced, Denise Merle, has taken on responsibility of Senior Vice President of HR and Investor Relations. And Beth Vaughn is the Director of Investor Relations. They will both be available to answer any follow-up questions that you may have.

And again, I'd like to thank everybody for joining us this morning and we appreciate your interest in Weyerhaeuser.

Thank you. This concludes today's conference call. You may now disconnect.