威爾豪瑟 (WY) 2016 Q3 法說會逐字稿

Good morning. My name is Ginger and I will be your conference operator today. At this time I would like to welcome everyone to the Weyerhaeuser's third-quarter 2016 earnings conference call.

(Operator Instructions )

Thank you. Ms. Beth Baum, Director of Investor Relations, you may begin your conference.

Thank you, Ginger. Good morning, everyone, and thank you for joining us today to discuss Weyerhaeuser's third-quarter 2016 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings 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 to GAAP can be found in the earnings materials on our website. On the call this morning are Doyle Simons, Chief Executive Officer, and Russell Hagan, Chief Financial Officer. I will now turn the call over to Doyle Simons.

Thank you, Beth, and welcome, everyone. This morning Weyerhaeuser reported third-quarter net earnings of $227 million, or $0.30 per diluted share, on net sales of $1.7 billion. Our third-quarter results include after-tax earnings of $65 million from discontinued operations and $10 million of after-tax charges for merger-related expenses. Excluding these items we earned $172 million, or $0.23 per diluted share. This is an improvement of over 30% compared with second quarter and over 40% compared with a year ago. Third-quarter adjusted EBITDA totaled $434 million, an improvement of $21 million compared with the second quarter.

Our employees delivered strong performance in the quarter, as operating results improved across each of our businesses, with a Timberlands driving increased EBITDA through merger synergies and wood products achieving its highest third-quarter earnings in 12 years. However, these results reflect only some of our quarterly achievements, as we also closed the sale of our liquid packaging board business, completed the move to our new corporate headquarters in Seattle, and completed our commitment to a $2 billion accelerated share repurchase. I'm proud of what our teams accomplished and the pace at which they continue to operate as we work together to be the world's premier timber, land, and forest products company.

Before turning to our business results, let me make a few brief comments regarding the housing market. Third-quarter housing activity was roughly in line with our expectations, and we are anticipating nearly 1.2 million housing starts for 2016, in line with consensus estimates. Although total housing starts for September were weaker than expected, the headline number was driven by the volatile multifamily sector. Single-family starts have continue to grow at a favorable pace. Through September, single-family starts are up approximately 10% compared with 2015 on a seasonally adjusted basis and low inventories of homes for sale reflect continued steady demand.

As we entered the seasonally weaker fourth quarter, we are encouraged by the strength of September permitting activity, new home sales, and continued solid builder confidence. Although constraints such as field labor, permit delays and fees and rising costs for land and construction may be functioning as a governor on supply-side growth, rising employment and wages and favorable mortgage rates continue to drive improving housing demand.

Let me now turn to our business segments. I will begin the discussion with Timberlands, charts 3 to 5. Timberlands contributed $122 million to third-quarter earnings and $223 million to adjusted EBITDA. Adjusted EBITDA increased by $3 million, compared with the second quarter. Western Timberlands contributed $109 million to third-quarter EBITDA compared with $114 million in the second quarter. Western fee harvest volumes decreased and average log realizations were largely flat.

Sales volumes to Japan improved moderately during the quarter as low mortgage rates continued to drive strong housing activity and the effect of the delay in the consumption tax increase continued to fade. Average realizations for Japanese logs declined slightly early in the quarter, but stabilized as the quarter progressed. Sales volumes to China decreased due to timing of shipments and a slight seasonal decline in demand and average realizations decreased modestly. Log inventory to Chinese ports declined during the quarter and remained within a normalized range.

Western domestic markets remained solid during the quarter and pricing for domestic logs improved marginally, as some markets were tensioned fire-related harvest restrictions and increased mill demand. Western logging cost benefited from operational excellence initiatives during the quarter. Although we anticipated a seasonal increase in per-unit logging cost due to the harvest at higher elevation stands, crews were able to mitigate this cost increase through a new harvesting technology that improves productivity on steep slopes and reduces the need for the highest cost cable logging operations.

Southern Timberlands contributed $108 million to third-quarter EBITDA, $9 million more than the second quarter. Seasonally higher log sales volumes were partially offset by seasonally higher silviculture and forestry costs and a 1% decrease in average log price realizations. This decline was partially attributable to mix, as third-quarter harvest included a slightly higher proportion of pulp wood. Southern logging costs benefited from operational synergies, with merger integration progress enabling further optimization of logging and hauling activities across the combined ownership.

Northern Timberlands EBITDA improved $3 million compared with the second quarter. Seasonally higher volumes were partially offset by weaker realizations and seasonally higher road and forestry expense. Subsequent to the end of the quarter, we announced a strategic review of our Uruguay operations. This review will enable us to ensure that we are best positioning the business for long-term success and maximizing value for our shareholders. We look forward to providing further information after the review is complete.

The Timberlands business remains relentlessly focused on capturing operational excellence and synergies and is on track to achieve its $30 million to $50 million target for 2016. Internal benchmarking teams are rolling out the initial best practices that resulted from comparing a subset of high-value activities at each company. We are pleased with the progress to date and look forward to continuing to capture the benefits later this year and into 2017.

Real estate, energy, and natural resources, charts 6 and 7. Real estate and ENR contributed $15 million to third-quarter earnings compared with $12 million in the second quarter. EBITDA increased by $9 million to $37 million. Real estate EBITDA increased by $7 million. Average price per acre declined slightly as we sold the greater percentage of lower value northern acres compared with the second quarter. Contributions to earnings increased minimally due to a proportionally higher land basis as the northern properties are legacy Plum Creek holdings that were marked up to fair value in acquisition accounting.

Our real estate team is making strong progress as they apply Plum Creek's asset value optimization process to the legacy Weyerhaeuser Timberlands. Work began first in the US South and that process is entering the latter stages. As we wrap up portions of the southern analysis, the focus will turn to the West. Work remains on track and we continue to anticipate the process will be substantially complete in the first half of 2017.

Wood products, charts 8 and 9. Wood products contribute $170 million to third-quarter earnings, an increase of $14 million compared with the second quarter. These earnings are the strongest since third quarter 2004, when we operated roughly twice the number of manufacturing facilities we do today. Adjusted EBITDA for the third quarter totaled $203 million. EBITDA from lumber totaled $85 million. Average realizations increased less than 1% compared with the second quarter. Operating rates and sales volumes decreased slightly due to downtime for capital projects and weather.

Log costs for Canadian mills increased, primarily due to weather, and Western log costs were also higher. EBITDA for OSB increased to $63 million, an improvement of over 45% compared with the second quarter. Average sales realizations increased 7%. Operating performance was very strong and the business benefited from operational mix, excellence initiatives to reduce spending on controllable manufacturing costs, wax, and resin. Engineered wood products contributed $43 million to EBITDA compared with $45 million in the second quarter.

Sales volumes for solid section and i-joist increased modestly and average realizations were flat as improved pricing in the West was offset by slower -- slightly lower Eastern realization and a weaker product mix. EBITDA for distribution declined slightly to $7 million, primarily due to a seasonal shift in products mix. The business remains focused on improving margins and lowering costs. Year to date, wood products earnings have nearly doubled compared with 2015 and operational excellence has made a meaningful contribution to that improvement. The wood products segment has made good progress on this year's OpEx initiatives and remains generally on track to achieve its 2016 targets.

I will now turn to discontinued operations, chart 11. Discontinued operations, which was formerly our cellulose fiber segment, contributed $65 million to after-tax earnings in the third quarter. This includes an after-tax gain of $41 million on the sale of our liquid packaging board business, which closed on August 31 for gross proceeds of $285 million. Excluding this gain, net earnings from operations declined $14 million compared with the second quarter. Maintenance expense increased to significantly and pulp production declined due to additional scheduled maintenance outage days. This was partially offset by higher average sales realizations for pulp, primarily due to mix.

On October 4, we announced an agreement to sell our printing papers business to One Rock Capital Partners. This completes the strategic review of our Cellulose Fibers business announced in November 2015. Both this transaction and the sale of our pulp mills to International Paper are on track to close in the fourth quarter. I'm proud of the contributions our Cellulose Fibers employees have made to Weyerhaeuser and I want to thank them for maintaining their focus on operating safely and delivering a superior customer experience throughout the strategic review process. I will now turn it over to Russell to discuss some financial items and our fourth-quarter outlook.

Thank you, Doyle, and good morning. The outlook for the fourth quarter is presented in chart 14 of the earnings slides. In our Timberlands business, we expect fourth-quarter adjusted EBITDA will increase slightly over the third quarter. In our Western Timberland operations, we anticipate harvest volumes will be lower than third-quarter levels. However, we expect sales realizations will increase modestly in each of our export markets as housing activity remains strong in Japan and Chinese demand remains solid.

Domestic log sales volumes are expected to be comparable to the third quarter. We anticipate domestic sales realizations will increase slightly in the fourth quarter as a result of steady domestic demand and seasonally lower available log supply. Western logging costs will continue to benefit from the results of our operational excellence initiatives. Southern harvest volumes are expected to be slightly higher than third quarter. Mills have adequate log inventories entering the fourth quarter and average sales realizations are expected to be flat quarter over quarter. Silviculture and road spending will be seasonally lower in the South during the fourth quarter.

In the north, fourth-quarter harvest volumes will decrease seasonally from third-quarter levels, as third quarter is typically the best operating quarter of the year. Real estate and energy and natural resources earnings for the fourth quarter are expected to be slightly higher than the third quarter, while adjusted EBITDA will be about double the third-quarter results. It is important to note that the real estate sales include a mix of legacy Weyerhaeuser properties and Plum Creek properties and that the Plum Creek properties have proportionally higher basis because they were marked to fair value in the purchase price allocation. This results in lower earnings when these properties are sold.

For wood products, we expect lower demand due to seasonal decline in building activity. Channel inventories remain lean as buyers purchase for immediate needs. We expect lumber sales realizations and the fourth quarter will be flat to slightly down compared to third-quarter levels. We expect OSB prices will decrease, giving back much of the third-quarter gains. Engineered wood products prices are expected to be similar to the third quarter.

We anticipate seasonally lower sales volumes across all product lines in the fourth quarter, and a slight increase in manufacturing costs as a result of the holiday season and scheduled downtime to complete maintenance and capital projects. Overall, we expect fourth-quarter adjusted EBITDA in earnings for the wood products segment will be seasonally lower than the third quarter. We do, however, expect adjusted EBITDA will be nearly double the fourth quarter of 2015.

Moving on, chart 10 outlines the major components of our allocated items. The contribution to earnings before special items was $5 million, $4 million higher than the second quarter. As a reminder, unallocated corporate function expense now includes about $9 million of expenses previously allocated to Cellulose Fibers. On October 31, our partner in the Southern Diversified Timberland venture redeemed their interest. Following the redemption, Weyerhaeuser now holds all of the equity interest and consolidates the Timberland venture as a wholly owned subsidiary. As a result, in consolidation the investment was eliminated and the note payable to the Timberland venture has been classified as intercompany debt. At the end of the second quarter, the investment in the Timberland venture was $825 million, and the note payable was $830 million. These items no longer appear on our balance sheet as of September 30 for financial reporting purposes.

Chart 12 summarizes our key financial items. We ended the quarter with a cash balance of $769 million, an increase of $284 million from the second quarter. This is higher than our targeted cash level and we expect the balance will decrease as we pay down the term loans with proceeds from previously announced Cellulose Fibers assets sales. We expect these sales will close by year end. Cash from investing activities during the quarter included $285 million from the sale of the liquid packaging board business.

Capital expenditures for the third quarter totaled $129 million, including $29 million for our discontinued operations. CapEx for our continuing operations will be approximately $200 million in the fourth quarter. $150 million will be for wood products, which typically has the highest capital spend during the fourth quarter. Financing cash flows for the quarter included $231 million for common dividends and $11 million of preferred dividends, which represent the last dividend payment on the mandatory convertible preference shares. During the quarter, we drew an additional $300 million on our term loan and as of September 30, we had drawn $1.7 billion of the $2.5 billion available under the term loan facilities.

Long-term debt, not including the term loan balance of $1.7 billion, was $6.6 billion at the end of the third quarter. Interest expense was $114 million in the third quarter. We expect interest expense will be similar in the fourth quarter. For our continuing operations, the Company now anticipates the full-year tax rate will be between 15% and 17%, based on the expected mix of 2016 earnings between the REIT and the taxable REIT subsidiary.

I'll wrap up with chart 13, which provide some additional detail on our share count and repurchase activities. During the third quarter we repurchased 10 million shares of common stock for $306 million, completing our post-merger goal of repurchasing $2 billion of our shares on an accelerated basis. Overall, under the $2 billion accelerated program, we purchased a total of 68 million shares of common stock at an average price of $29.49 per share. On July 1, the mandatory convertible preference shares converted to common shares. As a result of the conversion, the Company issued approximately 23 million shares. We ended the quarter with about 748 million shares outstanding. Now I'll turn the call back to Doyle and look forward to your questions.

Thank you, Russell. I will wrap up with some brief comments on merger synergies and integration. We continue to implement the changes necessary to achieve our $100 million hard-dollar cost synergy target. As of the end of the third quarter, we have achieved about two-thirds of these reductions on a run rate basis. I am highly confident we will meet or exceed our $100 million run rate cost synergy target by the end of year one.

We've also fully identified the sources of the reductions for the $35 million of cost formally allocated to Cellulose Fibers and are on track to eliminate these costs within one year of closing the International Paper transaction. The integration with Plum Creek continues to progress well. Working together will be the foundation of our success and I'm encouraged by the teamwork I see within and between the businesses and functions of our merged Company. I'm excited by what we have achieved and where we are going and I look forward to continuing to share our successes with you as we work together to drive value for shareholders through a focused portfolio, industry-leading performance, and disciplined capital allocation. With that, I'd like to open the floor for questions.

(Operator Instructions)

Anthony Pettinari, Citi.

Good morning.

Morning, Anthony.

Doyle, I had a question on the Softwood Lumber Agreement. Earlier this year there seemed to be some optimism a new agreement would be negotiated and over the past couple of weeks we've had US legislators and the Canadians issuing statements saying the other side isn't serious. I was wondering if you were surprised by the lack of an agreement at this point and kind of where we stand here. With the expiration of the standstill, period, I guess the US Lumber Coalition has talked about initiating trade cases and to the extent that you're able, I was wondering if you would give us any thoughts on that process.

Yes. Anthony, as we previously said, we are very actively involved with and fully supportive of the US Coalition. Frankly, we would prefer the certainty of a negotiated agreement and hopeful that one will be reached. As you mentioned, the governments are having ongoing negotiations of those are pretty fluid right now. With that said, as we've said consistently, any agreement would need to be consistent with the objective identified in Obama/Trudeau joint statement, which is to maintain Canadian exports at or below an agreed US market share to be negotiated. Where we are now I think is ongoing negotiations, but if no agreement is reached, we would expect a petition will be filed soon and then we'll see how it plays out from that point forward. That's kind of where we are and the approach we're taking.

Okay. That's helpful. Just switching gears to wood products, I was wondering if you could talk a little bit about the pricing environment in engineered wood products. I think there were some price initiatives on the table earlier this year and in 3Q prices seem to be flattish to maybe down a little bit. I was wondering if you could just talk about the forces that are impacting that market and kind of outlook for 4Q.

Yes. There are a lot of moving pieces in the pricing for the EWP currently. To get to the second part of your question, we anticipate EWP prices will be essentially flat in the fourth quarter versus the third quarter. Regarding the price increase, the price increase that went into place it within the West in the quarter, the second quarter and third quarter, that was successful, but was offset by some pricing pressure in the East. As you know, Anthony, there's been a lot of dealer consolidation in the Eastern markets and a lot of jockeying around has occurred in those markets. Up in the West, down in the East, which has resulted in the net pricing that we saw in the third quarter. We think that's stabilized and anticipate essentially flat prices in the fourth quarter versus the third.

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

Brian McGuire, Goldman Sachs.

Thank you. Good morning, everyone.

Good morning, Brian.

Just wanted to follow up on wood products. Obviously a really strong quarter like you highlighted in the prepared remarks, good EBITDA lot year on year, but seemed like it could have been a little bit better if lumber margins had been closer to where they were in 2Q. I know you mentioned maybe some downtime and weather related issues, but just wondered if you could dig into that a little bit more and talk about the margins and lumber and where they might be headed from here.

Yes. I think there were three things that impacted our lumber results in the third quarter versus the second. As you mentioned, we had a strong second quarter in lumber. Three things the third quarter. One was we had slightly lower sales volume. Two, as you mentioned, lower operating rates. That was due to weather and some downtime for installation of some capital projects as we continued to invest capital in that business to drive down our overall cost structure. Third, and the most surprising one for us, was that log cost increased in Canada. That was weather related. As you may know, Canada has been very wet this year and as a result having to spend additional dollars to get wood to the bills, so that had an impact.

Also, we had a lot higher log costs in the West. That's consistent with what we reported in our Timberlands operation so those, both higher log costs in Canada and the West impacted our margins and results in the third quarter versus the second quarter. Going forward, we would anticipate, as we've said, lumber prices in the fourth quarter to be essentially flat to maybe down just a little bit in fourth quarter versus third quarter.

Okay. Great. Then just a follow-up on the real estate segment in the fourth quarter. I know you said you'll be about double in the EBITDA. Is that the start of may be a trend higher here as you're getting to the process of evaluating everything? Can we start to think about it being somewhere closer to that neighborhood then where you've been historically? Or is there just some lumpiness in it and we're kind of back to lower levels in 2017?

Brian, this is Russell. On the real estate, as we mentioned, we expect fourth-quarter to be double the third quarter, and then we would expect that trend to continue as we work into 2017, work through our AVO process, and really start bringing some of the Weyerhaeuser properties in through the real estate program. As we've indicated, our target for the real estate and energy and natural resource business is at 15% of total EBITDA and so I would expect that in 2017 we would start moving towards that target.

Okay. Thanks very much.

Thank you.

George Staphos, Bank of America Merrill Lynch.

Hi, everyone. Good morning. Thanks for the details. I wanted --

Good morning, George.

How are you doing, Doyle?

Good.

I wanted to dig into wood products a bit further. Can you comment at all, maybe provide a few more details in terms of where you stand with being, as you termed it, back at the bottom? I know we'll get more color probably in December on this, but what either initiatives do you have going on or where you stand in terms of the -- are you -- you're certainly not 100% done but where you stand in terms of being done on that project. The related question was on operational excellence, you said, as you were talking about wood, if I heard you correctly, that you are generally on track. Now, that's fine, but I kind of took your comments as maybe there were some areas that were not progressing as well as you'd like. If that was the correct assessment, where do you need to see some accelerated pickup? Then I had a couple of follow-ons either way.

Okay. George, to your point, we will be talking about both of those issues, extensively, in our December investor presentation, which we are looking forward to. Let me give you a sense on both of those. On -- in terms of black at the bottom, as you know and as we've talked about consistently over the past two or three years, that has been our focus in terms of our operational excellence initiatives, driving down our costs, the capital that we are spending and we've made a lot of progress on that front.

As you said, we're not there yet but I would say we're 60% to 70% of where we need to be, maybe even a little more than that in terms of getting our cost structure where we are black at the bottom. As we've said before, what we measure that is against is what happened back in the recession in the 2007, 2008, 2009 timeframe, type timeframe. Saw a lot of progress made there, more work to do. In terms of generally on track, George, I wouldn't take -- I wouldn't over focus on that generally. I would say we are on track in terms of our OpEx initiatives, still three -- I guess three months left in the year, so didn't want to get over our skis, but again, we will give you a report on that in December. I'm very pleased with the progress we are making in our wood products operation and frankly, also in our Timberland operation in terms of delivering against our OpEx targets for 2016.

All right. Thanks for that, Doyle. Two last ones and then I'll turn it over. As we think about value return and the dividend, certainly the Company has done a very, very good job of returning value to shareholders over the last couple of years, so this is not a complaint. As we think forward for the dividend, should we more or less think about it trending with the realizations that you can get in Timberland in terms of what drives the next level of, if there's anything left, for that matter, of a sustainable pick up in the dividend growth rate? Russell, on the term loan, should we expect that you'll be paying that down pretty quickly from here on a going-forward basis? Thanks, guys, and good luck on the quarter.

Thanks for those question, George. I will address the dividend increase and then I'll ask Russell to answer the term loan question. In terms of the dividend, again, as we've said consistently, we are committed to a growing and sustainable dividend. 2006 is a very noisy year, as we all know, as we do this various transactions. Looking into 2017 as we think about it, we're going to benefit from our costs -- continue to benefit from our cost and operational synergies, continued OpEx improvements and what we believe will be stronger housing markets.

To your point, we're also going to benefit from a portfolio perspective, from a much more stable earnings streams for Timberland and as we just talked about, improvements made in wood products cost structure to eliminate some of the downside. With all that said, we will be working very closely with our Board to determine the right level of dividend going forward. Russell, if you will address the term loan question.

George, as I mentioned, we have $1.7 billion drawn on the term loan. As we start closing on the Cellulose Fibers transactions, we will start paying back down. We would expect that to be paid down hopefully by year end or soon around that time.

Thank you very much.

Chip Dillon, Vertical Research Partners.

Yes. Good morning, Doyle and Russell.

Good morning, Chip.

First question is, I might be mistaken but I think you're earning maybe more than 100% of the cumulative profits in the engineered wood business. That's quite a turnaround. I really seriously wanted to ask you about with these kinds of numbers and looking at the rest of the industry, and it looks like you're not necessarily transferring raw materials and low, so how are you doing it? Is it because of the distinctiveness of some of your products? Or would you say that maybe it is being vertically integrated? Or maybe there's something else that were missing.

Yes. I would not attribute it -- much of it, Chip, to being vertically integrated. I would attribute it to all the things that we've been working on now for two or three years starting to fall to the bottom line in terms of log recovery, controllable spend, preventive maintenance. Chip, you've heard as talk ad nauseam about it's the basic blocking and tackling and I think we're starting to see the benefit of that hitting the bottom line.

The other part of it, as you mentioned, is kind of the products that we bring to market and the additional value that we get for some of those products. I think it's a combination of both but I think really the reason for the improvement that we've seen of the last two or three years have primarily been driven by basic blocking and tackling in that business.

I suppose it's safe to say it's no longer sort of in the category that you put it in when you had your first investor meeting with us.

Chip, I'm happy to say that it is no longer in that category. I think that business has proven the right to be part of our portfolio and on an ongoing basis. You constantly got to earn that right but that business, as you've highlighted and I appreciate you saying it, has made a dramatic turnaround in terms of bottom-line performance.

Then just a couple quick ones and turning it over -- before turning it over. Can you update us on what you -- and you might have mentioned this, what you see CapEx at this year? I know it's early, but directionally, where should it go next year? Lastly for Russell, I know there's roughly a $600 million tax bill tied to the sale of the Cellulose business. Does that tax actually get paid in cash sometime in 2017?

The first question on CapEx, as we've indicated, we're focused on about $425 million CapEx this year, $125 million in Timberlands and $300 million in wood products. I think next year we expect around that general amount, maybe just a little more in Timberlands as we bring in the combined Plum Creek and Weyerhaeuser properties. As far as the tax bill on CF, we would expect that to be paid, hopefully again by year end but possibly in the first quarter.

Okay. Thank you.

Gail Glazerman, ROE Equity Research.

Hi. Good morning.

Good morning, Gail.

I assume of this is baked into your guidance, so can you just talk about any impact you had from Hurricane Matthew, either in terms of your operating facilities were your timber operations?

Yes. We are fortunate, Gail, from the hurricane perspective, that we had minimal damage to our Timberlands operation due to the hurricane. A couple days, or maybe a few more that we were kind of out of the woods in the Atlantic region, but very minimal damage. In terms of from a wood products perspective, we had some production loss as you would expect at our Atlantic mills. We had some minor water damage to finished lumber, some finished lumber, but nothing that's (technical difficulty).

Okay. Going back to the softwood lumber agreement, can you just give a little bit of color on how it's affecting your conversations with customers and how they may be preparing for it as they look out to the building season next year?

I mean, clearly there's some uncertainty regarding the Softwood Lumber Agreement and how it plays out, Gail, but I wouldn't say it's affecting of the way our customers are thinking about their ongoing business. In fact, customers continue to be -- especially homebuilders, continue to be very optimistic about the demand that's out there in terms of new home sales and just underlying demand for new houses. It's a minor part of our conversation. It's not a major part, but our customers continue to be optimistic for the balance of 2016 and into 2017.

Okay. One last one. It can you give us any sort of color on the export market, particularly some of the competitive dynamics in terms of logs from Russia and New Zealand or even some finished wood products from Europe going into Japan, just what you're seeing and how that's been trending?

Yes. Let's talk about that. Bottom line is we're encouraged by what we see in the export markets currently. From a Weyerhaeuser perspective, we anticipate that from in Japan, which as you know is our most important market, that pricing will be up in the fourth quarter versus the third due to study demand and lower log supply that always happens in the fourth quarter. We think volume may be down a little bit but that's just going to be due to timing and the way the shipping works.

In China, we continue to see solid demand, anticipate higher prices in China in the fourth quarter, and encouragingly, inventories actually came down a little bit in the third quarter versus the second. They're currently at 3.38 million cubic meters, which is down from where they ended at the second quarter. In terms of just overall views on it, we've seen a slight increase in imports into China from Russia, but nothing significant and New Zealand seems to have kind of stabilized. That's what we're seeing overall in export markets.

Okay. In terms of European competition in Japan with finished goods?

Yes. That's the challenge that our customers face is glulam that comes in from Europe. Currencies have not been helpful from that perspective. The good news in Japan is housing is growing 6%, 7%, 8% and our customers continue to have very good demand for our Doug fir, which is used, of course, to build houses and the solid logs -- or solid lumber is a preferred building material for post and beam construction.

Thank you.

Thank you.

Mark Wilde, BMO Capital Markets.

Good morning, Doyle. Good morning, Russell.

Good morning, Mark.

Doyle, first question. It sounded from your comments like maybe the AVO process was going a little bit slower than expected. You said you expected to have it substantially done by the end of the first half of next year. Initially we had been talking about it sort of by late this year, very early next year.

No, Mark, I would not say it has slipped at all. Our focus has been on the South and as I said, we're in the process of wrapping that up currently or in the latter stages of it. We'll then be moving to the West and it may take us until -- into the second quarter to complete it in the West, but I would actually tell you it's going very well. Our biggest opportunities, as we said all along, are in the South so we're pleased that we're wrapping that up. As Russell mentioned, I think were going to start to really see the benefit of that in early 2017 as we move forward with this process. I would categorize it as right on track.

Okay. All right. That's helpful. Can you give us a little bit more color background on the Uruguay announcement, and then if you were to dispose of that, what you would likely do with the capital?

Yes. Mark, as we previously mentioned, as part of this merger integration, we've done a review of all 13 million-plus acres of our timberland. As you know, Uruguay is a project that was started back from the ground up, back in the mid-1990s, and is just now really coming into maturity. Our focus going forward is going to be primarily domestic and we think there may be an opportunity to position Uruguay with what I would call a more natural sponsor that may be more focused on those markets going forward. In terms of what we'll do with the cash, as you would anticipate, Mark, we will run that through our capital allocation priorities as we do everything and figure out the best use of that cash to drive value for our shareholders long-term.

All right. Doyle, just if I could, they one other kind of block of land that seems like a little bit of an outlier is these kind of northern Timberlands in New England and the Great Lakes. They are not plantations. It's a little different business than what you have in the South or the West. Any thoughts there?

Mark, I would answer that this way, consistent with what we said before. We are in the midst of a review of our overall Timberland portfolio with 13 million-plus acres that we now have, we have lots of flexibility as to how to create the most value for our shareholders so we will be factoring all of that in as we move forward.

Okay. The last question I had, Doyle, is just back on the SLA one more time. I'm just curious from your perspective, it seems to mean that we are likely to have a more protectionist administration no matter who is elected come January. I'm just curious about whether you share that view and whether you think that's having any effect on sort of the negotiations right now. In other words, are the Canadians perhaps more interested in getting something done with this administration rather than waiting to see what they get come January?

Yes. Mark, I would say I don't think the election is currently having much effect on the negotiations. In terms of predicting what in the hell they happen in this election or what the implications of that may be is probably not somewhere that I should go or am qualified to go. We'll see how the election plays out but we are encouraged, Mark, at this point about the negotiations that are going on between the government and we will just have to wait and see how this plays forward.

Okay. All right. Sounds good. Good luck in the fourth quarter and into next year, you guys.

Thank you, Mark.

Mark Connelly, CLSA.

Thank you. Doyle, two things. Obviously, the step up in basis affects the real estate profit that you report but it doesn't mean that the sales are any less attractive. Can you give us a sense of whether these were higher or lower than average quality sales?

Mark, this is Russell. I think on the quality sales, as we mentioned, a lot of those were transactions were the northern properties. It's not that they weren't lower quality is just lower price per acre than you would see in the West or in the South.

Okay.

Mark, you're exactly right on your first comment that yes, that doesn't mean they're not quality sales just because they were written up. Thank you for making that point. That's exactly right.

Yes. I'm sorry, Russell, what I was really trying to get out as relative to what you do in the north, was this pretty typical stuff?

Yes. I think those are typical transactions that you would see in the north.

Okay. That's helpful. Just one simple question, how much of a higher OSB prices that we saw in the quarter actually hit engineered wood products in the quarter? I'm just trying to get a sense of how fast that flows through.

About $2 million impact in the quarter, Mark.

Perfect. That's all I need. Thank you very much.

Thank you.

Collin Mings, Raymond James.

Good morning, Doyle. Good morning, Russell.

Good morning, Collin.

I guess just first one just recognizing you're taking a pause right now as the Cellulose Fiber sale is being finalized. Just maybe update us on how you're thinking about the remaining $500 million under the share purchase reauthorization, again, especially here with the stock at $30 or so. Not too terribly different than kind of the average repurchase price of the $2 billion that you completed this year.

Yes, Collin. If you'll recall, when we announced the merger with Plum Creek, we said at that point in time that we were going to do two of the $2.5 billion on an accelerated basis, and as you just alluded to, we completed that, actually, in a little less than six months. We also said at that point in time, when we announced it, that subsequent to that we would take a pause and work closely with our Board to determine the timing of the additional $500 million, see where we were on our Cellulose Fibers transaction and a lot of other factors. We're in that pause period. We will work closely with our Board to determine what the timing is going to be on the additional amount. As you alluded to, where our stock is trading will be an important component of that decision.

Okay. Just following up on the commentary as far as the outlook for Q4, just on Timberlands, you indicated that it would be up modestly relative to 3Q, but could it actually be higher year over year relative to 4Q 2015 or is it likely to fall somewhere in between?

Yes. I'd have to go back and look at the 4Q 2015 numbers because as you very well know, Colin, there's lots of moving parts with 4Q of 2015. We didn't have Plum Creek as part of the Company, so we'll have to get back with you on exactly that. What I would tell you, as we said in the guidance, we do think it will be up in the fourth quarter versus the third and a big driver of that, as I mentioned earlier, is what we're seeing in export markets.

Okay. One last one for me, just as your budgeting for 2017 and given of the lack of momentum clearly in the log pricing in the US South this year, just curious how you're thinking about shaping up harvest activity for next year. Again, recognizing you are not providing guidance on harvest wise at this point, but just how does that factor in, Doyle, just as you've referred to before the stubbornly low log price in the US South as you think about harvest plans.

We are working on our harvest plans right now, Colin, as we put the two companies together. We think we're going to have the opportunity to maximize the harvest land on a go-forward basis. As part of that, we will factor in what we think is going to happen with southern saw log prices. We do remain convinced that we are going to reach the inflection point where southern saw log prices are no longer stubbornly low but start to head in the right direction. We're encouraged by what we see, as I mentioned earlier, about continued growth in housing, and are also encouraged by some of the announcements we've seen regarding additional capacity coming online in 2017 in the South. All that will be factored in and we'll be providing more color on that as we move forward.

All right. Thanks, Doyle. See you in December.

All right. Thank you.

Steve Chercover, Davidson.

Thanks. Good morning, everyone. I was hoping you could (inaudible) the dissolution of the Timber joint venture. If I'm not mistaken, the counterparty was the Campbell Group and I think you said the debt and the note will negate one another, but is there any kind of capital call? Then I had a second question.

Sure. This is Russell. As I mentioned, we did dissolve that at the end of August. When we did that, if you recall, that was 450,000 acres in six states. It was a joint venture with the Campbell Group. They redeemed their interest and so we received the note back, distributed the Timberlands. There is a small gain in recognition at about $6 million, but there's no additional capital calls and there's no continuing ongoing obligation.

Okay. Well, that's good news. I thought, and hopefully this is just a red herring, that the IRS was challenging the structure and there was some discussion or litigation with them?

You are correct. Our 2008, Plum Creek's 2008 income tax return is currently being audited and, as you recall, Plum Creek, we appealed that to the IRS but we could not reach a resolution and so recently Weyerhaeuser filed a petition in the US Tax Court. As you are aware, this will take a number of years to resolve but we remain confident that in our position, we really, we do expect a favorable outcome from the US Tax Court.

I assume that Weyerhaeuser didn't put out a filing because it's not material, but can you tell us in a worst-case scenario what the financial impact might be?

Yes, we're not going to -- we won't do that but we will say, I'll reiterate, we're very confident in our position and expect we will get a favorable outcome.

Okay. It does fail to meet the test of materiality, I assume.

We have not reserved anything related to this. Again, we're very confident that we are going to succeed in this.

Great. Thanks, Russell.

You bet.

Mark Weintraub, Buckingham Research.

Thank you. A couple follow-ons. First, going back to the dividend, the fact that there hasn't been an increase in 2016, you mentioned a lot of moving parts and there was also the question on the share repurchase. You mentioned wanting to have the Cellulose Fibers sale done as well. Should one read the fact that there hasn't been a dividend increase so far this year, is that because the way fundamentals have played out? Or is that because you would want to wait to see to get the asset side sales done, et cetera, before that would even be contemplated?

Mark, as you would expect, we factor all of what you just outlined into a dividend decision. We'll, as I mentioned, continue to work with the Board to figure out what the right timing and what the right level is for a dividend increase as we move forward.

Okay. In terms of the AVO process, you indicated that the southern analysis would be done well before the western analysis and relatively soon. Were you -- when that part of the analysis is done, will that be shared with the investment community or is the intent to wait until the whole analysis is concluded?

Mark, as you would expect, we will be providing a significant update on that at our December investor meeting. We'll tell you where we are, how were thinking about it, how the South is playing out and maybe even preliminary how we're thinking generally about the West. All those details are still being fleshed out but we will be giving a significant update at our December investor meeting.

Okay. Great. Lastly, a real small one. On the Uruguay, if you were to go forward with a sale, would that be -- would that potentially be taxable or would that not be a taxable event?

The Uruguay assets -- this is Russell. The Uruguay assets are held in a combination of the REIT and the TRS and so we would have some minor tax leakage. We really haven't gotten to that point yet, but we would expect, probably, some tax leakage because of the TRS-held assets.

Okay. Great. Thanks a lot.

Thank you, Mark.

Paul Quinn, RBC Capital Markets.

Yes. Thanks very much. Good morning.

Good morning, Paul.

Just a question on wood products. It looks like you did a very good job on the OSB segment, a little bit -- I don't know -- a little bit off of versus our numbers on the lumber side. It looks like costs were up. I think you cited weather and capital projects. Maybe you could just outlined what the capital projects you had in the quarter and how much of that was an effect on lumber cost.

Yes. As we mentioned, lumber was off basically for three reasons. One was the slightly lower sales volume. Second one, as you just alluded to, was lower operating rates due to weather and downtime for installation of capital projects. The third and the largest to try to quantify this, which I think is where you're headed, Paul, was the log cost increase, primarily in Canada but also in the West, as we mentioned earlier.

The downtime for installation of the capital projects was not for any big one project. As you know, we're spending roughly $300 million a year in capital in our wood products operation. Some of that maintenance capital but some of it's also capital that we're putting into drive down our overall cost structure. We just had a couple of those projects that hit in the third quarter and there'll be more of those in the fourth quarter.

Okay. I just had a question on softwood lumber, just trying to understand Weyerhaeuser's position on this. Without knowing quota levels or any kind of levels of taxation under CBD or AB duties, from a theoretical standpoint, what's better for Weyerhaeuser, a quota or a combined duty?

I would say, ultimately, a quota is the best for all parties involved because it's simpler. It establishes what the levels is. There's a certain level of certainty so what we would like to stand up with, Paul, as we've said all along, is an agreement rather than having to go through the legal system and having a quota in place, a very simple quote in place, that sets forth the amount of imports from Canada into the US.

Well, thanks. That's all I had. Best of luck.

All right. Thank you.

There are no further questions at this time, Presenters, do you have any closing remarks?

Yes. Let me make a couple of closing remarks. If I've already alluded to, I just wanted to remind everybody that we will be holding our Investor Day on December 13 at the New York Palace Hotel. We look forward to that and we look forward to seeing many of you there. I would just conclude by thanking everybody for joining us this morning and thank you for your interest in Weyerhaeuser.

This does conclude today's conference call. Thank you for participating. At this time, you may now disconnect.