威爾豪瑟 (WY) 2016 Q4 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 fourth-quarter 2016 earnings conference call.

(Operator Instructions)

Thank you. I would now like to turn the call over to Beth Baum, Director of Investor Relations. Please go ahead.

Thank you, Brent. Good morning everyone, and thank you for joining us today to discuss Weyerhaeuser's fourth 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 of GAAP can be found in the earnings materials on our website.

On the call this morning are Doyle Simons, Chief Executive Officer; and Russell Hagen, Chief Financial Officer. I will now turn the call over to Doyle Simons.

Thank you, Beth, and welcome everyone. 2016 was a transformational year for Weyerhaeuser. Through our merger with Plum Creek and the $2.5 billion divestiture of our cellulose fibers business, we became a focused timber, land, and forest products Company, and nearly doubled the size of our timberland holdings.

In the midst of executing these portfolio changes, we maintained our relentless focus on performance. In 2016, we increased full-year EBITDA by almost 55% to nearly $1.6 billion. We delivered the highest annual wood products earnings in over a decade. We captured merger cost synergies faster than expected, and raised our 12-month run rate target by 25%, and we achieved over $100 million in operational excellence improvements. Finally, we returned $2 billion of cash to shareholders through the repurchase of common shares.

For the full year 2016, Weyerhaeuser reported net earnings of just over $1 billion, or $1.39 per diluted share, on net sales of $6.4 billion. These results include the solid fourth-quarter performance I will highlight this morning.

Our fourth-quarter net earnings were $551 million, or $0.73 per diluted share, on net sales of $1.6 billion. This includes after-tax earnings of $489 million from discontinued operations, primarily the gain on divestiture of our pulp mills, and after-tax special charges of $44 million for a tax adjustment associated with repatriation of Canadian earnings following our Cellulose Fibers divestiture, merger-related expenses, and some non-cash real estate impairments.

Excluding these items, we earned $106 million, or $0.14 per diluted share. Adjusted EBITDA for the fourth quarter totaled $400 million. This is an improvement of over 60% compared with a year ago, and represents substantial increases in each of our operating businesses.

Before discussing our business results in more detail, I will make a few comments on the housing market. Single-family housing activity continued its steady improvement in the fourth quarter. Single-family starts rose 10% compared with the third quarter, and ended up the year up 9% compared with 2015.

Total US housing starts finished the year at nearly 1.17 million, a 5% improvement from 2015. As expected, the single family share of activity increased during the year, and multi-family activity remained volatile. For 2017, we expect single-family housing starts to increase by over 10%, and we anticipate total housing starts of approximately 1.25 million to 1.3 million.

Economic fundamentals support a trajectory of continued steady housing growth. Employment and wages are rising. Consumer confidence is strong.

Mortgage rates remain historically favorable, and published surveys indicate that builder confidence remains near historic highs. Although builders are managing through some constraints, such as availability of skilled labor, stringent permitting requirements, and land and construction cost inflation, our customers echo the optimism seen in builder surveys, and feel confident the housing market will maintain solid upward momentum.

Let me now turn to our business segments. I will begin the discussion with timberlands, charts 4 to 6. Timberlands contributed $123 million to fourth-quarter earnings, $1 million more than the third quarter, and $223 million to adjusted EBITDA. Western timberlands contributed $101 million to fourth-quarter EBITDA, compared with $109 million in the third quarter.

Export log volumes declined due to seasonally slower construction activity and timing of shipments. Average realizations, however, improved moderately across all export markets, as market dynamics remain favorable.

In Japan, housing activity remained solid, with wooden housing starts up 8% for the full year. Japanese lumber inventories, which were elevated for much of 2016 after delaying the consumption tax increase, continued to decline through the seasonally slower construction period, and are now at more normal levels. This created favorable supply/demand dynamics, and supported improved pricing in the quarter.

Pricing for our Chinese export logs improved, also. Fourth-quarter log inventories at Chinese ports were largely flat with third-quarter levels, and we experienced continued strong take-away throughout the quarter.

In the western domestic market, sales volumes were lower as mills took holiday down time, but average realizations improved slightly. Low mill inventories drove demand, particularly in southern Oregon markets. Our western crews did a good job adjusting harvest plans to adapt to record October rainfall.

Our fourth-quarter harvest volumes were unaffected by weather, and we had no infrastructure damage. However, per-unit logging cost and road spending increased compared with the third quarter, due to the wetter weather.

Moving to the south, southern timberlands contributed $112 million to fourth-quarter EBITDA, up $4 million compared with the third quarter. Southern markets remained flat as mills held adequate inventory, and average log realizations were largely comparable to the third quarter. Fee harvest volumes increased modestly, as fourth quarter typically includes a higher volume of stumpage sales.

As in the west, our crews successfully flexed harvest settings to adjust to November's severe weather, and we had no material damage to our timberland. Silviculture expenses declined as fourth quarter typically includes fewer site preparation and hardwood management activities. EBITDA for northern timberlands totaled $7 million.

This was unchanged from the third quarter on comparable prices and volumes. The strategic review of our Uruguay operations is proceeding well. We continue to see strong interest, and look forward to providing further information when the review is complete.

Real estate, energy, and natural resources -- charts 7 and 8. Real estate and E&R contributed $13 million to fourth-quarter earnings, excluding special items, the segment earned $27 million, $12 million more than the third quarter. EBITDA increased nearly -- start over, EBITDA increased nearly 2.5 times to $90 million.

Our average price per acre declined due to mix, as fourth quarter included a large transaction in Montana, where timberland prices are regionally lower. For the full year 2016, we sold approximately 83,000 acres, or roughly 0.6% of our land base. Fourth-quarter special items included $14 million of non-cash impairments.

These resulted from a change in strategy for several small-legacy real estate projects that were formerly targeted for development. The asset value optimization work continues to proceed well. As we indicated during our December Investor Day, we have finished applying the AVO process across our southern ownership, and are in the process of listing some of the 500,000 newly identified acres.

Our focus has now turned to the west, where we are evaluating our Washington and Oregon acres. This work is going very well, and remains on track for completion by mid-year 2017.

Wood products, charts 9 and 10. Wood products contributed $99 million to fourth-quarter earnings. The business delivered full-year 2016 earnings of $512 million, the strongest annual earnings since 2005.

Fourth-quarter adjusted EBITDA totaled $132 million, $71 million lower than the third quarter, primarily due to seasonally lower sales volumes and operating rates. Lumber contributed $57 million to EBITDA, $28 million lower than the third quarter. Sales volumes declined 12%, average lumber realizations decreased 2%, and western log costs increased.

Operating rates were lower, and unit manufacturing costs increased due to planned down time for installation of capital projects at several of our southern mills. Heavy rains and regional flooding resulted in modest weather-related down time in some of our western and southern locations, and higher manufacturing costs for our Canadian mills.

EBITDA for OSB totaled $46 million, $17 million lower than the third quarter. Sales volumes declined 18%, and average sales realizations were comparable to the third quarter. Operating rates declined due to down time for planned maintenance, as well as repairs to our Sutton, West Virginia, mill.

As we previously disclosed, the Sutton mill experienced a fire on November 1. This was an insured event. Repair activities progressed rapidly and successfully, and the mill resumed full production around year end.

The net fourth-quarter financial impact of this fire on the OSB business was approximately $5 million, the amount of our deductible, as we brought the mill up and received insurance reimbursements faster than expected. We anticipate no net financial impact from this event in the first quarter, as modest repair expenses should be offset by reimbursements received within the quarter.

Engineered wood products contributed $26 million to EBITDA, $17 million lower than the third quarter. Sales volumes for solid section and I-joists declined approximately 10%, and operating rates were lower due to planned maintenance and holiday down time. Average realizations increased modestly.

EBITDA for distribution totaled $5 million, slightly lower than the third quarter. By focusing on improving product margins and tightly managing costs, the business performed well in what is typically a seasonally challenging quarter.

I will now turn to discontinued operations, chart 12. We closed the sale of our pulp mills and printing papers business on December 1 and November 1, respectively. This completed the divestiture of our cellulose fibers segment. Net after-tax earnings from discontinued operations of $489 million are primarily comprised of the gain on these two divestitures.

Chart 13, operational excellence. As I mentioned in my opening remarks, I'm proud that each of our businesses maintained its relentless focus on improving relative performance, and delivered strong 2016 operating results throughout the merger integration process. Each of our businesses met or exceeded its 2016 operational excellence target.

Timberlands delivered $42 million of operational excellence improvements, primarily from merger-related operational synergies. In wood products, OpEx improvements included $16 million in lumber, $21 million in OSB, $12 million in engineered wood products, and $15 million of EBITDA improvement for distribution. The benefits of these improvements are clearly visible on our bottom line.

In total, wood products EBITDA improved by almost $270 million in 2016 compared with 2015. A $41 per 1,000 square feet year-over-year improvement in our OSB realizations created a tail wind of $120 million; and an $11 per 1,000 board feet improvements in our lumber realizations provided a tail wind of approximately $50 million. The remaining $100 million improvement was largely attributable to nearly $65 million of wood products OpEx and the addition of the Plum Creek wood products mills.

For 2017, we are targeting additional operational excellence improvements of $95 million to $125 million across our businesses. This includes $40 million to $50 million in timberlands, $20 million to [$25 million] in lumber, $20 million to $25 million in OSB, $10 million to $15 million in engineered wood products, and $5 million to $10 million in distribution.

I will now touch briefly on our merger cost synergies. We have been achieving our targeted cost synergies faster than anticipated, and as we mentioned in December, the scope of opportunity has exceeded our initial expectations. We raised our cost synergy target by 25% to $125 million, and remain highly confident we will achieve this full amount on a run-rate basis by the end of first quarter 2017.

We also remain on track to eliminate the $35 million of costs formerly allocated to our cellulose fibers business no later than 2017 year end. I will close this morning with a few comments on the softwood lumber agreement. Although discussions between US and Canadian negotiators continued through the end of 2016, we have been unsuccessful in reaching an agreement.

With the change in administration, negotiations are currently on hold while US trade representative and Department of Commerce appointees are confirmed and take office. In the mean time, the US International Trade Commission and Department of Commerce have continued to evaluate the petition for countervailing and anti-dumping duties filed by the US coalition at the end of November.

On January 6, the ITC unanimously determined that there's a reasonable indication that the US has been materially injured by imports of softwood lumber products from Canada. The US Department of Commerce is currently conducting an investigation that will result in a determination regarding preliminary duties. We expect the announcement regarding preliminary countervailing duties in late April, with an anti-dumping determination following in late June.

Our preference remains for a negotiated agreement. The US coalition continues to work closely with the office of the US trade representative, and we look forward to resuming negotiations. I will now turn it over to Russell to discuss some financial items and our first-quarter outlook.

Thank you, Doyle, and good morning. The outlook for the first quarter is presented in chart 16 of the earnings slides. In our timberlands business, we expect first-quarter earnings and adjusted EBITDA will be comparable to the fourth quarter.

In our western Timberlands operations, we expect increased log sales volumes and slightly higher average sales realizations in the first quarter, primarily driven by higher export mix. Export volumes to Japan and China are expected to increase as a result of the timing of shipments and continued favorable demand.

Domestic log sales volumes and average sales realizations are expected to be comparable to the fourth quarter as a result of continued stable demand. Western road costs will decrease due to lower road spending, which is typical in the winter months.

Southern harvest volumes are expected to be seasonally lower than fourth-quarter levels, as a result of harvest timing in some of our southern markets. We expect average sales realizations for the first quarter will be similar to fourth-quarter levels. Silviculture spending in the south will be higher than in the fourth quarter, as we perform more forestry activities such as competition control and fertilization during the first quarter of the year. In the north, we anticipate first-quarter sales volumes will be slightly lower than the fourth quarter, and we expect average sales realizations will be comparable to fourth-quarter levels.

Real estate, energy, and natural resources earnings and adjusted EBITDA for the first quarter are expected to be significantly lower than the fourth quarter as a result of the timing of our real estate sales, with first-quarter EBITDA comparable to the first quarter of 2016. We typically close fewer transactions in the first and second quarters of the year, as recreational buyer traffic slows during the winter months.

The spring and summer months are the most active selling seasons, with the largest portion of the sales closing in the second half of the year. We continue to expect over $250 million of EBITDA from our real estate and energy and natural resources business in 2017.

As we discussed at our December investor meeting, we expect land basis as a percentage of real estate sales to be between 45% and 65% for the full year 2017. For wood products, we anticipate higher sales volume across all product lines in the first quarter, as we enter the spring building season. We expect manufacturing costs will improve as our operating rates return to normalized levels, following fourth quarter's decreased levels, resulting from maintenance and capital project installations.

Realizations remained relatively strong going into the fourth quarter, as we did not experience the seasonal declines in wood product pricing that typically occur during the holiday season. We anticipate lumber and OSB sales realizations in the first quarter will be comparable to fourth-quarter levels. Overall, for wood products we expect adjusted EBITDA and earnings for the first quarter will be higher than the fourth quarter, and will be roughly $50 million higher than the first quarter of 2016.

Chart 11 outlines the major components of our unallocated items. For the fourth quarter, the $31 million earnings variance in unallocated items is driven by a $20 million increase in non-cash charges related to LIFO inventory adjustments, profit elimination, and foreign exchange.

Moving on to our retirement and pension plans, the year end 2016 funded status of our defined benefit pension plans and post-employment retirement plans decreased by $383 million compared to 2015, as a result of a decrease in the prescribed discount rate. Discount rates decreased by approximately 20 to 30 basis points for both the US and Canadian plans. We did not make any cash contributions to the US qualified pension plan in 2016, and we don't anticipate any cash contributions in 2017.

Cash paid for all other pension and other post-employment retirement plans in 2016 was nearly $100 million, which included one-time payments related to the Plum Creek merger. We expect cash payments in 2017 will be approximately $70 million. We expect to record approximately $100 million of non-cash unallocated pension and post-retirement expense in 2017.

Chart 14 summarizes our key financial items. As Doyle mentioned, we closed the sale of the cellulose fibers pulp mills on December 1. Pursuant to US GAAP, the receipt and use of cash proceeds from the sale are recorded in different categories within our cash flow statement. The $2.2 billion of cash proceeds from the sale is shown in cash from investing activities. Immediately following the close of the sale on December 1, we used a portion of the proceeds to pay off the $1.7 billion term loan, which you can see in cash flows from financing activities.

Finally, we paid $494 million of taxes related to the sale of our cellulose fibers mills in the fourth quarter, which is recorded in cash from operations, and results in the negative $151 million of net cash from operations. Excluding the cash taxes paid on the cellulose fibers sale during the fourth quarter of 2016, cash from operations would have been $343 million.

Moving on to debt, we ended the quarter with $6.6 billion of long-term debt. We have one scheduled maturity in August of 2017 for $281 million, which we intend to re-pay with available cash. Capital expenditures for the fourth quarter totaled $207 million, including $22 million related to discontinued operations. Net of discontinued operations, capital expenditures for the full year 2016 were $425 million.

Looking ahead to 2017, we expect total CapEx will be approximately $435 million, $300 million for wood products and $135 million for timberlands. Interest expense was $108 million in the fourth quarter. We expect interest expense will be approximately $400 million in 2017.

Our 2016 effective tax rate for continuing operations was approximately 18%, slightly above our earlier forecast, due to a tax adjustment reported as a special item in the fourth quarter in connection with the sale of our cellulose fibers business. For 2017, we expect the tax rate will be between 15% and 17%, based on the forecasted mix of our earnings for our REIT and taxable REIT subsidiary.

I'll wrap up with chart 15, which provides some additional detail on our share count and repurchase activities. During 2016, we repurchased 68 million shares at an average price of $29.49 per share. There were no share repurchase activity in the fourth quarter, and we ended the quarter with about 749 million shares outstanding.

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

Thank you, Russell. I am proud of our 2016 achievements. We have transformed our portfolio, delivered strong operating performance, and taken substantial strides toward a successful and value-creating merger integration.

Entering 2017, I am very optimistic about the opportunities in front of us. We remain strongly committed to driving industry-leading performance, capturing merger synergies, fully capitalizing on improving markets, and demonstrating disciplined capital allocation to drive superior value for our shareholders. Now I'd like to open the floor for questions.

(Operator Instructions)

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

Good morning.

Good morning, Anthony.

With regards to the CapEx guidance, and I think you said $300 million for wood products, is it possible to say if you're adding or de-bottlenecking capacity in lumber and OSB for the year, and roughly what percent capacity growth you might anticipate? Specifically with regard to the anti-dumping duties which we might get in spring, summer, are you taking steps to re-balance capacity between the US and Canada in your system?

Let me start with your second question regarding the anti-dumping duties, and we are not taking any steps to re-balance, Anthony. As we've talked about previously, if you look at our Canadian operations, about 1/3 of our Canadian operation is sold -- of our production is sold in Canada, 1/3 is sold in export markets outside the United States, and 1/3 comes into the US. Overall, our Canadian lumber operations is roughly 20% of our overall lumber operations, so you take that 20%, times 1/3, it's not a big part of the driver for our lumber operation.

In terms of CapEx, Anthony, the $300 million is in line with what we've done over the last couple of years, and our primary focus in our CapEx in our wood products operation is low-risk, high-return projects that drive down our overall cost structure, and that's been a key part of our accomplishing our OpEx. With that said, some of those projects do in fact result in de-bottlenecking and additional capacity.

As we've also stated, we are in the process of rebuilding two of our mills, Dirks and Mill Port, which have been really good mills for us historically. But in order to significantly drive down the cost structure of those mills, we essentially needed to rebuild them in place. That will result in some additional capacity as well. But again, the primary focus is on the cost side, but we will be increasing capacity as a result of some of the projects that we put in place.

Okay, that's helpful. Then just regarding the real estate guidance for 2017, should we expect land sales to be weighted towards the south and maybe the north, as you're still working through AVO in the west? If you could just talk generally about the demand you're seeing for timberlands and rural lands, and if you could highlight any difference in demand between the west and the south?

Sure, Anthony. This is Russell. As you know, the real estate business is a little lumpy, but getting through our AVO process in the south -- and as Doyle indicated, we're starting to work through to bring some of that AVO work to market. We identified the 500,000 acres, and now we're starting to bring a portion of that into the market place.

I would expect the activity to be weighted a bit to the south. We still have opportunities in the north, obviously, and we'll be looking at that. As we get through the AVO process in the west, we'll start looking at what opportunities there are to bring that to market.

As far as demand for the rural real estate, the south definitely has continued demand. There's really strong recreational buyer activity in the south. We do have demand in the north, obviously, but it's a little different buyer, and it's more of a small plot, small timberland plot type ownership. We see good, strong demand in the south for recreational properties.

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

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

Thanks, hi everyone, good morning. Thanks for all the details. Congratulations on the progress. First question, I just want to double-check something. I thought I heard you say, Russell, that the pension liability ultimately went up -- I want to say something like $300 million -- but you didn't anticipate funding being required this year. If I heard that correctly, could you discuss why? I think you also threw out a pension expense figure for this year, but I did not catch that. If you could repeat that, that would be great?

Sure. The pension liability, or the pension -- the funded liability was down $383 million. As far as the pension expense, it did increase. That's really a function of a couple of things. The first is the return on the pension assets. We did decrease our rate down from 9% to 8%.

Then we have additional amortization of pension loss. That's really driving the increase. That total on an unallocated basis is $100 million. As far as the funding, the funding requirements are really prescribed by GAAP funding and then IRS funding. We don't have any funding requirements in 2017.

Okay, thank you for the clarification there. Could you talk about what operating rates -- recognizing it's early in the year and a lot could change, what kind of operating rates do you think you'll be running at across the major wood products businesses? As relates to distribution and engineered wood products, are you finding any opportunity to further marry those businesses and have them coordinate to a greater degree as the -- and take share within the large builder pack market?

Yes, George. In terms of operating rates, we are optimistic about demand as we move into 2017 for all of our products. I would tell you, there will be some seasonality as there always is. But I would anticipate lumber operating in the low- to mid-90%s, OSB operating in the low- to mid-90%s. ELP normally operates about 10% lower than that, so I would anticipate that being in the mid-80%s-type range. As I said, we're encouraged by what we are seeing in terms of demand. As we talk to our customers, they are bullish on housing, and increasing demand for all of our products in 2017.

In terms of the coordination between engineered wood and distribution, that's something that here at Weyerhaeuser we've done a lot of work on. I would tell you, those two operations are working more closely together than they ever have historically. That's been very beneficial in driving improvements in both our EWP and our distribution business. I think there will continue to be further opportunities for that coordination as we move forward.

Doyle, is there a way to size, if at all, what kind of benefit you might get from that in 2017? Then my last question, not that you haven't had great performance on this over the last couple years, but I noticed a little bit of a pick-up in G&A. Is that still the residual effect of putting Plum Creek into the business, or are there other expense categories that are growing that you'll need to manage for in 2017? Thank you, and good luck in the quarter.

Thank you, George. In terms of G&A, I would tell you the slight increase in fourth quarter versus third quarter is just timing. We are -- if you look at where these companies were before we combined them in 2015, versus where we're going to end in 2017, we are highly confident that we're going to meet or exceed our $125 million target by the end of the first quarter of 2017. As I said earlier, we are at a basically a $100 million run rate through the fourth quarter of 2016. In really good shape on our G&A. As I mentioned earlier, the $125 million is 25% higher than what we originally factored in, when we announced the merger.

In terms of the engineered wood products and distribution coordination and quantifying that, George, as you would expect, that is difficult to quantify; but that is part of the OpEx improvements that we've highlighted in 2017. There may be some upside as these two operations continue to work closer together, and figure out a way to drive value for customers and improve bottom-line profitability.

Thank you for the details.

Thank you.

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

Hi, good morning.

Good morning, Collin.

Hi. First question from me, just as it relates to the lumber dispute. As we enter the potential look-back window, have you started to see any change in Canadian shipments to the US just more broadly in the market place?

Collin, it's hard to tell yet. We're only into the -- through the month of January, and as you know the look-back will be roughly 90 days, so hard to determine yet if there's been any significant change in the Canadian activity. As you know, the Canadian activity was up significantly in 2016, and we'll be watching how that plays in 2017. A lot of rumors floating around as to what may or may not happen, but too early to tell what changes, if any, the Canadians may be taking as we move into 2017, and the potential look-back period.

Okay, thanks for that, Doyle. Switching gears, I might be splitting hairs here, but just your guidance on real estate seems to maybe be a little more optimistic than the December investor meeting, just given the language around looking for it to exceed the $250 million in adjusted EBITDA. Am I reading too much into the language choice there, or is there something driving maybe a little more optimism on the real estate front?

Collin, what I would tell you as we continue to learn more about our real estate operation and what the opportunity is there, we continue to be encouraged by the AVO process, and what that is unveiling. We are confident that number will be over $250 million for 2017.

Okay. Then curious, just given the potential for tax reform, can you touch on how important 1031 exchanges are to the real estate business? I know that's something that Weyerhaeuser legacy had engaged in to some degree, but how do you think about it now, just given your current tax status on a combined basis?

Collin, this is Russell. As far as the 1031 program, you're correct. Weyerhaeuser had used that in the past, and that was primarily because they were in the built-in gains period. Now that they're out of the built-in gains period -- on a combined basis we're out of the built-in gains period. It's really not a tool that we would use going forward in a meaningful way.

Okay, great. I'll turn it over. Thanks, guys.

Thank you, Collin.

Your next question comes from the line of Gail Glazerman with Roe Equity Research. Please go ahead.

Hi, good morning.

Good morning, Gail.

Can you give a little bit more color on what you're seeing in the export market? A lot of other commodities are seeing a big up-lift in volumes to China. Are you sensing any of that at all in either logs or lumber, either from North America or from other parts of the world?

Gail, we continue to be encouraged about what we see in the export markets. Let's start with Japan. As you know, that's our biggest market. As I said, as we said earlier, prices were up in fact in the fourth quarter, which was encouraging. Volumes were down, but that was due to seasonality, and frankly some of the timing of our shipments and how the ships played out that were going to Japan.

In the first quarter, in line with your point, we do anticipate volumes will be up. Our best guess right now is price -- flat pricing. We continue to be encouraged by what we see out of Japan. Housing markets activity was up 8%, roughly, through the month of November, which is the last data point that we have.

As we look to China, encouraging there as well. As you know, log inventories continue to be at normal levels. Pricing was in fact up in the fourth quarter. Volume again was down seasonally. Then as we move into the first quarter, continue to anticipate good demand out of China, and we anticipate volumes up in the first quarter versus the fourth quarter.

Okay. Can you give a little bit more color on the charges on some development projects? Are there any projects that we might have heard, or are they just really small?

This is Russell. As we've gone through our AVO process, part of that is also to identify any kind of small development projects. Weyerhaeuser had done some small development activities, really around entitlement and maybe some minimal infrastructure-type investment.

As we went through the portfolio, given the change in our strategy as it relates to development, we chose to move those into an HBU category and sell through those a little quicker. Because of that, we took the impairment against those assets. It's very small properties, select properties, and we don't expect to have any material impairments going forward in the future.

Okay. Doyle, can you give any sense of where your customer log inventories are positioned moving into the year?

Yes, I would say customer log inventories in the west are toward the low end of normal as we move into the year. I would say in the south they're at normalized levels in terms of where you would have seen log inventories historically.

Okay, and one just last one. Obviously you're looking for fairly stable southern pricing in the first quarter. Can you give any perspective on what your outlook is for the year? Are you seeing any sense of traction building?

Gail, our take is the first and second quarter we would anticipate pricing to be essentially flat. We do think there's the possibility of slight improvements in pricing as we move to the second half of the year. Then as we look further out than that, we continue to be quite optimistic about improvement in southern log prices. As housing continues to improve, that will drive demand.

As you also know, there are significant projects that are being built and will be coming on line in 2017, 2018 type time frame, and we think that's going to drive 12 million, 13 million green tons of additional demand. Then of course a big component of this will be what happens with Canada. We think either as a result of hopefully a negotiated agreement which will result in a quota, or the duties, that that will have an impact on the amount of lumber that's coming in from Canada, which will result in more demand on southern saw logs.

All those factors, we are encouraged by what we see there, and like I said, are hopeful that we'll see some slight improvement in the second half of this year, but more importantly, as we move into 2018 and beyond, we think we're going to see some pricing power in southern saw logs.

Okay, thank you.

Thank you.

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

Thank you, a couple of follow-ups. First, you gave us the sense of inventories, customers on logs. Do you have a view where they are on lumber and OSB?

Yes, Mark. I would tell you that our sense is inventories for lumber and OSB are pretty thin. I would say below normal levels. That seems to be how our customers are running their business, but I would say inventories are lean.

Okay. A bit of a hypothetical, but have you been able to do any work, have any thoughts if a border tax adjustment were to be part of new tax bills, et cetera, what would that mean for lumber and for that matter OSB coming in for Canada? I don't know if you've gotten any -- if it would be treated any differently, or any thoughts on implications there?

Mark, this is Russell. As far as a border tax adjustment, we've looked at the implications of that. But as Doyle mentioned, given we have relatively low volumes coming in from the Canadian operations into the US, we're primarily a domestic producer and sell into the domestic markets. We don't think it would have a material impact on our operations or effect on us.

Coming from the other angle, would it have material implications on wood coming in from Canada, not produced by you. Essentially, a home builder's not going to be as inclined to buy the wood from the Canadian, and essentially act as a further umbrella for US pricing.

Yes, that could be a factor in the amount of volume that comes down from Canada. I would say that's a possibility.

With a lot of these changes, Mark, we're doing a lot of work on it, but it's still too early to know exactly how these will play out under this administration. But a lot of moving parts that could have frankly potential benefits for our Company going forward.

Understood, appreciate it. It's just whether there was anything that would be different about materials coming in from -- wood products coming in from Canada, but there's nothing that's being talked about that would differentiate it from anything else coming in from anywhere? Is that fair?

At this point, that is generally fair -- more work to be done and more specifics to be learned. But I think to your point, if anything, it should be a net positive for our Company and the US industry.

Okay, thanks much.

Thank you.

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

Yes, good morning, everyone.

Good morning, Chip.

First question is, Doyle, I remember it was about three years ago when you got into your current role. It seemed like you had a couple years where you were going to improve pretty much the whole wood products business. I think it's fair to say you've exceeded expectations. But I was under the impression that after those two years CapEx might come down, and you would be in a position where maybe you would have accelerated a lot of opportunities.

What I seem to see today is CapEx is staying elevated. But to be fair, you're also having continued high targets. In fact, it looks like lumber and OSB, they're higher for savings in 2017 than 2016. The question is what changed? Has it been since you've been in there you have found new things you can do to plants you've already worked on, or are you just expanding the number of plants that you're putting capital in, in order to get these savings?

It's a good question, Chip. What we -- when we started this process, as you will recall, and as you highlighted two or three years ago, a lot of the improvements were non-capital improvements because our take was show -- these mills needed to show that they could make operational excellence improvements without capital.

Then if they could do that, then they earned the right to capital to further drive down the cost structure. We initially said okay, let's do this without capital. Once you show that, then you earn the right to capital which will further drive down the overall structure of our mill set.

As you said, we made good progress. There's still more work to be done. But we now have confidence, Chip, as we put in this capital that we will in fact continue to deliver on these OpEx improvements, and more importantly than that, continue to drive down the overall cost structure of our mill system, where we will in the current up-turn that we're in, outperform the competition. When things do eventually roll over, which we think is many years from now, we will be black at the bottom.

With that said, Chip, I don't want to give you the sense that this $300 million of capital is going to be the level forever. We think there's a couple more years of spending at this level to get our mills fully positioned to where they need to be from a cost perspective, and then you would see capital fall off to a more normalized level in the $200 million to $250 million range.

Okay, so $200 million to $250 million. The second question is, it seems like as we've looked at the situation, here we are in 2017, that there would be a lot of TMO type partnerships that were established 10 to 15 years ago that are coming up for -- they're maturing, or the partnerships are at a point where they might dissolve. Yet it seems like the timberland market has stayed pretty solid. I don't know if it's great, but it's been pretty solid.

I didn't know if you had any thoughts as to -- are you seeing a lot of these partnerships extend themselves, or are you instead seeing them dissolve, but there's solid demand to have new replacements in terms of investors to take over these ownerships?

Chip, what I'd tell you is I think timberland markets do continue to be strong, and we see that over and over, especially for high-quality timberland. There's a lot of interest in this investment class. For high-quality timberlands there's a lot of interested buyers, both domestic buyers and frankly, international buyers starting to show up.

As these TMOs do mature -- and that is happening, some of them you see being extended due to performance, some of them you see trading back and forth; but a lot of interest in -- continued in this asset class. Like I said, any process that's being run, and there are some being run, and we participate in just about all of those, there are a number of interested parties who are part of that.

Okay. Then last question, quickly. Any update on your thinking about either the dividend, dividend policy, at this point?

Yes, Chip. As we mentioned at our Investor Day, currently with 90% of our business assets in timberlands and as you just highlighted a significantly improved cost structure for wood products, our go-forward cash flow will be much more stable, and that's intentional. We're in the process of discussing the pay-out ratio with our Board. We will update you when those conversations are complete. But we think there is the opportunity to increase the pay-out ratio as we look forward.

In terms of a dividend increase, as we have consistently said for the past few years, we are committed to a sustainable and growing dividend. As we look into 2017, we're clearly going to benefit from cost and operational synergies, continued OpEx improvements, and as we've talked about this morning, stronger housing markets. All those things will be factored in as we work with our Board on decisions regarding our dividend.

Great, thanks for the update.

Thank you.

Your next question comes from the line of Brian Maguire with Goldman Sachs. Please go ahead.

Hi, good morning, and congratulations on the strong 2016 results.

Good morning, Brian. Thank you.

We're seeing some inflation out in the economy these days; definitely a lot of commodity prices moving higher. Just wondering if you're starting to see that in your business, seeing some cost pressure? Related to that, maybe just wondering if some of the higher oil and gas prices might have any benefit on the energy part of the real estate segment, just in terms of royalties, and if that's factored into your outlook or not?

On the second part of your question, clearly higher natural gas and oil prices will benefit our energy and natural resources segment. We have a lot more leverage to natural gas. For every -- rough numbers, just to give you a sense -- every $1 improvement in natural gas, $5 million to our bottom line, all else being equal. But as you would also anticipate, when pricing increases, that also gives you the opportunity to go lease more. Don't have quite that type of leverage to oil, but as oil prices continue to improve, there will be more opportunity from a leasing perspective.

In terms of commodity price push, starting to see a little bit of that, not big numbers at this point. But that's -- frankly, that's why OpEx is so important is we are at some point going to see some cost push. A big part of our operational excellence efforts are to make sure we're doing things that offset that, or frankly more than offset that, so that the benefits we see from our increased pricing and volume fall directly to the bottom line.

Okay, great. Then the another area where there's been a lot of volatility lately has been in currencies. I know you've got some sensitivity to the yen. Just wondering what kind of impact the post-election move in the dollar is having on realized pricing or competitive trade flows, particularly into Japan, where I know you've got some competition from some European producers?

Yes. As you said, the strong US dollar continues to be a headwind for us. All of the currencies that are important to us weakened versus the US dollar after the election. Some of them have strengthened slightly since December, but they overall net-net remain weaker than where they were at the end of the third quarter.

In Japan, as you said, the risk there is the strong US dollar pressures prices. Our customers' products compete with lower-cost lumber imports from Europe. As I said earlier, despite all that, we continue to have good demand for our logs into Japan. We actually saw some fall-off in the imports that were coming in from Europe during that time period. Net-net, while it's not a positive, we've worked through that and continue to have good demand from our Japanese customers. Part of that's built on the long-term relationship and unique relationship we have with our customer base in Japan.

Okay. One last one, if I could, just on the corporate expense in the quarter and the outlook there going forward. I think there was maybe a LIFO or inventory hit there in the quarter. I assume that's maybe just a year-end true-up. But just thinking about what kind of a run-rate level we're at going into 1Q there, and as you remove some of the stranded costs from cellulose fibers, where you think we'd be ending the year there?

This is Russell. As far as the $14 million LIFO adjustment, that was a combination of LIFO and profit elimination. That was really a function of increasing inventories at year end, and then also bringing on some of the Montana inventories that were legacy to Plum Creek. We increased log inventories, particularly in those regions, for anticipating winter break-up. It's really just an increase in inventory was the driver for the LIFO and profit elimination.

As Doyle mentioned, we're on track to capture our synergy targets, $125 million by the end of first quarter; and then we are on track to capture the additional $35 million of CF stranded costs by the end of 2017. We're making good progress on both those accounts.

Okay, thanks very much.

Thank you.

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

Thanks, Doyle. Just expanding on Chip's question, are the nature of the operational excellence improvements in timberlands any different now? I'm just curious whether things are evolving there, and maybe maturity schedules and things are getting involved?

Yes, so the -- I would say the biggest difference in timberlands versus where we were the first two or three years are the additional opportunities that have been presented as a result of combining Weyerhaeuser and Plum Creek. A portion of the $42 million that we got in 2016 was due to those operational synergies, the ability to re-balance wood flows to minimize cost and increase realization, to optimize the silvicultural cost based on our larger scale; and then best practices in harvesting and transportation -- both again, as a result of scale.

But maybe even more importantly learning from each other. There were some things that Weyerhaeuser, when we got in there and looked at it, did better and lower cost than Plum Creek, and there were some things that Plum Creek did. As we move forward, while we're confident in having what I would say are fairly significant targets, $40 million to $50 million in 2017 and I would anticipate a similar number in 2018, are because of the opportunities that have been created by combining these two companies.

Taking best practices, taking advantage of the larger scale, both from an ability to service customers, re-balance wood flows, and drive down the overall cost structure of our timberlands operations. Really excited about that. I can tell you our folks are really excited about it as they almost on a daily basis find additional opportunities for OpEx as a result of the combination.

That sounds great. Just one point of clarification. In real estate, you mentioned a shift to the south. But is there anything lumpy, or should we start to think of this as a relatively normal quarter in terms of realizations?

As I mentioned earlier in my comments, the first and second quarter are pretty low volume on sales, so we're guiding for a lower amount than fourth quarter. Real estate sales can be a little lumpy. It depends on the character of the transactions, and so it's a little difficult to predict.

In the second half we'll see it will pick up. That's pretty much the pattern we would expect, pretty low in the first and second quarter, and then picking up in the third quarter, and then a lot of closings really occurring in the fourth quarter.

Mark, in terms of the value from the different components, it really is depending on -- as you very well know, there's different value components in the north, tend to be lower per acre, south higher than that, and then of course the west even higher than that on a per-acre basis. It's really going to depend on what the mix is. As Russell said, at least initially it will be more weighted to the south and the west, and then as we move to the west as we complete our AVO process, that will factor in on the per-acre value.

Very helpful, thank you.

Thank you.

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

Good morning, Doyle. Good morning, Russell.

Good morning, Mark.

Good morning.

Doyle, I wonder if you and Russell could just give us some sense of how your appetite is right now for timberland acquisitions, and where your biases would be just regionally?

Mark, I'll tell you that right now our focus -- what I like to say, number one, two, and three is continuing to make sure we fully capitalize on the value that we can create by combining Weyerhaeuser and Plum Creek, and driving the synergies and other benefits to the bottom line. That is what we are primarily focused on.

As we continue to work through that, and as I like to say, earn the right to continue to grow, we will be looking at timberland acquisitions to potentially grow our Company. With that said, with the scale we have and diversity of geography we have, we don't have to grow, so we can be very disciplined as we move forward.

In terms of south versus the west, we're basically like both of those markets, so it's not a weighting more to one than the other. We like both the south and the west, and would look to potentially growing both of those as we move forward.

Okay. Then on the other side of the equation, Doyle, I know you're still in the midst of the evaluation down in Uruguay. But can you just give us some sense of any tax consequences on that sale?

Mark, this is Russell. Pardon me? Thanks for the qualification. If that were the case, we would have minimal tax impacts on that transaction.

Okay. All right, Doyle, one last question I had is just over in engineered wood. I know that there have been some conversations about more fire code restrictions around particularly I-joists. Can you update us on what that situation is and how Weyerhaeuser deals with those changes in regulation?

Good question, Mark. There are a lot of various regulations, potential regulations regarding that. I can tell you we're doing an immense amount of work on that front. We've got a really good technology group that is looking for different applications that you can put on engineered wood products that will in fact extend the -- it's called a burn-through test, extend that; and as a result of that, meet any additional requirements that may be put forth from that. Again, a lot of work being done on that, very encouraged about what we've seen so far in the tests that we're running, and think we will be well-positioned as we go forward in EWP.

How widespread is this, Doyle? Is this a state by state, or is this on more of a national basis?

No, it's clearly state by state. That's the way these things work. Again, a lot of uncertainty regarding exactly what that may look like and what the timing may be, but we've been on top of it and feel good about the opportunities to deal with this on a go-forward basis.

Okay, just the last question also on I-joists. I noticed in your graph that prices of I-joists have been trending down over the last, I don't know, four or six quarters, yet at the same time, the inputs for OSB for web stock are actually going up. Would you expect to see those higher input costs starting to roll through to I-joist prices here over the next few quarters?

Yes, Mark, I do think there is the opportunity for price improvement in EWP as we move through 2017.

Okay, very good. Good luck this year, guys.

All right, thank you.

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

Yes, thanks very much, and morning, gentlemen.

Good morning, Paul.

For me, just a question on softwood negotiations. You mentioned that government appointments haven't been made yet, so there's no government-to-government negotiations. Maybe you could just give us some color on whether the industry's talking, and whether you're making any progress, and when you expect government-to-government negotiations to start?

Yes, I think it's going to take a little bit of time, Paul, to get the appointments in place and approved and get up to speed. I can't tell you exactly when negotiations will start again, but it's going to take a little bit of time. In terms of the US coalition, a lot of work continues to be done, just so we don't lose any momentum during this period of time. I think the US coalition are all on the same page, and like I said, are hopeful of a negotiated settlement as we move forward.

Great, that's all I had. Best of luck, guys.

All right, thank you. Take care. As I understand it, that was our final question. I'd like to thank everybody for joining us this morning. As always, I really appreciate your interest in Weyerhaeuser. Take care.

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