威爾豪瑟 (WY) 2017 Q1 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 welcome everyone to the Weyerhaeuser First Quarter 2017 Earnings Conference Call. (Operator Instructions) 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 first quarter 2017 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. This morning, Weyerhaeuser reported first quarter net earnings of $157 million or $0.21 per diluted share on net sales of $1.7 billion. Excluding after-tax special items of $10 million for merger-related cost, we earned $167 million or $0.22 per diluted share. This is over 2.5x the earnings from continuing operations we reported in the fourth quarter and 1 year ago. Adjusted EBITDA totaled $454 million, an improvement of 14% compared with the fourth quarter and 35% compared with the first quarter of 2016.

I am very pleased with our first quarter performance as we illustrated the power of leveraging internal improvements across improving markets. Our employees did an outstanding job of capitalizing on operational excellence initiatives, merger-related synergies and strengthening market conditions to achieve outstanding operating and financial results in the quarter while also fully delivering on our increased $125 million merger cost synergy target. One year into our merger with Plum Creek, I'm proud of what our teams have accomplished and the dedication and focus they continue to display 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. Housing activity began 2017 on a very solid trajectory. Total housing starts averaged over 1.25 million for the first quarter, an improvement of 8% compared with last year despite some unusually wet West Coast weather. Single-family starts rose 9% in the month of March and are up 6% year-to-date. Leading market indicators are also favorable. Single-family permits are up 13% compared with the first quarter of last year, and builder confidence remains near record highs. Employment and wages are rising. Consumer confidence has surpassed prerecession levels. And interest rates, although increasing, remain historically low. Our customers are reporting robust demand with strong activity in California as winter weather has mitigated and signs that an increasing number of millennials are entering the home-buying market.

Labor and lot availability remain the most active constraints, but builders are motivated to manage through these challenges and capture the benefit of favorable market conditions. The spring selling season appears to be off to a robust start, and we continue to expect between 1.25 million and 1.3 million total housing starts for 2017.

Let me now turn to our business segments. I will begin the discussion with Timberlands, Charts 3 to 5. Timberlands contributed $148 million to first quarter earnings, $25 million more than the fourth quarter. Adjusted EBITDA rose to $242 million. Western Timberlands delivered $133 million of first quarter EBITDA, an improvement of over 30% compared with the fourth quarter and 13% more than a year ago.

The market for Western domestic logs was stronger than expected during the quarter as the combination of solid building activity and low mill inventories drove demand, while unusually wet and snowy winter weather reduced the available log supply. Our Western team did an exceptional job of taking full advantage of our scale and operability, flexing harvest settings to some lower elevation tracts and leveraging our strong road system as they directed additional volume into the most tensioned domestic markets. Domestic log sales volumes and realizations increased compared with the fourth quarter, and unit logging and road costs decreased due to lower logging elevations, continued operational excellence improvements and the furlough of some silviculture and road maintenance activities due to wet weather.

Turning now to our export markets. In Japan, housing activity remains solid, with year-to-date starts up approximately 5% through February, and demand for our logs has remained steady. Although Japanese construction activity typically moderates in the first quarter due to winter weather, log sales volumes were up slightly and average realizations increased compared with the fourth quarter. In China, log sales volumes declined compared with the fourth quarter due to timing of shipments and our intentional decision to flex volume into the strong domestic market. Average log realizations improved, and market conditions remained favorable. Log inventories at China -- Chinese ports remain within a normalized range, having risen early in the first quarter before declining in March as construction activity resumed following the Lunar New Year holiday.

Moving to the South. Southern Timberlands contributed $96 million to first quarter EBITDA, lower than the fourth quarter due to seasonally lower harvest volumes and slightly lower average realizations. Southern markets remained flat as log availability was plentiful due to favorable weather, and mills are holding adequate inventory. Fee harvest volumes declined seasonally compared with the fourth quarter, and average log realizations were slightly lower due to a higher proportion of pulpwood sales. Although pulpwood log realizations weakened during the quarter as seasonal maintenance and other mill shutdowns reduced demand, realizations for our delivered sawlogs were comparable.

Northern Timberlands contributed $8 million to EBITDA, an improvement of $1 million compared with the fourth quarter as the region benefited from OpEx initiatives to reduce contract logging cost. Fee harvest declined seasonably, and average realizations were comparable.

The Timberlands business made good progress on its operational excellence and synergy initiatives in the first quarter. Regional teams continue to identify and roll out best practices for optimizing spending and value creation for our silviculture activities and improving wood flows to further reduce costs and maximize the realization we capture from every log. The business is on track to achieve its $40 million to $50 million OpEx target for 2017.

The strategic review of our Uruguay operations continues to proceed well with strong interest from multiple parties. We look forward to providing further information when the review is complete.

Real Estate, Energy and Natural Resources, Charts 6 and 7. Real estate and ENR contributed $26 million to first quarter earnings and $43 million to adjusted EBITDA. Adjusted EBITDA declined by $47 million compared with the fourth quarter but improved $9 million compared with the first quarter of last year. Fourth quarter is typically our seasonally strongest quarter, while first quarter typically reflects the lowest level of transaction activity.

Earnings were comparable to fourth quarter earnings before special items as first quarter had a lower average land basis on the mix of properties sold. Average price per acre improved by $500 due to mix. Approximately 3/4 of our first quarter acreage sales were located in the U.S. South, with the remainder predominantly in the Pacific Northwest. In contrast, fourth quarter included a large transaction in Montana, where timberland prices are regionally lower. Our team continues to make excellent progress applying the asset value optimization process to our Western Timberlands, and I remain very confident we will meet our target of completing this work by midyear.

Wood Products, Charts 8 and 9. Wood Products contributed $172 million to first quarter earnings, an increase of nearly 75% compared with the fourth quarter. Adjusted EBITDA improved $75 million to $207 million.

EBITDA for lumber totaled $99 million, $42 million more than the fourth quarter, primarily due to a 5% increase in average realizations. Lumber sales volumes increased 6%. Operating rates and manufacturing costs improved due to strong operating performance and reduced downtime for maintenance and capital projects, although several Western mills did lose small amounts of production due to weather.

EBITDA for OSB totaled $66 million, $20 million more than the fourth quarter and more than double the first quarter of 2016. Average sales realizations increased 3%, and sales volumes increased 21%. All of our OSB mills ran extremely well in the quarter, and unit manufacturing costs declined due to higher operating rates and strong OpEx progress on controllable manufacturing cost.

Engineered wood products contributed $37 million to EBITDA, an improvement of $11 million compared with the fourth quarter. Sales volumes for solid section increased 11%, and I-joist volumes were up slightly. Operating rates rose seasonally, and unit manufacturing costs improved due to less planned maintenance and holiday downtime. Average realizations for solid section and I-joist declined slightly due to mix as first quarter typically includes a greater proportion of commodity and industrial products.

Distribution EBITDA totaled $8 million, an increase of $3 million compared with the fourth quarter and double the EBITDA of 1 year ago. This business continues to make progress by improving product margins and tightly managing warehouse, delivery and selling costs across increased sales volumes.

Each of the Wood Products businesses made good progress on their respective OpEx initiatives during the quarter, with OSB and distribution demonstrating particularly strong results. We continue to expect collective OpEx benefits of $55 million to $75 million from this segment in 2017.

I will wrap up the Wood Products discussion with a few comments on the Softwood Lumber Agreement. On April 24, the Department of Commerce announced preliminary countervailing duties on Canadian lumber producers. For most producers, the duty will be approximately 20%. These duties will become effective upon publication in the Federal Register. For some producers, the duties will also be imposed retroactively effective 90 days prior to publication. The Department of Commerce continues to evaluate the coalition's petition for antidumping duties, which would be additive to the countervailing duties announced earlier this week. We expect a preliminary decision on the antidumping duties to be reached on June 23.

We appreciate the action the U.S. government has taken to address the unfair trade practices that are harming U.S. (inaudible) lumber producers. The government will continue its investigation through the end of 2017 as the Department of Commerce and International Trade Commission collect and evaluate additional information in support of final determinations on both the duties and material injury to U.S. producers. These determinations are expected in early November and late December, respectively.

We continue to prefer the certainty of a negotiated agreement. Formal discussions remain on hold, pending confirmation of the U.S. Trade Representative. In the meantime, the coalition is working closely with both the Office of the USTR and the Department of Commerce. We look forward to resuming formal negotiations and are hopeful we will be able to reach a quota-based agreement.

I will close this morning with a couple of comments on merger cost synergies and other cost reductions. As I mentioned earlier, we are very pleased to achieve our merger cost synergies ahead of schedule and at levels that exceeded our initial expectations. We captured our original $100 million run rate target at the end of 2016, several months earlier than anticipated, and have now exceeded that by 25%, fully delivering an increased $125 million run rate target by our year 1 deadline. Approximately 80% of these costs have been achieved through reductions in controllable SG&A, while the remainder have come from cost of sales. We 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 now turn it over to Russell to discuss some financial items and our second quarter outlook.

Thank you, Doyle, and good morning. The outlook for the second quarter is presented in Chart 12 of the earnings slides. In our Timberlands business, we expect second quarter earnings and adjusted EBITDA will be lower than the first quarter and comparable to second quarter of 2016. Western sawlog markets continued to perform well with solid domestic and export demand, while southern sawlog markets remained flat. We also expect seasonally higher road, logging and silviculture costs as we begin the spring and summer months.

In our Western Timberland operations, average sales realizations should increase slightly, but fee harvest volumes are expected to decrease modestly. Japanese export log volumes and average sales realizations should be comparable to the first quarter, supported by continued strength in the Japanese housing market. Export log volumes to China are expected to be higher in the second quarter as a result of the timing of shipments and continued favorable demand. Average sales realizations should be comparable. Domestic log sales volumes are expected to decrease slightly compared to the first quarter, while average sales realizations should increase slightly, supported by a continued steady demand.

Western road costs are expected to be higher than the first quarter due to additional road spending, which is typical as road-building activities increase in the second quarter in catch up on activity which was not completed in the first quarter due to weather.

Logging costs will also increase due to planned shifting of harvest activities to higher elevations. While an increase in higher elevation logging is typical in the spring months, it will be more notable than usual because we flex some first quarter activities to lower elevations due to unusually wet and snowy weather. Southern harvest volumes are expected to be higher in the second quarter as more favorable weather allows for increased access to harvest areas. We anticipate average sales realizations for the second quarter will be similar to first quarter levels.

Silviculture spending in the South is expected to increase due to typical seasonality. In the North, we anticipate second quarter sales volumes will be significantly lower than the first quarter due to spring breakup season. Average sales realizations will be comparable to the first quarter levels.

Real Estate and Energy and Natural Resources earnings and adjusted EBITDA for the second quarter are expected to be comparable to the first quarter. As is typical for the real estate business, activity will begin increasing in the spring and summer months, with a large portion of sales closing in the fourth quarter. We continue to expect over $250 million of adjusted EBITDA from our Real Estate and Energy and Natural Resources business in 2017.

For Wood Products, higher sales realizations for lumber, OSB and engineered wood products, along with higher sales volumes from most product lines, will result in significantly higher adjusted EBITDA in the second quarter. Overall, we expect earnings and EBITDA to improve by approximately 20% to 30% compared to the first quarter.

Before moving to unallocated items, I'd like to highlight a new accounting standard we've adopted in the current quarter, which changes how we report pension and postretirement costs. Previously, we recorded this activity within cost of products sold, general and administrative expenses and other operating costs. The new accounting standard results in a reclassification of most of these costs to a new line item below operating income titled nonoperating pension and other postretirement benefit costs or credits. The total amount recorded in the statement of operations does not change.

Looking at Chart 10, unallocated items, the $28 million variance in earnings before special items compared with the fourth quarter is driven by a $33 million increase in nonoperating pension and other postretirement benefit costs. As I mentioned on our fourth quarter call, this expected variance is primarily the result of the annual update to our pension and postretirement actuarial assumptions, which included the decrease in the discount rate used to measure the liabilities of both our U.S. and Canadian plans. We expect to record approximately $20 million to $25 million per quarter of noncash pension and postretirement expense in unallocated throughout the remainder of 2017. As stated in our prior earnings call, we do not expect to make any cash contributions to our U.S. qualified pension plan in 2017, and we anticipate cash payments in 2017 of approximately $70 million for all other pension and postretirement plans.

Chart 11 summarizes our key financial items. We ended the quarter with a cash balance of $455 million. Cash from operations during the quarter was $35 million. The first quarter is usually our lowest operating cash flow quarter due to inventory and other working capital build as well as the timing of semiannual interest payments. The current quarter also included $59 million in net taxes paid primarily attributable to the foreign tax payments associated with the 2016 gain on the divestiture of our pulp mills.

Capital expenditures for the first quarter totaled $75 million. We continue to expect our full year capital expenditures to total approximately $435 million, $300 million for Wood Products and $135 million for Timberlands. Financing cash flows included $233 million for common dividends paid in the first quarter.

Moving on to debt. We ended the quarter with $6.6 billion of long-term debt. We have a scheduled maturity in August of 2017 for $281 million, which we intend to repay with available cash. Interest expense was $99 million in the first quarter. We expect interest expense will be similar in the second quarter and approximately $400 million for the full year. We continue to anticipate the full year 2017 tax rate will be between 15% and 17% based on the forecasted mix of earnings for our REIT and taxable REIT subsidiary.

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

Thank you, Russell. I noted at the beginning of today's call that internal improvements and strengthening market conditions can create a powerful combination. Our first quarter results demonstrate this. And with a solid, improving housing trajectory, favorable dynamics across our Wood Products businesses and continued leverage from operational excellence and merger synergies, we are well positioned to deliver continued strong results. Although markets are improving, we will not lose focus on the factors under our control. We remain committed to fully capturing the benefits of our merger with Plum Creek, achieving industry-leading performance and demonstrating disciplined capital allocation to drive superior value for our shareholders.

And now I'd like to open the floor for questions.

(Operator Instructions) Your first question comes from the line of Mark Wilde with BMO Capital Markets.

Doyle, a couple of questions around the South. One, can you update us on where you're at with the capital program at the southern sawmills and whether a resolution on this trade issue could lead you to invest more capital in southern lumber operations?

So Mark, as we have consistently talked about, we are focused on investing capital to drive down our cost in our overall Wood Products operation. For last year, this year and for probably the next couple of years, we will be investing at approximately a $300 million level in our Wood Products operation overall. We would not anticipate investing more than that during the time frame. And in fact, after investing at this $300 million level for the next couple of years, we would anticipate going back down to what I would call a more normalized level between $200 million and $250 million. We are encouraged, very encouraged by the initial returns on the capital that we have spent. And part of the capital in our lumber operations specifically -- again, the focus is to drive down costs through low-risk, high-return projects. But we also will be increasing capacity modestly as we rebuild a mill in Dierks, and that will be coming on later this year, and also a mill in Millport. So net-net, that will add about another 300 million board feet of capacity, but again, the focus is on driving down our cost.

Okay. And just one related question. I noticed, in looking at some of the trade data, that the southern log export volumes are up more than 100% year-to-date. I know Plum had been doing some work in trying to develop these markets. I wondered if you could talk about what you are doing to kind of participate in this and whether there are any things you can do to encourage kind of more log export volume out of the South because it looks like it would really help to kind of create a little more tension in the markets down there.

We agree with you, Mark. We think it would be helpful from that perspective, and we're doing a lot of work on identifying and promoting export activity out of the South. We've had some initial successes, still at a very small level, but spending a lot of time talking to potential customers and starting to develop those markets and, frankly, are pretty optimistic about it. It's still early, still small volumes, but we think there's a real opportunity to expand southern export markets as we move forward.

Okay. And then just lastly, Russell, are you guys -- can you give us any number for what you expect to pay in countervailing duties on the Canadian operations this year?

Yes. So we've done the calculation on the countervailing duties with the volume coming out of our Canadian operation into the U.S. And based on a high-level estimate, we would expect about a $6 million cost on a per quarter basis.

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

I just wanted to delve a little bit further into operating rates on the supply side across your wood businesses. So recognizing you've got the capacity coming on later on in Wood Products and in lumber, Doyle, currently, what would you estimate of your operable capacity, what your operating rate is? One of your peers was reporting yesterday that they've obviously been able to take up their production through capital projects and optimization programs. Do you have further ability to flex your existing capacity without running at impractical levels either from a waste or safety standpoint? And then on OSB, I think you said production was up something like 20%. Congratulations on the performance. What further ability do you have to take your production up? And do you think you garnered a bit more share than peers in this quarter and why? And then I had one follow-on.

Yes. So in terms of operating rates, George, in the quarter, lumber was in the low 90s. As we mentioned, our OSB operation ran very well. It was in the high 90s. And ELP was in the mid-80s. You're always looking for opportunities to increase reliability and, therefore, increase production. Our mills are running well. There's always what I call creep in terms of being able to increase production. But there's not big steps other than what we've already talked about in response to Mark's question of what we're doing on the lumber side to increase incremental -- significantly incremental capacity. So what we're focused on is running reliably and at the lowest cost as possible.

Okay. And I guess on OSB, you're pretty much -- if you're in the high 90s, you're pretty much tapped out. Would that be fair? And do you think you garnered more share than peers in the quarter? And if so, was it geographic mix or something else, do you believe?

Other than creep, I would agree with you. We are almost maxed out in OSB. And don't believe we necessarily grew share. We've been running at pretty high levels in OSB other than taking in some maintenance downtime and those type of things. So we just ran extremely well in OSB in the quarter, and demand for the product was very good despite the fact that the first quarter is normally a slower seasonal period.

Appreciate that, Doyle. My last one and I'll turn it over. As we think about the AVO program -- and I realize the details will come out in June, so maybe just getting a little ahead of the curve. If we think about the premiums that you've been getting in the South, would it be fair to say that in the West, you'll be less likely to achieve that same premium? Probably because development and land values, for that matter, in the West are harder to do and higher priced, respectively. Or how would you have us, at least preliminary, think about that?

Yes. What I would tell you is, as I said, we're encouraged by the process so far in the West. As you also said, we'll be talking more about that when we wrap it up. With that said, as we very consistently have said, we are looking for a premium of 30%. And I would anticipate that we will achieve that premium or more in the West, just as we have in the South.

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

Just first, a clarification. On the OSB, that big percent increase in volume, that was versus the fourth quarter, where you were fire-impacted? Was that also against the prior year first quarter?

Mark, really good question, and glad to be able to clarify. You're right. A big part of the pickup in first quarter versus fourth quarter was due to the fact that Sutton was running for the full quarter. My comments were more due to the fact that in OSB in the first quarter, we ran in the high 90s, as I indicated. But quarter to quarter, you're exactly right.

Great. And then in the -- you had mentioned in the prepared remarks about a 20% to 30% improvement in EBITDA. Was that specific to Wood Products? Or was that for the company as whole, looking 2Q v 1Q?

Again, thanks for clarifying. That was a specific comment regarding Wood Products, and that range is due to the fact that we don't know exactly what prices are going to do from this point forward. If prices stayed where they are today or moved up, it would be at the higher end of the -- toward the 30%. If they rolled -- or turned down from this point, it would be closer to the 20%. So that's the reason for the range. With that said, Mark, that comment was very specific to Wood Products.

Okay, great. And then lastly, is there any visibility at all as to timing on when duties might become quotas? And I realize you certainly don't have anything specific, but are we talking potentially quarters? Or is that more likely -- a process that could take years?

You're right, Mark. We don't know exactly. But I would be -- I am hopeful that we could be in a situation where we could enter into a negotiated agreement, a quota-based agreement, sometime this year.

Okay. And then lastly, if I could, on the duties that are being collected, what happens to those duties? Is that determined yet? Or is that yet to be decided?

Well, those duties go to the U.S. Treasury and are held by the U.S. Treasury.

Okay. Might they go back to U.S. sawmills, as I think they did last time, or not necessarily?

Yes, not necessarily. That was a negotiated agreement. As you will recall, after many months of back and forth, some of it went back to U.S. sawmills. Some of it went back to the Canadian producers. So that was part of a negotiation, so I don't think -- we'll just have to see how this plays out as we move forward.

Your next question comes from the line of Gail Glazerman with Roe.

Just starting on the Western log market, the weather that you suggested that impacted your ability to harvest on higher elevations, how much do you think that contributed to the overall market pricing in the quarter? And have you started to see kind of better harvest condition take some pressure off?

So as I've said in comments, Gail, we were very pleased with our ability to leverage our scale, operability, good roads during the quarter to capitalize on the tight markets. What I would tell you, as we moved into the second quarter, we continue to be encouraged by what we see in the West, continued strong demand. To your point, the mill inventories remain thin, especially in Oregon. Now they're better than they were at some points in the first quarter, but mill inventories continue to be thin. And I would tell you, overall, we -- as Russell indicated, we anticipate prices in the West to be up slightly in the second quarter. So weather has improved. We are able to move up into the higher elevation in the second quarter, but we're very pleased with our ability to capitalize on what happened during the first quarter.

Okay. And going back to the trade agreement, do you have any sense of how the market might have anticipated that and how much that might have played into what you saw in lumber pricing in the first quarter?

Gail, as you know, it's hard to determine how much, if any, impact the overhang from the waiting for the quotas to come out had on pricing. What I will tell you is I think key drivers to the pricing improvement were the fact that inventories were very lean going into the first quarter and demand was better than expected. I think all you have to do is look at OSB, which didn't have the whole tariff situation, and those prices ran as well. So I'm not going to tell you that the SLA didn't have an impact on pricing in the first quarter because I'm sure that it did. But I think it was more -- had more to do with the volatility in pricing that we saw. I think underplaying supply and demand was the biggest driver of the improvement in lumber pricing that we've seen year-to-date.

And do you feel that the CVDs, as announced, were pretty much in line with what the market was expecting? Or do you think there's a sense of surprise that it was 20% and not higher or lower?

I think -- there was a lot of speculation, as you very well know, Gail, on what those rates would be. What I will tell you is it came in about where we expected that it would. And I think now we'll wait and see what happens in the antidumping and what the overall number is as we move forward.

Okay. And just finally, can you talk a little bit what you're seeing in terms of log export markets and, particularly, the competitive environment there? Any incremental or relief in pressure out of Russia, for instance, going into China? Any incremental competition, Japan from Europe?

Yes. So what I would tell you is we continue to be encouraged by what we see in the West, overall, including the key export markets, which, of course, for us, are Japan and China. In terms of Japan, Japan housing market remains solid. 2017 total starts are up almost 5% year-over-year through February. Demand and pricing for logs, as we said, was solid in the first quarter, and we anticipate that's going to continue into the second quarter. In terms of China, inventories there are in good shape, which, as you know, is a real key. Ended March at roughly 3.8 million cubic meters. We anticipate that inventories are going to remain at levels -- reasonable levels through 2017. And in the second quarter, we anticipate volumes are going to rise, and we'll have log prices that are comparable to the first quarter levels. And we anticipate, as we move through the balance of the year, continued strong demand and pricing to be up slightly for the remainder of the year in China. Did not see any big moves in terms of competitors. Again, we're kind of maxed out in terms of the infrastructure challenges that we have. So we did see an increase in U.S. exports to China in the -- so far in the first quarter of 2017, and that number is up pretty significantly versus first quarter of 2016.

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

First question, just going back, Doyle. In February, I believe you indicated that you were hopeful we'd see some slight improvement in log pricing in the U.S. South as we move into the second half of the year. Just can you update us on your thinking here just in context of what's happening on the lumber side of the business?

Yes. So what I would tell you is at this point, Collin, we don't expect any -- well, let me start by what we've seen in sawlog pricing. So if you go back and look at the last 4 quarters in terms of just sawlog pricing, it's been very flat. You've seen some pressure on pulpwood pricing, but sawlog prices has been very flat over the past 4 -- with the past 4 quarters. As we look into the second quarter, we don't expect any significant improvement in sawlog pricing. We do continue to believe there is some potential for maybe some minor pricing traction in late 2017 as demand continues to grow and the Canadian (inaudible) lumber markets declines, whether it's due to duties or, hopefully, as I mentioned earlier, a negotiated agreement. Now longer term, as we've talked about, we're very optimistic that due to the additional housing demand, the incremental capacity that's coming online in the U.S. South, and right now, that's at least 12 million tons of additional demand that's in the process of coming online, and then again, less lumber from Canada, we think all those things are going to add up to provide us with the opportunity for much better pricing on southern sawlogs as we move into 2018 and beyond.

Okay. That's a helpful update there. And then maybe switching gears. Can you just maybe touch more on your outlook for OSB pricing throughout the year just against the backdrop of clearly better pricing here to start the year, better residential construction activity, but then also the potential for more supply?

Yes. So we're optimistic about OSB pricing for the year of 2017. We talked about that it was up nicely in the first quarter, but as you look at where it is in the second quarter, current prices are up probably 10% versus the first quarter average. And we think based, again, on the strong housing demand that we've seen and the current supply, that OSB pricing should be good for the year 2017. As we move into 2018, as you highlighted, there will be some incremental capacity that comes online, but we're going to, frankly, need some of that as housing continues to grow. And the other observation I would make is it takes a while for new capacity to get up and be fully running. So we'll see how that plays out, but we're hopeful that supply and demand continue to be in good shape as we move forward.

And then just one last one from me, just going back to the OpEx goals. And again, in the prepared remarks, you highlighted you were on track to achieve that in the Wood Products side. Is there any way to quantify or think about how much of 2017 goals were captured in the 1Q number versus what you still have ahead of you as far as the runway of just kind of the OpEx side of things, regardless of what happens with the product pricing?

Yes. So what I would tell you is in Timberlands, as we talked about, we're right on track for the $40 million to $50 million. So I would say, in the quarter, we got about what you would expect if you just do it on a quarterly basis. In terms of our Wood Products operation, Collin, as we said, we had particularly good quarters from an OpEx perspective in OSB and distribution. So I would tell you, at least for -- and it's just 1 quarter out of 4. But through the first quarter, we're ahead of schedule in both of those businesses and, I would say, right in line with our other 2 businesses, which are lumber and EWP.

Your next question comes from the line of Steve Chercover with Davidson.

It sounded like the U.S. and Canada nearly had a softwood lumber deal late in 2016, and someone on the Canadian side thought they'd get a better deal with President Trump. I guess if that's true, it's a bonehead move on Canada's part. But as the largest U.S. lumber producer, presumably, you were privy to the details. So can you say whether the terms were similar to the deal that expired in October of '15?

Steve, not surprisingly, we don't have any comment on negotiations that go on between the U.S. and the Canadian governments.

Okay. Well, clearly, the 2 countries need one another, so it sounds like you're looking more for a quota.

Well, clearly, the 2 countries need one another. And as I've said, we are very hopeful of a negotiated agreement between the U.S. and Canada as we move forward.

Okay. And then I'll switch gear with one other question. You made some nice progress on engineered wood. And it's great that it wasn't driven by price, but it's interesting for me that price is down when generally, high lumber prices, I thought, were conducive to substitution into EWP. So why were prices...

Yes. So what I would say -- I'm sorry. Go ahead.

Well, I was going to say, why were they down? And are there any initiatives to raise prices?

Yes, there are, in fact, initiatives to raise prices, and we have announced a 7% to 10% price increase and are encouraged by the progress we're making on that. Of that 7% to 10%, we should realize that by the end of the third quarter, with maybe 25%, 30% of that in the second quarter and most of the balance of that to be realized in the third quarter. To your first comment, the reason prices were down slightly was primarily due to mix and the fact that the first quarter typically includes a greater mix of commodity and industrial products, which carry a lower price. So just as you indicated, positive lumber pricing, good for EWP, and we anticipate EWP prices moving up for the balance of the year.

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

Just wanted -- a question on Timberland values. I think RISI's last report was questioning some of the softness in the market. And you see the transactions out there. They seem to be a little bit all over the place. So the idea of softness was sort of -- and it's more in the U.S., so with the idea of disappointing U.S. South sawlog prices and higher discount rates. Are you seeing that at all? Or are you seeing more robust market conditions?

No, Paul. We haven't seen that at all. What I would tell you is demand for high-quality, well-managed timberland remains very strong as investors continue to view timberland as an attractive part of their portfolio. Timberland valuations remain steady. We're participants to all the major deals that come to market and have not observed any changes in the valuation trends overall. As you very well know, there was a big transaction that happened this quarter by one of our competitors that was at a nice level in terms of value per acre. So we continue to see strong interest from a diverse group of investors in every deal that comes along, again, for high-quality, well-managed timberland.

Okay. And just on a potential deal on softwood lumber. You guys are clearly in favor of quota. Would you like to share with us sort of what percentage or quota you would like to see?

Paul, those are ongoing -- or those will be ongoing discussions between the Canadian and U.S. government. Now again, hopefully, we can reach an agreement that works for all involved by the end of this year.

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

It's actually Salvator Tiano filling in for Chip. So firstly, a little bit on the land sales. You're guiding for EBITDA of $150 million this year. So over the next 5 years or even more, we know there's quarterly seasonality, but how lumpy will you say would that be on a year-on-year basis?

So on the real estate, yes, as you indicated, that can be a little lumpy because it's more transaction based. But I think what we'll see coming in, as I indicated, the second quarter will be comparable to the first quarter. And then we'll see a majority of the transactions close in the fourth quarter. That's probably the typical pattern of closing and cash flow that you'll see in this business. We just don't get a lot of activity in the winter months, and then it backloads at the end of the year.

Sure. So on a yearly basis, let's say, from 2018 and onward, do you expect a lot of variability on a year-on-year basis?

No, I think we've indicated that we would expect the Real Estate and Energy and Natural Resources business to contribute anywhere from 10% to 15% of our total adjusted EBITDA. And so that's pretty much where we target that business.

Okay, perfect. And just on the acquisition front, given that Wood Products are performing very well, are you considering selected acquisitions on that front? And if so, which specific categories, lumber, OSB?

So what we've said is currently, our priorities #1, 2 and 3 are making sure we successfully merge Plum Creek and get to the bottom line all the benefits from that merger. And as we indicated earlier, we made a lot of progress but still have more to do, so that is our primarily focus. As we move forward, we will look to opportunities to grow our company. We think our biggest opportunities will probably be in Timberlands. With that said, if we can find appropriate acquisitions in Wood Products, especially if it's close to our timber base, those are opportunities we would look on -- look at from a bolt-on perspective, and we'll continue to identify opportunities for that as we move forward.

Makes sense. And just to clarify, you mentioned you'll prefer it if it's close to -- if the mills would be close, I guess, to the timberland assets, but you would be open to do a separate transaction, let's say, a lumber mill that's not a part of a bigger operation with timberland as well.

I'm not sure I understood your question. Say that again.

Sure. I think you mentioned you would be open to acquiring some wood product assets that may not be close to timberland assets. Is that correct? So you would be open to...

Well, we would factor in everything in terms of potential bolt-on acquisitions. It would probably be more attractive if it was close to our timberland. But would we necessarily rule it out if it wasn't near our timberland? Probably not. But again, with our timberland base, most sawmills, for example, would be more than likely aligned with our timberland base.

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

Really strong results in Wood Products. I think the pricing that everyone tracks, the public benchmark price is up a lot. Your own realizations seem to lag it maybe just by a little bit. Just wondering if there's a little bit of timing lag on recognizing some of the market prices, maybe a presell of some volume a little bit ahead of time? Is that the case? And is that something that we should just expect going forward? And can you kind of quantify how much of a lag there might be?

Yes. So there clearly is a lag. And especially in strong markets like we had in the first quarter, with extended order files, the lag tends to be maybe, if anything, a little longer than normal. But what I would tell you, as we've moved into the second quarter, prices have continued to improve. As I indicated earlier, current prices for OSB, up more than 10% -- our realizations are up more than 10% versus the first quarter average. And we've also seen a nice improvement in lumber prices, with quarter-to-date lumber prices up roughly $30 versus the first quarter average. So you're exactly right. There is a lag but it is ultimately realized, and the lag is a little longer when you're -- have the situation where you have extended order files, which is a good thing.

Okay. Just sticking with Wood Products, really good engineered wood product volumes. Just wondering if any of that, in your mind, had to do with prebuying ahead of the price increases that are out there in the market for the spring and just wondered if that would have been a factor in the strong volumes.

I think that may have been a small factor. I think it was more driven by what we've seen on the housing front, Brian. I can't tell you there wasn't any prebuying. But as we move through the second and third quarter, as I indicated earlier, we will fully capture the 7% to 10% price increase that's being put in place.

Okay. And then just switching gears. You made some comments at the Investor Day back in December about the dividend, just kind of reevaluating the payout ratio and how you and the board would think about it going forward. It's been a while since we've gotten a change in the dividend. Just wondering about your updated thoughts on it and timing and how that strategy is coming together.

Sure. So as we've consistently said, we are committed to a growing and sustainable dividend. With 90% of our assets in Timberlands and a significantly improved cost structure for Wood Products, our go-forward cash flow will be much more stable than it's been historically. We continue to work with our board on the appropriate payout ratio and the timing for increasing the dividend going forward. And as you would expect, the board factors in many things when considering the appropriate dividend level, including the pace of improvement in housing, southern sawlogs and wood products as well as the benefits from our internal initiatives for operational excellence and operational synergies. So that's how we're currently thinking about it.

And then just in terms of timing, is there a particular meeting within the year where the board takes it up or pays special attention to it?

No, we have no specific cadence in terms of our dividend review.

Okay, great. Just one last one for Russell, if I could, on the -- the working capital seemed a little bit -- like a little bit of a bigger use of cash than historical. Maybe that's to do a little bit with the Plum Creek in there. But -- and maybe that had to do with the taxes coming out of the Cellulose Fibers sale. But just wondering about your thoughts on, for the full year, how you think working capital will be a source or a use of cash or maybe flat.

I would expect it to be pretty consistent with the prior years. You're right. We did have probably an increase in working capital just because of the addition of the Plum Creek lands. We have inventory builds in the North, particularly in Montana, which would mean you'd see an increase in some working capital in the first quarter, which we saw. But I wouldn't expect anything out of the ordinary for the remainder of the year.

And I'd like to turn the call back over to Doyle Simons for closing remarks.

Yes. As I understand it, that was our final question, and I'd just like to close by thanking everybody for joining us this morning. And as always, thank you for your interest in Weyerhaeuser.

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