威爾豪瑟 (WY) 2017 Q2 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser Second Quarter 2017 Earnings Conference Call. (Operator Instructions) I will now turn the call over to Ms. Krista Kochivar, Director of Finance and Investor Relations.

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

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

Thank you, Krista. And welcome, everyone. This morning, Weyerhaeuser reported second quarter net earnings of $24 million or $0.03 per diluted share on net sales of $1.8 billion. Excluding after-tax special items of $188 million, we earned $212 million or $0.28 per diluted share. This is more than 1.5x the earnings from continuing operations we reported in second quarter 2016 and an increase of about 27% from first quarter 2017. After-tax special items for the quarter included a $147 million noncash impairment charge related to the sale of our Uruguay operations, a $31 million for Flak Jacket remediation, $8 million for softwood lumber duties and $2 million of merger-related costs.

Adjusted EBITDA totaled $506 million, an improvement of 23% compared with second quarter 2016 and over 11% compared with first quarter 2017. Each of our businesses delivered strong second quarter operating results, with Wood Products leveraging improving markets and ongoing operational excellence initiatives to achieve record adjusted EBITDA in the quarter.

In addition in the quarter, we announced the pending sale of the Uruguay operations, completed the asset value optimization process for our Western Timberlands, and eliminated roughly 2/3 of the $35 million of costs formerly allocated to our sale of fibers business and continue to expect to eliminate the remaining costs by the end of the year.

Before covering our business results, let me make a few brief comments regarding the housing market. Housing starts continue to move higher. After a robust start to the year, the pace of starts slowed early in the second quarter before picking back up again in June. Year-to-date, total housing starts are up approximately 4% and single-family starts are up 8%. Leading market indicators remain favorable. Employment and wages are rising, consumer confidence continues to be strong and mortgage rates decreased from first quarter levels. Single-family permits are up 9% compared to last year, and we are seeing especially strong single-family building activity in California and in the South. We expect total housing starts of approximately 1.25 million in 2017.

Let me now turn to our business segments. I will begin the discussion with Timberlands, Charts 3 to 5. Timberlands contribution to earnings before special items was $135 million, $13 million less than the first quarter. Adjusted EBITDA was $222 million. Western Timberlands delivered $124 million of second quarter EBITDA, a decrease of $9 million compared with first quarter, but an increase of $10 million compared to a year ago. The market for Western domestic logs remained strong in the second quarter, supported by robust building activity in the West and low mill inventories. Log supply remained tight as record rainfall in the Pacific Northwest continued throughout the second quarter. Domestic log sales volumes and realizations increased slightly compared to with the first quarter. And road and forestry costs increased seasonally, even though we deferred some of the projects as a result of the wet weather.

Turning now to our export markets. In Japan through May, total housing starts increased 2% compared to the prior year, while post-and-beam starts were up 4%. Our log sales volumes decreased slightly due to timing shipments, and average realizations were comparable to the first quarter. In China, market conditions remained favorable, and log sales volumes and average realizations increased compared to the first quarter. Log inventories at Chinese ports declined slightly again in June and remain within a normalized range.

Moving to the South. Southern Timberlands contributed $91 million to second quarter EBITDA, $5 million lower than the first quarter, which benefited from seasonal seedling sales. Fee harvest volumes increased slightly compared to the first quarter, and average log realizations were unchanged.

Northern Timberlands contributed $2 million to EBITDA, a decrease of $6 million compared with the first quarter as fee harvest volumes declined seasonally due to spring breakup. Average realizations were higher as a result of a mix shift to a greater percentage of hardwood.

The Timberlands business made good progress on its operational and excellence initiatives in the second quarter. Regional teams continued to implement best practices for harvesting and transportation. Optimizing wood flows over a larger footprint allows our teams to minimize costs and increase realizations. The business remains on track to achieve its $40 million to $50 million OpEx target for 2017.

Real Estate, Energy & Natural Resources, Charts 6 and 7. Real estate and ENR contributed $23 million to second quarter earnings and $37 million to adjusted EBITDA. Adjusted EBITDA declined by $6 million compared with first quarter, but improved $9 million compared with the second quarter of last year. During the second quarter, our real estate team completed the asset value optimization, or AVO, process review on our 2.9 million acres of Western Timberlands. The AVO process identified approximately 365,000 acres where we expect to capture our targeted premiums to the underlaying timberland values. We will bring these properties to market over time, including some in the second half of this year.

Wood Products, Charts 8 and 9. Wood Products' contribution to earnings before special items was $238 million in the second quarter, an increase of 38% over the first quarter. Adjusted EBITDA improved $67 million to $274 million, an increase of 32%. EBITDA for lumber totaled $127 million, $28 million more than the first quarter due to a 7% increase in average sales realizations and a 5% increase in lumber sales volumes.

EBITDA for OSB totaled $87 million, $21 million more than the first quarter and more than double the second quarter of 2016. Average sales realizations increased 12% and sales volumes were comparable to the first quarter. All of our OSB mills ran extremely well again in the second quarter.

Engineered wood products contributed $52 million to EBITDA, an improvement of $15 million over the first quarter. Average sales realizations increased for all products during the second quarter. We also captured a larger percentage of the February price increase in the quarter than we originally anticipated.

Distribution EBITDA totaled $13 million, an increase of $5 million compared with the first quarter and an increase of $4 million compared to the second quarter of last year. The distribution business remains focused on margin improvement and controlling operating and selling costs.

Each of the Wood Products businesses is making good progress on their respective OpEx initiatives through the first half of the year. We continue to expect collective operational excellence 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 June 26, the Department of Commerce announced preliminary antidumping duties on Canadian lumber producers. For most producers, the duty will be approximately 7% and will also be assessed retroactively. The antidumping duties are additive to the countervailing duties, which were announced at the end of April. Combined, these duties average between 25% to 30% for most producers. The government will continue its investigation through the remainder of the year, as the Department of Commerce and International Trade Commission collect and evaluate additional information in support of final determinations of the duties and a level of material injury to U.S. producers. These determinations are expected later this year. The U.S. coalition continues to work closely with the Department of Commerce, and we remain hopeful we will be able to reach a quota-based agreement.

Before I turn it over to Russell to discuss some financial items and our third quarter outlook, let me touch on the Flak Jacket issue we disclosed last week as well as an update on capital allocation. Regarding Flak Jacket, our top priority is to take care of our customers and their customers. We are working proactively to quickly implement solutions, and remediation is already underway or completed in over 100 houses. We've halted all production, sales and shipments of this product, and we are collecting unused products from our customers. We are absolutely committed to doing the right thing and resolving this situation as quickly as possible.

Finally, capital allocation. Since converting to a REIT in 2010, we have communicated a target payout ratio of 75% of our funds available for distribution over this cycle. Following the merger with Plum Creek and the divestiture of our Cellulose Fibers business, it is clear to us and our board that Weyerhaeuser's cash flow profile is significantly different than it was in 2010. After divesting of our homebuilding and Cellulose Fibers business, doubling our timberland holdings and significantly improving the cost structure of our Wood Products operation, our cash flow is more stable and predictable. Considering these factors, we have determined that the company no longer requires the level of retained cash flow implied by a 75% payout ratio, and we have made the decision to increase our target payout ratio to 85% over a cycle.

Going forward, the board will continue to regularly review the dividend in light of a full range of external market conditions as well as our internal improvements. We expect the biggest driver for a substantial dividend increase will be improving pricing for Southern sawlogs, as that would generate a sustainable and growing earnings stream to provide strong support for the dividend over time.

Now let me turn it over to Russell to discuss our third quarter outlook.

Thank you, Doyle, and good morning. The outlook for the third quarter is presented in Chart 12 of the earnings slides. In our timberlands business, we expect third quarter earnings before special items and adjusted EBITDA will be slightly lower compared to second quarter. At our Western Timberland operations, we anticipate slightly higher average sales realizations, with fee harvest volumes expected to decrease modestly compared to the second quarter. Japanese export log volumes will increase, while average sales realizations are expected to be slightly higher compared to the second quarter, supported by continued strong demand in Japanese housing market. Export log volumes to China are also expected to increase, with slightly higher average sales realizations. Third quarter domestic log sales realizations are expected to be comparable to the second quarter, with lower sales volumes.

Western road spending was deferred due to record wet weather in the second quarter. Spending in the third quarter will increase, as we expect to complete the deferred roadwork in addition to our typical summer road activities. Logging costs are expected to be slightly higher in the third quarter because we tend to log in higher elevations during the summer.

In the South, we expect higher harvest volumes, as the weather improves from a very wet second quarter. We anticipate average sales realizations for the third quarter will be comparable to second quarter levels. Silviculture spending in the South is expected to increase due to seasonality as well as weather-related deferral of activities from the second quarter into the third quarter. In the North, we anticipate third quarter sales volumes to be significantly higher than the second quarter, as we move past the spring breakup season.

Real Estate, Energy & Natural Resources earnings and adjusted EBITDA are expected to nearly double in the third quarter as compared to the second quarter and continue to ramp up in the fourth quarter, which is when we typically expect the largest portion of the real estate transactions to close. We continue to expect over $250 million of adjusted EBITDA from our Real Estate, Energy & Natural Resources business in 2017.

Turning to Wood Products. We anticipate third quarter earnings before special items and adjusted EBITDA will be comparable to second quarter. Strong demand and low inventories throughout the supply chain have led to continued strong July pricing for lumber, OSB and engineered wood products. Overall, we expect comparable quarter-over-quarter lumber sales realizations and slightly higher OSB and engineered wood products sales realizations. Sales volumes are expected to be consistent in lumber and engineered wood products, with a slight decrease in OSB.

Looking at Chart 10, unallocated items, the $26 million favorable variance in earnings before special items compared with the first quarter is primarily the result of a $14 million reduction in nonoperating pension and other postretirement benefit costs. In the second quarter of each year, we finalized prior year-end estimates. And as a result of this work, we now expect to record approximately $15 million per quarter of unallocated nonoperating pension and postretirement expense for a total of $60 million in 2017. Our total anticipated cash payments for pension and postretirement remains unchanged at $70 million for all of 2017, with no funding required for our U.S. qualified pension plan.

Chart 11 summarizes our key financial items. We ended the quarter with a cash balance of $701 million, an increase of $246 million from the first quarter. Cash from operations during the quarter was $489 million, an increase of $454 million over the first quarter, which is typically the lowest cash flow quarter of the year. Capital expenditures for the second quarter totaled $87 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.

Moving on to debt. We ended the quarter with $6.6 billion. Earlier this week, we completed a refinancing of our $550 million term loan, which was scheduled to mature in 2020, replacing it with a new $225 million term loan maturing in 2026 and prepaying $325 million in cash. In addition to this refinancing, we also have a scheduled bond maturity of $281 million in August of 2017. Interest expense was $100 million in the quarter. The repayment of the August maturity, which has an interest rate of 6.95%, will reduce interest expense by approximately $20 million annually.

We anticipate the full year 2017 tax rate will be between 15% and 17% based on the forecasted mix of earnings from our REIT and taxable REIT subsidiary.

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

Thank you, Russell. Looking forward, we are extremely well positioned to continue to capitalize on the improving housing market and remain relentlessly focused on driving value for our shareholders through operational excellence and disciplined capital allocations. And with that, I'd like to open up the floor for your questions.

(Operator Instructions) And your first question is from the line of Anthony Pettinari with Citi.

Southern log prices were flat quarter-over-quarter. I think that's the first quarter since 2015 that prices weren't down sequentially. I was just wondering if you could talk a little bit more about what you're seeing in Southern logs markets. Are you seeing price stabilization or improvement? Or was that just mix? Any kind of additional color you could give there would be helpful.

Sure, Anthony, and what we're seeing in the South is just as you said, flat sawlog pricing. At this point, we do not expect any significant improvement in sawlog pricing in the third quarter. We would anticipate it would be flat with the -- with Q2. But as we move forward, we do see some potential for some pricing traction as we enter into 2018. Housing demand continues to grow. As you very well know, there's more capacity that's being put in place in the South. The Canadian share of U.S. lumber markets, we believe, is going to decline, due to either the duties or hopefully a negotiated agreement. And the other thing I would tell you that we're encouraged about is that the export markets out of the South are starting to grow. And in fact, we recently signed a contract for weekly shipments to India. We're also sending weekly shipments to an existing customer, Western customer in China. So we think that has the potential to grow over time. So all of those things we think will ultimately lead to improvement in Southern sawlog prices as we move forward.

Got it. And understood it's probably a very relatively small amount. But is it possible to quantify export shipments out of the South, or maybe where you think they could be by the end of the year?

Yes. So like I said, we're encouraged. It is a small amount at this point in time. But we think over time, it could grow to 400 or 500 containers, 400 to 500 containers a week, which would be, just to give you a sense, equivalent to the -- a small sawmill. So that will make a difference in the marketplace.

Okay. That's very helpful. And then just following up on the quota. There have been press reports the DOC might be near a quota that would cap Canadian share at 27% or 28%. I was just wondering if you could give any more color about your preference for a quota versus continuation of duties and just striking the right balance between resolving the issue quickly, but also making sure that your concerns and the Lumber Coalition's concerns are adequately addressed.

Yes. And as we've said, Anthony, the U.S. coalition continues to work very closely with the Department of Commerce, and we remain hopeful we'll be able to reach a quota-based agreement, and we like the certainty of a negotiated agreement. However, as we've also said, we want the right agreement. And if we don't get that, we'll let the process continue to play out in terms of the duties. So again a lot of discussions going on. We continue to be hopeful of a negotiated quota-based agreement, which we think would be the best outcome.

Your next question comes from the line Gail Glazerman with Equity Research.

I guess just staying on the Softwood Lumber Agreement, I guess the preliminary duties phase out in August, and there could be a gap between final duties. Just how do you expect -- any sense how customers might react to that?

Yes, that's a good question, Gail. And as you very well know, we've seen an improvement in lumber prices that's -- so let me say it this way. The overall trend in lumber prices that we've seen we think is ultimately being driven by supply and demand. And that's due to the fact that inventories are lean, and demand continues to be strong. On top of that, we've seen that exacerbated a little bit by the fires over the past few weeks. The way I see it, the uncertainty around the SLA has driven the volatility in pricing, but the overall pricing trend has been driven by fundamentals of supply and demand. As the countervailing duty goes off in August, I think we'll continue to see volatility in pricing if that happens. Exactly how that will play out, we'll have to wait and see. But again, I am encouraged by the underlying supply and demand dynamics. And we're just going to have to see how the SLA plays out going forward, and specifically, what impact that has at the end of August when the CVD lapses for a short period of time.

All right. And can you give a little bit of perspective, I guess? Southern yellow pine was weaker than SPF and just how you see that relationship building over the next couple of quarters?

Yes. So you're exactly right. Those kind of got out of sync during the quarter. I think there were a number of drivers of that. Part of it was the duties that have come into place. Part of it was FX and with the Canadian dollar strengthening versus the U.S. dollar, and then of course, the fires that have impacted BC over the past few weeks. So I think all of those things resulted in the relative change in SPF to southern yellow pine. I think going forward, you'll see the normal gap that you see -- that you normally -- that we've normally seen between those come back to normal as those factors play out.

All right. And just to go to the guidance, you mentioned that you expected a little bit of improvement in Japanese log prices in 3Q. Is that correct? And I'm just curious, because I thought long line shows a little bit of pressure in June. I'm just wondering if you could give a little bit more color on the competitive dynamics in Japan.

Sure. And as we said in our comments, we continue to be encouraged by what we see overall in Western log markets. And domestic markets demand continues to be strong, primarily driven by what we see in the California markets. In Japan, specifically to your point, post-and-beam construction continues to grow at about 4%. And in the third quarter, we do anticipate kind of steady demand and potentially slightly higher prices in the third quarter. So that's how we see Japan. And then China, as you know, inventory continues to be in very good shape, at 3.5 million cubic meters. And there, we expect higher volume and slightly higher prices in the third quarter as well. That's kind of how we see the export market.

Okay, one just really quick one. You mentioned that you're doing weekly deliveries to your customer in China out of the South. Is that cannibalizing the business that you have in the West at all?

Business out of the West is strong right now, as I just indicated. And in fact, total log imports into China from the U.S. are up 35% year-to-date. So the amount that we are sending to our Chinese -- into China is an existing customer, but it's both a growth in overall volume as well as displacing a little bit out of the West. But we're fine with displacing a little bit out of the West based on the strong markets that we see in China.

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

Wanted to follow up a little bit on the change in the dividend policy and the tying to the Southern sawlog pricing over the long term. Should we understand by that, that there could be modest or moderate increases in the dividend prior to the recovery in Southern sawlog pricing, and then you can get bigger ones when there is visibility on that recovery? Or is it that there really likely wouldn't be any dividend increases until you saw that recovery?

Mark, as we said, the board is going to continue to review the dividend. It's going to consider all conditions, external market conditions as well as internal improvements and things we're doing. As you very well know, our largest asset is our Southern Timberlands. And very purposeful, we said we expect the biggest driver for a substantial dividend increase will be improving pricing for Southern sawlog. Because that's what's going to ultimately generate a sustainable and growing earnings stream that would provide strong additional strong support for the dividend over time. So that's the way we're looking at it and the board's looking at it.

Okay, and I realize this is a really tough one, but do you have any -- what's your perspective on the potential timing of that recovery in Southern saw timber pricing now, versus where your thought process would have been previously? What drivers are -- are there any...

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north of 1.3 million that we could reach the inflection point where we start to see some improvement in Southern sawlog prices.

Okay. That's very helpful. And then just lastly, curiosity, why do you prefer quotas over duties?

So Mark, the reason we like the quotas versus the duties is that it's simple, it's effective and we think it will allow the U.S. industry to grow to its natural size. Now with that said, if we can't get the right agreement in place we can make the duties work as well. But we just like the certainty of having a quota in place. Everybody understands exactly what that is and then go forward based on that.

Your next question is from the line of Mark Wilde with BMO Capital Markets.

Doyle, let's just come back to the Softwood Lumber Agreement one more time. I'm just curious. If we don't get a deal in the next few weeks, and then we have kind of -- we're in a point we've reopened these NAFTA negotiations, does that then kind of preclude getting a deal done on lumber until NAFTA's redone?

Mark, it's hard to answer that question because we don't know exactly how that's going to play out. I do think if the SLA gets drug into NAFTA, that could prolong our ability to reach a negotiated agreement. But there's just a lot of uncertainty exactly how the SLA will interplay with NAFTA at this point.

You have a guess on your side? I mean, I think we're all kind of scratching our heads.

Yes, and I wish I could provide more clarity, Mark, but we're kind of scratching our heads too just because it's just an unknown.

Okay. Second question I had Doyle, I know you guys had been very focused on kind of integrating Plum Creek. I'm just curious as to whether you think you are at a point where you might start to look at some meaningful acquisitions. There is a lot of timberland that's potentially in the market over the next year or 2.

Mark, if we -- as we've consistently said, our priorities number one, two and three have been the integration of Plum Creek. We have made very good progress on that, and I'm pleased with where we are. As we move forward, we would potentially look at timberland acquisitions. But as we've also said, the beauty of our portfolio is we are very well positioned and we don't have to grow anywhere. So with that said, we can be very, very disciplined in looking at potential timberland acquisitions if we find opportunities that we think will provide shareholder value, that's something we would consider. Otherwise, we'll just continue to focus on what we can do internally to continue to drive improvements in our overall performance and shareholder value.

All right, that's fair. Last question I had, Doyle, just any more color on sort of options around fireproofing on the I-joist, the thing that I think Flak Jacket was an attempt to deal with?

Mark, right now -- I'm sorry, go ahead.

I was just going to say -- I'd also like to get a sense if I could, about how big a -- how many markets that, that really is an issue in right now? Because I think a lot of it is state-by-state regulation.

It is state-by-state regulation, Mark. And our focus right now, as you would anticipate, is making sure we're doing everything we can with our customers to resolve the situation with Flak Jacket. As we move forward, we'll be determining whether -- how we want to proceed on the -- on any future product that would have this fire retardant material.

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

Yes, I had a question just on -- first question is a few weeks ago, we saw that one of the large privately held wood products companies is announcing an engineered wood facility in South Carolina. And I know you've seen a great improvement in your results in that business. But I think my perception is that's mostly internally driven, not really markets-driven. So what are your thoughts about that? Do you think the market can handle that addition to capacity?

Chip, and thanks for saying -- making your comments on the internal improvements. And clearly part of the improved performance in WP has been internal improvements. But with that said, those markets are also improving. As you very well know, we're -- we put in a price increase. That was in February. We saw a significant benefit of that in the second quarter. We'll see a little bit more benefit from that in the third quarter. And I just give that background to say as housing continues to improve, we will need, we as an industry, we'll need some additional capacity. Now how that matches up when this mill comes online, and it will take a while to get this mill online. As you very well know, it takes -- a start-up takes a while. How that meshes with where we are exactly on housing starts remains to be seen. But as housing continues to improve and gets to 1 4, 1 5, 1 6, whatever the number is, there will be additional capacity that will be needed in engineered wood products.

Okay. And I don't know, either you or Russell, what are your thoughts about the -- you mentioned that obviously the board is going to think about how to approach the dividend in terms of the ongoing rate. But it's interesting, obviously the sawtimber tie-in in the South is -- makes total sense because sawtimber prices of course tend to be a lot more stable than wood products. But you still have this great wood products business that's doing very well. Now I know other companies, one specifically for years has practiced sort of a variable dividend, and then there's another one who yesterday said that they were considering that, just because that is obviously more appropriate given the volatility you have there. Would that be something that you personally would consider or recommend to the board, as sort of an override to the ongoing quarterly dividend in years or periods where the wood business is particularly strong?

Yes. This is Russell. As Doyle said, our objective is a growing, sustainable dividend over time. Clearly, the Wood Products business is performing well. We are pinned on kind of Southern sawlog as being the catalyst. However, we would take into consideration, depending on where the market is at. But our primary focus is growing dividend, growing steady dividend over time.

Our next question is from the line of Steve Chercover with DAD.

I recognize it was a wet spring here in the West, but it sure has been hot and dry in the last month. So are any of your western lands now operating under harvest restrictions? And is that incorporated into your timberland guidance?

Good question. And you're right, it was a very wet spring. And now, at least where we live, we haven't seen rain in a month or so. So at this point in terms of Washington and Oregon, nothing is under fire restriction at this point in time. But as we all know, that could change quickly as we move forward. That is -- so basically what's incorporated, Steve, in our guidance is kind of a what I would call a normal fire season, if there is such a thing. If that changes, you could see further restriction or further tightening, I would say, of softwood log markets in the Pacific Northwest. I would mention in Montana, we do have restrictions in place and no logging, at this point in time, is allowed after 1 p.m

Yes, I kind of thought we might be going to -- here soon.

That very well could happen.

Your next question is from the line of James Armstrong with Armstrong Investments.

The first question I have is as land sales pick up at the back half of the year, will there be much change in the mix? Or will realizations per acre be similar to the first half of the year? Just I noticed that realizations were up nicely in the first half.

James, this is Russell. as Doyle mentioned, we completed the Western analysis for our AVO, our asset value optimization. So we are very pleased with those results. And so we'll see some of those acres coming into the market in the second half of the year. As we indicated, third quarter will be double second. And then we'll see a ramp up in the fourth quarter. Those properties will have a higher value than the southern or the northern properties. So you may see a change in the average per acre value coming through the program.

Okay. That helps. And then on EWP, switching gears. You mentioned that you had more price realization this second quarter than you expected. Could you comment on how much you expect to get remaining in the third quarter? And will that be it for the February price increase? Or will some bleed into the fourth quarter?

Yes. So -- in the second quarter, we realized about 70% of the price increase, which as we mentioned, was higher than we originally anticipated. In the third quarter, we would anticipate an additional 20%, and then the balance, the 10%, to show up in the fourth quarter. So that's kind of how we see it plan out.

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

Just following up on the use of cash line of questions, it looks like you have -- balance sheet's up to about $700 million of cash and you should get some proceeds from Uruguay sale soon. Just wondering how share repurchases might fit into the capital reallocation strategy. And as you're contemplating where to move the dividend in a sustainable way, if share repurchases could be a solution to a little bit of a release valve for some of that cash that's building up on the balance sheet?

Sure. And as we've consistently said in terms of our priorities for capital allocation, first and foremost is returning cash to shareholders. That will be primarily through a growing and sustainable dividend. But Brian, as we've indicated, we're also open to share repurchase where appropriate. And as you know, we currently have a authorization of $500 million in terms of share repurchase.

And one, I see you chose to exclude the $11 million duties from the Wood Products adjusted EBITDA. Just wondering the thought process there, if you guys are viewing that as a onetime thing in nature, maybe because they'll lapse at the end of August or they'll eventually be replaced by a quota. And then maybe could you clarify, is that $11 million tied to the actual lumber sales in the quarter? Or was there some impact from 1Q sales due to the retroactive nature of the duties?

So Brian, you're -- this is Russell, correct. We did put that as a special item, and there's 2 components. One is the retroactive countervailing duties and then the go-forward countervailing and antidumping duties. So we do view those as pretty unique relative to the overall lumber operations, and that's why we put it in the special items. And then you're correct. It will drop off in August 28 until there's an actual final determination and then the duties are reinstated. So it will be a little lumpy coming through if we put it into the operations.

Okay. And if we were to think about what an actual -- theoretically, if the duties did stay at the current levels in actual expense in the quarter, would it have been something closer to $6 million or $7 million instead of the $11 million?

Yes, probably $6 million to $7 million.

Okay. And one -- just last one for me. We've seen a big move in the Canadian dollar in the last couple of weeks and months. Could you remind us of the impact to your earnings, every penny or so move in the dollar might have? And then thinking beyond the translation impact, any impact you might expect on trade flows from that? And historically, have you seen Canadian imports of lumber dry up a little bit and a little bit more production shift to the U.S. when this has happened?

Yes. We noted that the change in the relationship on the FX for the Canadian dollar and the U.S. dollar. But we've been operating in a relatively strong dollar environment, and we don't really see material impacts on those interquarter shifts. So we really don't look at what is the impact on a per penny shift on that. So we don't think there'll be a material change in the inflows. It will really be primarily driven by the SLA and then also some of the restrictions resulting from the fires up in Canada.

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

Just thanks for the updated payout ratio that you've targeted [85 cents] (sic) [85%]. I understand catalyst is on southern log price movement. Just on that question, we had a lot of deferrals in the U.S. following the recession in '08 to probably '14. Just wondering what your assessment is of the current growth versus drain on the overall South. Are we harvesting more than the trees are growing down there? And when do you think we'll start to see some tension in the market?

Paul, this is Russell. As we look in South, again as Doyle mentioned, the continued strength in the housing market and continued increase in production, we're definitely seeing some rebalancing in some wood baskets. And I expect that as we continue to see the housing market recover and less Canadian volume coming into the U.S. market, we'll see those tensioned over time. But it is -- it's not consistent across the entire South, but we're definitely seeing some benefits particularly in the Atlantic South where those markets are starting to tension.

Okay. And then just on the guidance. When you guys -- for Q3 when you're guiding for timberland to be slightly down, is that like a 5% number? And then one of the things that surprised me was the lower fee harvest volumes expected in the West. And what's the result of that?

So in terms of the guidance, we said slightly. So I would say that's 5% or less in terms of what that would mean in terms of dollars. And then in terms of the lower harvest in the West, that's primarily due just to timing. As you know, a lot of farmer, what we call farmer wood, comes on the market in the quarter, which can have a negative impact on pricing. We tend to back off during that period of time and then capitalize when pricing tends to be a little bit better.

Okay. That's helpful. And then just lastly just on this potential Southwood lumber deal, I'm pretty aware what happens in Canada on this side. It seems like a black box in terms of the coalition's acceptance of the deal. Maybe you could give us some broad strokes. Is that a 2/3 vote requirement? Is that volume weighted basis for lumber producers in the U.S. -- in the U.S.?

So Paul, what I would tell you is the Lumber Coalition continues to be very united in terms of the approach on the Softwood Lumber Agreement and is united behind, as we mentioned earlier, a quota-based agreement. So I think if a deal can be negotiated that works for both sides, that's something that the U.S. Lumber Coalition would in fact support.

(Operator Instructions) Your next question is from the line of George Staphos with the Bank of America

I had one last quick one on SLA, recognizing that it might not be something you really want to get into. But just for the record, what do you think the odds are that -- as there's been some speculation that there might be an agreement before the NAFTA discussions begin middle of next month? And to the extent that you can comment at all, has there been a significant narrowing in your view of the sort of bid-ask spread in terms of the quotas that both sides have seemingly wanted to apply?

George, as you know, there have been a lot of discussions and negotiations between the parties. And what I would tell you is we do in fact, remain hopeful that some type of framework can be agreed on before we get into this NAFTA issue. Trying to handicap it would be just pure speculation. But again, we do remain hopeful and we think some progress has been made.

Yes. Well, that's actually quite helpful. Russell, quick one for you, remind me the basis for the land sales for the rest of the year. What should we be modeling for this segment?

George, I'd say the basis is probably 40% to 50% for the full year.

Okay, and then back to the question of supply coming into the market. And recognizing one, that it's ultimately good for the timberlands business and hopefully the southern business in terms of sawlog pricing and then pulpwood pricing, and then also that your view is going to be ultimately that housing growth will absorb the capacity coming on. There has been a lot of capacity announced. As mentioned earlier, you have EWP facility going up in Southern California -- South Carolina. You have the lumber products in South Carolina, northern Carolina, Florida and you have the OSB announcement of the restart, I think today. Which of those markets do you feel has the most ability to absorb the oncoming capacity? And which would give you maybe a little bit of caution in terms of the absorption rate at least initially? Why and why not?

Thank you, George. And what I would tell you is going from the ones that I think have the most ability to absorb to where it may be a little lumpier in terms of absorption, I would say first is lumber. I think this additional lumber capacity is going to be

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So you have to see how that production phases in. One thing I would note is new mills, it always takes longer to start them up than most people factor in. And then some of these are restarts of mills that have been down for a very extended period of time. It will take time to ramp those up as well. So that's how we think about the additional capacity that's slated to come online.

On that latter point, Doyle, you say 6 months to a year in terms of start-up curve for an OSB mill restarting?

That's probably as good as any, George.

At this time, there are no further questions. Please continue with any closing remarks.

I'd just like to close by thanking everyone for joining us this morning. And as always, thank you for your interest in Weyerhaeuser.

Ladies and gentlemen, this does conclude the Weyerhaeuser Second Quarter 2017 Earnings Conference Call. You may now disconnect.