威爾豪瑟 (WY) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Weyerhaeuser Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to Beth Baum, Vice President of Investor Relations and Enterprise Planning. Thank you. Please go ahead.

Thank you, Regina. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's Fourth Quarter 2019 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on this 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 Devin Stockfish, Chief Executive Officer; and Russell Hagen, Chief Financial Officer.

I will now turn the call over to Devin Stockfish.

Thanks, Beth. Good morning, everyone, and thank you for joining us today.

This morning, Weyerhaeuser reported a full year net loss of $76 million, or $0.10 per diluted share, driven by a previously reported $0.47 noncash pension settlement charge. Excluding special items, our full year 2019 earnings totaled $285 million or $0.39 per share. For the fourth quarter, we reported a GAAP loss of $14 million or $0.02 per diluted share. Excluding net charges of $37 million for special items, we earned $23 million or $0.03 per diluted share for the quarter. Throughout 2019, all of our businesses executed well despite significant headwinds from sluggish housing activity in the first half of the year, persistently challenged commodity prices and continued global trade uncertainty.

I'm extremely proud of our accomplishments in 2019, which included achieving record-low controllable manufacturing costs in our lumber and oriented strand board operations, capturing over $100 million of operational excellence improvements, delivering the highest EBITDA ever from our Real Estate, Energy and Natural Resources business, delivering a 61% premium to timber value from real estate sales, strategically optimizing portions of our Northern Timberlands portfolio for total proceeds of nearly $450 million, reducing our pension obligations by $1.5 billion, and returning over $1 billion of cash to shareholders.

Before I dive into our fourth quarter business results, let me set the stage with some brief remarks on the housing market. The improved pace of U.S. housing activity that emerged during the third quarter continued steadily through year-end. Building activity in December was particularly strong. For the year, U.S. housing starts totaled 1.29 million, a 3% improvement compared with a year ago.

Looking forward, economic fundamentals support continued growth in U.S. housing activity. Real wages and household incomes are increasing. The unemployment rate is at a 50-year low. Household formations are at levels well above the historical average. Mortgage rates remain extremely favorable at 3.6%. Homebuilder sentiment is at the highest level since 1999. The inventory of new and existing homes for sale is low, and builders continue to shift more product to serve the significant demand for affordable housing. However, notwithstanding these positive demand fundamentals, we do expect the upside on housing will continue to be governed by many of the same supply side challenges that we faced for a number of years. These include labor availability, lot availability and regulatory burdens that make it more difficult to bring affordable housing to market.

As we enter 2020, unadjusted housing starts have exceeded 1.3 million on a run rate basis for 8 of the last 9 months, a sign that supply side infrastructure can support this level of increased activity. Our outlook is for continued modest growth in U.S. housing. For 2020, we anticipate just over 1.3 million starts, with the improvement driven primarily by additional single-family activity.

Turning now to our fourth quarter business results, I'll begin the discussion with Timberlands, Charts 5 through 7. Timberlands contributed $85 million to fourth quarter earnings before special items and $158 million to adjusted EBITDA. Western Timberlands EBITDA increased $14 million compared with the third quarter. Average sales realizations for domestic and Japanese export logs increased, and road and forestry expenses were seasonally lower. In the West, fourth quarter weather was milder than normal, and log supply remained above average due to favorable logging conditions. Domestic demand remained steady through the quarter as Western lumber pricing improved and mills took limited holiday downtime.

In our export markets, our average log sales realizations to Japan increased slightly compared with the third quarter, while log sales volumes were slightly lower. Although Japanese housing starts have moderated somewhat following the recent increase in the consumption tax, the effect on our key post-and-beam end market has been minimal. Post-and-beam starts were down only 1.5% year-to-date through November, and demand for our logs remains solid. In addition, a reduction in Canadian log exports to Japan is driving some Japanese saw millers to seek additional U.S. log supply.

In China, the market for U.S. logs weakened in the fourth quarter as abundant competition from salvaged European spruce logs continue to pressure pricing downward. Total log inventories at Chinese ports increased 6% during the quarter and ended the year at a relatively balanced 3.7 million cubic meters. However, the share of European spruce has continued to grow. Through November, European logs comprised about 17% of China's year-to-date softwood log imports compared with only 3% in 2018. Our fourth quarter China export realizations decreased compared with the third quarter, and sales volumes declined. Although demand for our China export logs continues to hold up fairly well, we're choosing to flex volume to the domestic market to capture higher-margin opportunities. Compared with the year-ago quarter, our total Western log export revenue decreased significantly due to lower sales realizations and volumes in China and Japan.

Moving to the South, Southern Timberlands EBITDA decreased $6 million compared with the third quarter. Southern log supplies tightened briefly in October due to wet weather, but normalized quickly thereafter with more favorable operating conditions. Mill inventories remained well supplied through the fourth quarter, and our average log realizations decreased 1%. Fee harvest volumes declined 3% compared with the third quarter. Although we had hoped to fully catch up on thinning activity postponed during the unusually wet conditions in early 2019, we were unable to complete all of the activity during the fourth quarter.

On the export side, we continue to operate our Southern log export business at minimal volumes due to the ongoing 25% Chinese tariff on Southern Yellow Pine logs. Comparing overall Southern Timberlands fourth quarter results with the year ago quarter, EBITDA decreased by $4 million due to lower fee harvest volumes and higher road costs. This was partially offset by higher average Southern sawlog realizations. Northern Timberlands EBITDA decreased $1 million compared with the third quarter and $3 million compared with the fourth quarter of 2018. Fee harvest volumes decreased due to the sale of our Michigan Timberlands, which closed in November. Average realizations decreased slightly.

Real Estate, Energy and Natural Resources, Charts 8 and 9. Real Estate and ENR contributed $22 million to fourth quarter earnings and $37 million to adjusted EBITDA. For the full year, the segment generated $274 million of EBITDA, an increase of $10 million from 2018. Fourth quarter EBITDA was $23 million lower than the third quarter and $53 million lower than the year ago period due to the timing of real estate sales. Construction materials and energy royalties also decreased slightly. As expected, the number of acres sold in the fourth quarter decreased significantly compared with the third quarter and the fourth quarter of 2018. During 2019, our real estate sales activity was heavily weighted towards the first half of the year, whereas in 2018 most of our sales occurred in the third and fourth quarters. Average price per acre was comparable to the third quarter and the year ago quarter, and average land basis as a percentage of real estate sales was lower due to transaction mix.

Wood Products, Charts 10 and 11. Wood Products contributed $60 million to fourth quarter earnings and $110 million to adjusted EBITDA. I am very pleased with our fourth quarter Wood Products performance, as our teams continue to display an unwavering focus on achieving operational excellence and an industry-leading cost structure. Our results include meaningful operating performance records in each of our 4 Wood Products businesses. For both the fourth quarter and full year 2019, our lumber and OSB businesses delivered the lowest controllable unit manufacturing costs in our history. Engineered wood products reduced controllable spending by over $11 million on a full year basis. And distribution delivered its highest fourth quarter EBITDA ever.

Compared with fourth quarter 2018, Wood Products EBITDA increased $44 million or over 65%, despite flat lumber realizations and significantly lower pricing for OSB. Compared with the third quarter, EBITDA decreased $13 million as seasonally lower sales volumes were partially offset by record fourth quarter cost performance in lumber and oriented strand board. EBITDA for lumber decreased $6 million compared with the third quarter. Seasonally lower sales volumes and slightly higher costs for Western and Canadian logs were partially offset by lower controllable manufacturing costs. Although lumber prices continued to trade in a narrow range during the fourth quarter, pricing for many products did recover slightly as stronger housing activity generated incremental demand, and channel inventories remained generally low.

On average, the framing lumber composite increased 3% in the fourth quarter compared with the third. Our average lumber realizations were comparable to the third quarter. Our production mix is more heavily weighted to wide-width Southern Yellow Pine, which saw a 9% decrease in published pricing. Our lumber sales volumes decreased 4% compared with the third quarter, and our production volume decreased slightly as we took some additional downtime for maintenance and capital projects. Fourth quarter EBITDA includes $4 million of charges for countervailing and antidumping duties on Canadian softwood lumber.

Compared with the year ago quarter, lumber EBITDA improved by $37 million due to lower unit manufacturing costs, lower Western log costs and modestly higher sales volumes. OSB EBITDA improved $6 million compared with the third quarter. Slightly improved realizations and slightly lower unit manufacturing cost and fiber cost more than offset a 2% decrease in sales volumes. Fourth quarter OSB pricing generally mirrored that of lumber. The benchmark OSB composite price increased 6% compared with the third quarter. Our average realizations increased 1% as the length of our order files creates a lag between published and realized pricing. Comparing our fourth quarter results to the year ago quarter, OSB EBITDA decreased by $12 million. Average sales realizations for OSB decreased by 14%, but this was significantly offset by lower unit manufacturing costs, higher sales volumes and slightly lower fiber costs.

Engineered wood products EBITDA decreased $14 million compared with the third quarter. Sales volumes for both solid section and I-joists decreased seasonally, and dealers and builders sought to minimize year-end inventories. Although our overall operating rate decreased, unit manufacturing costs improved slightly. Average sales realizations for I-joists increased by 1%, average realizations for solid section products decreased by 1% due to seasonal mix. Compared with the year ago quarter, EBITDA improved by $15 million due primarily to lower fiber and unit manufacturing costs. Distribution EBITDA totaled $8 million for the fourth quarter. This is $2 million lower than the third quarter as seasonally lower sales volumes were partially offset by lower warehouse and delivery costs. Compared with the year ago quarter, EBITDA increased by $6 million due to higher sales volumes. This improvement is partially attributable to an operational excellence initiative to upgrade the business' product mix.

I'd like to turn now to operational excellence. As a company, we achieved over $100 million of operational excellence improvements in 2019. I am very proud of the hard work, creativity and cross-business collaboration that drove these results. Timberlands did a remarkable job in capturing $48 million of improvements, primarily from initiatives to further optimize silviculture, forestry and road activities, reduce costs and improve log merchandising and marketing to maximize the revenue from every log we harvest.

Wood Products captured $52 million of improvements and has now achieved black at the bottom as we defined it 6 years ago. Our 2019 improvements in Wood Products came from initiatives in 3 primary areas: reducing unit manufacturing costs for lumber and oriented strand board, improving product mix in lumber and distribution, and increasing log recovery across our mill system.

Beyond each business' individual efforts, we also captured value through initiatives to generate cross-business OpEx. Historically, our OpEx focus has been on improved performance within a business segment. But we have also begun to identify opportunities to drive integrated OpEx by increasing collaboration between our Timberlands and Wood Products operations. The most obvious is further optimizing deliveries of our own logs to our own mills. This year, through cross-business collaboration, we delivered $7 million of OpEx that improved the margin of both segments. Our operational excellence program has delivered well over $0.5 billion of company-wide margin improvement since 2014. This is an incredible achievement. But over time, this level of success also means the traditional margin improvement opportunities of this magnitude become harder to capture. So we are taking a fresh look at OpEx and what it means for our company.

As we enter 2020, we are evolving how we define and measure operational excellence at Weyerhaeuser. Operational excellence has been and will continue to be focused on disciplined cost management and margin improvements. But we are also expanding OpEx to include activities that drive future value and improve efficiencies across businesses and functions. Our OpEx 2.0, as we are calling it, will include 4 main components to drive continued improvements across our company. First is margin improvement. These are the familiar OpEx initiatives focused on improving margin by capturing value at both the top and bottom line. Second is future value. These initiatives recognize activities that drive improved value in the future. A good example is working to execute on our targeted pending reforestation and fertilization programs at the highest levels of quality and completeness. We know this improves the value of our Timberlands over time.

Third is cost avoidance. This category is aimed at avoiding future costs or cost increases. Examples might include reducing employee turnover and optimize procurement initiatives; and fourth is efficiency. These initiatives will focus on improvements that enable higher value use of our resources. Examples would include things such as automating manual work or simplifying business processes. Together, these 4 categories expand the breadth of OpEx to include every business and function across our company. I'm really excited about the opportunities that OpEx 2.0 creates and the potential it has to further drive our working together culture. In 2020, we're targeting $50 million to $70 million of additional OpEx improvements from these areas, and I look forward to sharing more about our key initiatives as the year progresses.

I will now turn it over to Russell to discuss some financial items and our first quarter outlook.

Thanks, Devin, and good morning. Key outlook items for the first quarter and the full year 2020 are presented on Charts 14 and 15 of the earnings slides.

In our Timberlands business, we expect first quarter earnings and adjusted EBITDA will be slightly higher than the fourth quarter. And our Western Timberlands operations' demand remained stable throughout the fourth quarter. The mills took advantage of steady product takeaway into January. Log supply is adequate, and log inventories remain at reasonable levels. We expect our first quarter domestic log sales volumes will be higher than the fourth quarter. With seasonally improved demand, we expect average sales realizations will be modestly higher. Western road costs will be lower compared to the fourth quarter, as our roadwork activity slows as we progress through the winter months.

We expect our first quarter Japanese export log sales volumes will increase compared to the fourth quarter, and average log sales realizations will be comparable. Demand for our logs remains solid with additional support from continued disruption of the supply, competing logs coming out of Western Canada. Our Chinese export log sales volumes will decline in the first quarter, and average log sales realizations are expected to be modestly lower in the fourth quarter on softer demand due to the Lunar New Year and continued competition from salvaged European spruce logs.

In the South, we anticipate our first quarter fee harvest volumes will be seasonally lower and average log sales realizations are expected to be similar to fourth quarter levels. In the North, first quarter harvest volumes will be lower following the November close of the sale of our Michigan Timberlands. Fourth quarter special items include a $48 million pretax gain related to that transaction. In December, we announced an agreement to sell our Montana Timberlands for $145 million and recorded an $80 million pretax noncash impairment charge in connection with the agreement, which is also included as a special item in our fourth quarter results. The Montana transaction is expected to close in the second quarter and those assets are now listed on our balance sheet as held for sale.

Turning to the full year 2020, we expect total company harvest volume to be slightly over 36 million tons. We expect our Southern harvest volumes will be comparable to 2019, and our harvest volume in the West will be down slightly. In the North, our harvest volumes will approximately be 40% lower than 2019 due to the divestitures of our Michigan and Montana Timberlands. Collectively, our Michigan and Montana properties do not generate a meaningful EBITDA contribution to our overall Timberlands segment.

In our Real Estate, Energy and Natural Resources segment, we continue to see strong interest in real estate across our markets and the Pacific Northwest is particularly active. For the full year 2020, we expect adjusted EBITDA of approximately $255 million. This guidance incorporates the effects of fewer available real estate acres following the divestitures of Montana and Michigan. We expect the cadence of our 2020 real estate activity will be similar to 2019. We anticipate land basis as a percentage of real estate sales will be between 55% and 65% for the year. For the first quarter, we expect adjusted EBITDA for the segment will be nearly comparable to the year ago quarter, while earnings will be approximately $15 million lower. We expect first quarter land basis as a percentage of real estate sales to be near the high end of the full year guidance range.

Across our Wood Products business, our customers express optimism for the year ahead. Buyers continue to purchase for specific needs, and channel inventories are moderate. We anticipate sales volumes for lumber and oriented strand board will be slightly higher compared to the fourth quarter. For engineered wood products, we expect seasonally improved operating rates and lower per unit manufacturing costs in the first quarter. We expect first quarter earnings and adjusted EBITDA for Wood Products segment will be slightly higher than the fourth quarter before any benefit from improvement in average sales realizations.

For lumber, first quarter-to-date average sales realizations are $20 higher than the fourth quarter average, and current realizations are $25 above the fourth quarter average.

Oriented strand board, first quarter-to-date and current average sales realizations are comparable with the fourth quarter average. As a reminder, for lumber, every $10 change in realizations is approximately $11 million of EBITDA on a quarterly basis. For OSB, every $10 change in realizations is approximately $8 million of EBITDA on a quarterly basis.

Chart 12 outlines the major components of our fourth quarter unallocated items. Unallocated corporate function and variable compensation expense increased compared to the third quarter due to seasonally higher spending and a year-to-date adjustment for incentive compensation. Fourth quarter results also include a small noncash expense from elimination of profit in inventory and LIFO compared with an income from this item in the third quarter. Special items in fourth quarter consists of $6 million noncash settlement charge related to transfers of Canadian pension assets and liabilities.

In our pension and postretirement plans in 2019, we made significant progress against the series of actions we announced in 2018 to reduce the liabilities associated with those plans while maintaining benefit security for our plan participants. In the last 18 months, we've reduced our future obligations by over $2 billion. The year-end 2019 funded status for our pension and postretirement plans decreased by approximately $200 million compared to 2018 as a result of a reduction in discount rates. Discount rates declined by approximately 100 basis points for the U.S. plans and 60 basis points for the Canadian plans. In 2019, we did not make any cash contributions to the U.S. qualified pension plan, and we are not required to make any cash contributions in 2020. Cash paid for all other pension and postretirement plans in 2019 was $45 million. Our required cash payments for these plans will be approximately $30 million for 2020.

Excluding pension settlement charges, our noncash, nonoperating pension and postretirement expense was $61 million in 2019. We expect to record approximately $40 million of expense in 2020. The decrease is a reduction -- is a result of the reduction in discount rates.

Turning to our key financial items, which are summarized on Chart 13, we ended 2019 with a cash balance of $139 million. Cash from operations during the fourth quarter was $292 million. For the full year 2019, cash from operations was $966 million. Our capital expenditures for the fourth quarter totaled $143 million and for the full year 2019 were $384 million. Looking ahead to 2020, we anticipate total CapEx will be approximately $360 million, $120 million for Timberlands inclusive of reforestation costs, $235 million for Wood Products and approximately $5 million for corporate IT system upgrades.

Investing cash flows for the fourth quarter also included $297 million of net proceeds from the sale of our Michigan Timberlands. You'll also recall that in the third quarter of 2019, we paid $302 million to extinguish the debt of a variable interest entity that was established as part of a timber installment sale in the early 2000s. Earlier this month, we received $362 million of cash from the maturity of the related financial instrument. This is the last of these variable interest entities.

Moving on to financing, we ended the quarter with approximately $6.4 billion of total debt outstanding. This included $230 million balance on our line of credit, which was used to bridge the temporary cash outflow associated with the variable interest entity debt maturity. We have no debt maturities until 2021. As you may have seen in the 8-K that we filed earlier this week, we refinanced our $1.5 billion revolving line of credit to capture more attractive pricing. The new credit facility has a 5-year term that will expire in 2025. In the fourth quarter, interest expense was $89 million, bringing our full year expense to $366 million, excluding special items. We expect interest expense will be $345 million for the full year 2020.

I'll close my comments with taxes. Excluding special items, in the fourth quarter, we recorded $2 million of income tax expense. For the full year 2019, our effective tax rate before special items was a benefit of 13%. For first quarter and full year 2020, we expect a tax expense of 10% to 15% based on the forecasted mix of earnings for our REIT and taxable REIT subsidiary. Turning to cash taxes, we received $2 million net tax refund for the full year 2019, inclusive of a $43 million federal tax refund in the fourth quarter. As previously discussed, we have filed a claim for a $90 million refund associated with our 2018 pension contribution, and that claim remains in process.

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

Thanks, Russell. 1 year ago, in my first earnings call as CEO, I talked about 4 near-term priorities to drive value for shareholders. I'm pleased with our execution to date, and our focus on generating superior and sustainable value will continue in 2020 and beyond.

The first priority I highlighted was driving OpEx with a focus on cost and reliability. I'm incredibly proud of our work in OpEx in 2019, and I'm excited about what lies ahead in OpEx 2.0. Second was continuing to drive lasting culture change. We remain focused on the key behaviors that drive success, including accountability and urgency and increasing our focus on innovation across the company. Third was people development. In 2019, we continued our intense focus on people development and worked to increasingly build our bench of future leaders and key personnel across the organization. And fourth was disciplined capital allocation. We're committed to our balanced capital allocation philosophy of returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure.

In 2019, we continued to deliver on each of these capital allocation priorities. We returned over $1 billion of cash to shareholders. We invested over $380 million in disciplined capital expenditures to sustain and further improve our businesses, and we took steps to maintain an appropriate capital structure and support our investment-grade credit ratings by reducing our future pension liabilities.

Entering 2020, I'm encouraged that the U.S. housing market continues to show signs of stronger activity. Although pricing for many of our commodity products remain soft, we're optimistic that we will see continued improvement as we head into the 2020 building season. Going forward, I'm excited about the opportunities in front of us, and we remain focused on driving superior long-term value for shareholders by improving performance through operational excellence, fostering a winning and innovative culture that positions us to capitalize on a range of market conditions and demonstrating disciplined capital allocation.

And with that, I'd like to open the floor for questions.

(Operator Instructions) Our first question will come from the line of Brian Maguire with Goldman Sachs.

This is Derrick Laton sitting in for Brian. Yes, if we could just go back for a second, Devin, to the comments that you've mentioned around -- around lumber and OSB, I think you had mentioned a little bit of a lag coming through on some of the OSB pricing. Can we expect that, even holding everything equal, to accelerate a little bit as we go through the first quarter, just based on some of the gains that we saw exiting 4Q?

Yes, we saw pricing come up a little bit in 4Q. There was a little bit of a dip. Now it's started to come back up. So as Russell mentioned, quarter-to-date, our OSB realizations are flat relative to the fourth quarter. That being said, certainly I think the market sentiment is that the housing activity is going to continue to improve. We're seeing a lot of optimism out there. And so we would anticipate that as we get closer to the 2020 building season and that gets in full swing, we're going to see some uplift on OSB pricing as we get into the quarter.

Okay. That's helpful. And then just on the lumber side, Russell, like you called out, is going to be about $20 higher on average. I think current price is about 25% above the fourth quarter average, which is actually a little bit better than I would have expected, just looking at the composite. Is that a function of a little bit of a lag as well coming through the income statement? Or is that more just a function of some of the mix shift within the product grades that you guys produce?

Yes, that would be more attributable to the mix shift of what we produce in our lumber operations.

Your next question comes from the line of Mark Wilde with Bank of Montreal.

Devin, I wondered is it possible to get some sense for where you see land sales per year over the next 3 to 5 years if we exclude kind of Northern Timberlands?

Sure, Mark, this is Russell. So as we noted, we're going to bring down the real estate EBITDA a little bit from this year, from 2019. There's really 2 things that are happening in there. The first is on the energy and natural resources side, we had a couple of onetime type transactions. We had a small asset sale and then we had some recoveries on a royalty audit. And then we're also factoring in less HBU sales coming out of that Montana and Michigan properties. The Michigan properties are sold. Montana, we're expecting to close in the second quarter of this year. So that -- that gives us that $255 million number for 2020.

Kind of on a run rate basis, I think that $250 million to $255 million is a reasonable number for the run rate for that business. As we've stated in the past, our goal is to structure that total AVO program and the pipeline so that we have a sustainable business over time, so.

Okay. And then just as a follow-on, I'd like to just kind of step back and think about sort of leveraging your franchise. With the global focus on sustainability and carbon capture only going up, any thoughts on ways to kind of both leverage your expertise, but also the strong kind of social and environmental reputation that Weyerhaeuser has?

Yes, absolutely, Mark. I would tell you that's top of mind for us. As you know, there has been a lot of momentum around wood-based building for one, but also as we see more and more companies talking about becoming carbon neutral or carbon negative, our view is, practically speaking, that's going to be very hard to do without looking to the forest and our ability to sequester carbon. And so I think that is getting a lot of discussion, a lot of talk in the industry. It's something that we're very focused on.

Candidly, it's in the early stages of figuring out what the mechanics for that market are going to look like. There's a private market piece to that. There's a regulatory piece to that. But we're staying very focused on it. Clearly, I feel pretty comfortable in saying no organization in the history of America has planted more trees than Weyerhaeuser Company. So that is an area where we have deep expertise, and I think there may be a role for us to play. So we're keeping a very close watch on that. And we'll look for an opportunity to participate in a profitable way as that develops.

Would that include kind of structures beyond just outright ownership of Timberland?

I think we're at a stage right now, Mark, where we're really looking on all different kinds of opportunities. So I think at this juncture, I wouldn't foreclose any of those options.

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

First, for me, just can you elaborate on your full year outlook for the export markets and harvest plans in the West? How much of the downtick in harvest this year represents just a continued normalization of volume versus a response to some of the headwinds that you alluded to in the prepared remarks about the European sourced wood and other things impacting the Asian markets?

Yes, let me start with the Western harvest levels. Now really to understand what's going on in the West, you have to go back to our Longview Timber acquisition. And you'll recall that when we did that deal, one of the benefits of that transaction was that they had a significant amount of overmature timber in their portfolio. And so for several years after that acquisition, we were intentionally bringing that harvest level -- harvest age down, which increased our harvest levels in the West.

Over the last couple of years, we've really been on the tail end of that. And so as we roll into 2020, that volume that we're anticipating in the West, which is down around 3% versus 2019, that's what I would expect, all else being equal, to be the harvest levels for the next several years before it starts coming up again. And so that's really the answer on the harvest. Now frankly, you can flex up or flex down a little bit depending on market conditions and we do that from time to time. But the 2020 harvest schedule really is kind of that normalized harvest level in the West for the next several years.

Speaking to the export markets, and I'll start with China. Really, last year, for most of the year, even though there was more European salvage wood coming into the market, I would say, for the first 3 quarters, it wasn't having a material impact on our export volumes to that China market out of the Northwest. We really did see in the fourth quarter that European salvage wood started to have an impact in the China market, and we really started to see that impact our pricing certainly as we got deeper into the fourth quarter. As we think about the magnitude of that European salvage wood going into the market and you combine that with what is traditionally a pretty slow time of the year with the Lunar New Year holiday in that market, and you also have the dynamic of the coronavirus. And so I would expect the China market for us out of the Pacific Northwest is going to be choppy for a little while.

The Japan market, frankly, remains solid for us. You've seen housing starts dipped down just a little bit, but the key market for us, as I mentioned earlier, is that post-and-beam market. And that's held up pretty well, and you combine that with some of the challenges from the Canadian log exports, we're still seeing good volume and sales activity into the Japan market this year.

Just switching gears to kind of OpEx 2.0 can you maybe just elaborate a little bit on where you're targeting the $50 million to $70 million, just across the 4 different buckets you outlined? Specifically, how much would maybe fall into that margin bucket and that efficiency bucket?

Yes. I think we're still in the early stages of rolling this out to the organization. But what I would say is going into the year, I would still anticipate the majority of that is going to come from that margin bucket. The future value, efficiency and cost avoidance are new pieces of that program. And so we do think that, that will pick up steam as we roll it out to the organization. But I would say sitting here right now, most of that $50 million to $70 million for year 1 is going to come out of the margin bucket.

Okay. And then switching to Russell. Can you just maybe touch a little bit more on the AVO process and where that stands? Again, recognizing that is fluid, but there was obviously a number of large sales in 2019. Are there any other large transactions that you're going to be pursuing in kind of the foreseeable future? Or do you feel like a lot of the heavy lifting as far as the noncore asset sales is complete for -- at least for now?

So I'll talk to the AVO, and then I'll talk to kind of your second question on large transactions. The AVO process as you're aware, that's really an evergreen process. So we're constantly evaluating our Timberlands to determine if we're the best owner of that particular tract or if we can capture a higher value by selling it through our AVO process. So as we've noted, we have about -- at the beginning of the year, we had 1.6 million acres identified in the AVO process that we would take to market over the next 10 to 15 years. As I stated earlier, our goal is to have a sustainable business over time.

So as far as large transactions -- I'm not going to comment on our -- on kind of our future expectations related to large transactions. But I'll reiterate, even on the AVO process, we still look even on a broader basis across the portfolio and make sure that the Timberlands that we own are returning the highest value, and we get a good return on assets. And so as we demonstrated in the past, we have sold out of markets that are not strategic to us for the long term. But I think as we look at our portfolio today, we have no immediate plans.

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

Two follow-ups, really. The first -- thank you for the information on the Western harvest. And by the way, that's completely consistent with the presentation you did back in December 2016, where you show exactly as you laid out. That same presentation, it shows that the Southern harvest would likely be increasing during the '17 through '26 time horizon. And I realize maybe there's some sales of acreage, et cetera, perhaps. But what's the outlook for the Southern harvest relative to the levels we saw in '19 and what you seem to be suggesting for 2020?

Yes, Mark. And those are always fluid through the real estate programs, you get puts and takes here and there. We're not in a position right now, I think, to give public guidance on the long term other than to say in 2020 for the South, we're looking at comparable. We do have a little bit heavier mix to fiber for 2020, but it's going to be pretty consistent within the range that we have in 2020.

And maybe it's not a fair question on a spot moment. But is the type of -- is there any reason why the general direction you would have been expecting a couple of years ago wouldn't still be applicable today?

Yes, I think over time certainly as we have new generations of seedlings come ready for harvest, you'd expect the volumes to go up over time. So directionally, I don't think anything has changed. The timing of it, you'll have a little bit of up and down on any particular year or 2 basis. But directionally, over time, I don't think anything's changed.

Okay. And on the European spruce salvage wood, any intelligence at this point as to how long this issue is likely to be with us?

Yes. So I'll tell you what I do know and then what I don't know. And I'll start with what we think we know, which is unlike what we saw with the mountain pine beetle in British Columbia, the spruce beetle in Europe seems to leave that wood salvageable for a much lower period. And I think the general consensus that's building is 1 to 3 years on the stump is really as long as it's viable after you see that damage.

The question that's harder to answer, frankly, is when is the infestation going to abate? And so I don't know that we have a definitive view or if anyone has a definitive view on when that damage spruce beetle wood is going to stop growing across Europe. And so I do think -- our view is we've seen the geographies where you have that impacted wood, acting speedily to try to get out in front of it and salvage as much of that timber as they can. But as a practical matter, there are limits on how much you can do that. So it's hard to say how long it's going to last, when you really start seeing the spruce beetle die off. I think it will be a limited time period after that when you should see the volumes start to slow down.

And so is it fair to surmise, recognizing lots of uncertainty here, that it's probably going to be with us for a couple of years but then at some point in time, you end up having less wood coming from Europe than even prior to the infestation beginning? Is that how to think about it?

That's correct. And that's how we're viewing it. We're going to -- I think this is going to be with us for a year or 2. But as you say, it's important to remember when that volume goes away, it's going to have to be filled in from somewhere else. And so when you have that significant amount of wood that goes out of the system, it is going to change kind of the global supply chains for log supply.

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

First question, on your website, Montana is included in the Western U.S. acreage, but the volume is evidently coming out of the Northern fee harvest. So is that because the log prices in Montana are closer to Northeast values?

Steve, when we actually put together the regions at the time of the merger, we had put that Montana property in that Northern region. And so we've always reported that Montana property in the Northern region and then Washington and Oregon in the Western region. It is a different product, a little different pricing. So that's just how we set it up at the time of the merger.

Okay. So from a financial standpoint, both of the -- all that land is Northern. So I wanted to get a sense on the impact then of -- the financial impact on the sales. Would it be fair to say that given the aggregate sales price of $445 million, the EBITDA was around $20 million? Is that...

No. I think in the last call, what we had mentioned is full year 2018 was about $19 million, and you'll see full year 2019 at about $15 million. So we would expect that Montana and Michigan to be about half of that number.

Okay. And just 1 other quick one. Can you elaborate what you mean by innovation? Is it new product development in wood products? Or is it along the lines of log optimizations by end market?

Yes, I'd say the majority of that is operational innovation. So that's things like leveraging technology within the mills or out in the woods to drive down log and haul costs, to optimize how we build roads, to mechanize things in the mills, that's the majority of it at this point. We do -- in our Wood Products business, we do product innovation as well. But when we talk about the majority of the innovation work that we've done here over the last year or 2 has really been more around operational innovation.

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

Just had a question around CapEx, and thanks for the detailed breakdown into the buckets, but that $235 million you're spending on Wood Products, maybe you could highlight some of the bigger projects. And is there any volume gains that you expect to get over time on some of these projects going forward?

Yes, with the -- the $235 million, which is down about $15 million from 2019 and partially, that's just a reflection of the fact that as we finish up on the Dierks and Millport capital projects, which were much larger in scale, we just have a larger number of smaller activity in the CapEx bucket across Wood Products. And so I don't have anything significant to highlight of the Millport or Dierks magnitude. It's really just a lot of smaller CapEx projects that are really focused on driving down costs, improving reliability and really driving efficiencies in the mill set. You'll get some incremental around the margins, volume pickup with some of those. But the volume increase really is the primary focus of our capital programs at present.

Okay. And then just maybe -- just trying to understand what's going on in Timberland transactions. I haven't seen that many transactions. We've had interest rates go up in '18 and then come down in '19 and '20. I suspect that's had some kind of effect on valuations. Maybe you could just help me understand what's going on in the market?

Sure. This is Russell. In 2019, based on kind of our listing of all the transactions, we're expecting to hit about $1.8 billion. And we really didn't see any big deals like we saw in 2018. We saw probably 4 deals in 2019 of over $100 million and then the remainder were small to medium deals. So about 3 million acres looks like it's going to trade in 2019. So that's about 2%, 2.5% of the investable market. That seems kind of on par with what we've seen over the last few years. I think as we look to 2020, I would expect we would break that $2 billion transaction value number. And when you take the Poke deal and then the recent announcement we made on the Montana deal, you're at about $800 million. And so it's a pretty strong start of the year given we're in January.

As far as timber values, I would say they remain strong. Even with the soft product pricing in 2019, we really didn't see big value swings in the timberland values. And I think that reflects more of the longer-term nature that the investors have in this space and companies have in this space. So we're still seeing a strong flow of capital to good deals and the right deals, and quality timberlands remain in high demand. And as we've said in the past, we're in a pretty advantaged position. We have timberlands in every major wood basket in the United States, and we have the opportunity to see every transaction and so we're active, but we're also very disciplined in our acquisition strategy.

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

As you look at the long-term future, Japan's population obviously is shrinking. And obviously, there are other parts of Asia where demand can certainly get better for your timber. How do you think about those long term trends? I mean, have you done some work on where you think 5, 10 years from now, you'll see both Japan and other Asian markets, especially as it really has a big impact on your Western Timberland profitability?

Yes, absolutely. We do spend a lot of time doing analytics around that. And with respect to Japan, you're absolutely right. The demographics are such that the population is declining and that is clearly going to have an impact on housing over time. I think a couple of things that may mitigate the impact on us, however, are, again, our focus is primarily that post-and-beam market. And I think that is going to hold share and pick up share of overall housing starts in Japan over time. And so I think the impact on us will be less than on kind of the stick frame.

The second thing I would say is, just like in the United States and Europe, Japan is looking for opportunities to do more commercial and multistory buildings out of wood. And so I think there's an opportunity to pick up share on that front as well to mitigate some of the impacts from population decline on housing. But you're right, in a broader sense, Japan's population is not growing. There are other economies across Asia, where we do see growing populations. And so whether you're thinking China or India or some of the other Southeast Asian markets that are experiencing growth, we spent a lot of time on the ground in all of those markets. We have, in China, in particular, a pretty strong customer base. And so one of our focus areas is to continue to grow market in China and ultimately other markets for some of those higher-end Douglas fir products. And we think over time, we'll make good progress on that.

Your next question will come from the line of Mark Connelly with Stephens Inc.

If we assume that the labor issues in construction persist, do you think we're going to start seeing builders more aggressively embrace either prefab components or some other labor reduction? Or is there enough other issues like lot availability that they just don't have enough incentive to change the way they operate yet?

Well, I do think that you're starting to see some of the builders, particularly, the larger builders embrace panelization, off-site construction activities. And I do think that trend will continue. There are limits on how high that can go. But I do think we've reached a point where the labor constraints have caused many of the builders to really start to look for other options to mitigate that challenge. So I do think you're going to see that grow. The labor availability, I think, still remains one of the biggest challenges for the builders in both just meeting the construction needs, but also with the affordability piece. And so I do think that they're going to continue to look for ways to mitigate those labor challenges.

So is there an opportunity for Weyerhaeuser in that? To get involved in more of that process?

I think in the near term, the biggest opportunity for us is to stay close to those end customers and the builders and various folks throughout the channel that are doing that work. I think our biggest opportunity short term is just to be a key supplier, making sure we understand what the needs are in those panelized construction activities and be a good solid partner for them. I don't anticipate us getting into panelized manufacturing here in the near term. Longer term, obviously, we'll continue to watch the market. And if our view changes on the ability to create value in that space, we wouldn't necessarily rule that out. But I don't think that's a short-term priority for us.

That makes a lot of sense. Just 1 other question. With all the supply distortions and issues we had in the South last year, do you think private landowners are caught up on the land they wanted to sell? Or is there still a backlog there?

Yes. This is Russell. Pardon me?

I'm sorry, I said land. I meant stumpage.

On the stumpage side. I would say that probably, the markets were a little slower last year as far as getting contractors and broker dealers out on to those nonindustrial private lands. I think that's what you're referring to. So we don't have a real clean gauge on what those volumes are. But I would expect that that will still be an area of focus for the nonindustrial privates probably coming into this year and maybe the following years.

Our last question will come from the line of George Staphos with Bank of America.

This is actually John Babcock on for George. Just starting out, I was wondering if you could talk about which products are likely to see the incremental benefit from kind of this new OpEx setup? And also, if you could kind of give some weighting as to which product lines, that might be helpful, too.

Yes, I think just at a high level, we would anticipate it's kind of going to be evenly split between Wood Products and Timberlands. I think one of the differences that we're looking at from OpEx 2.0 is we're really looking to expand it and how we measure it beyond just the businesses to find opportunities even at a functional level, increase the level of cross-business OpEx that we're trying to drive. So that may change how the buckets are allocated a little bit around the margins. But going in, we would anticipate that would be kind of half and half, Wood Products and Timberlands.

Okay. And then can you review the key points as to why the Montana Timberland sale made sense from both the strategic and valuation standpoint?

Sure. This is Russell. There's 2 things, I guess, I would point out on that transaction. The first is, over the last number of years, we've been very active in capturing value on those lands. We've done conservation sales, higher and better use sales. We've also done some timber transactions. So we really had a lot of opportunities to understand the market and kind of what the future value of that land would be to us.

So the second is, when we go through our evaluation process, it's very detailed and robust. So we look at a number of things when coming to evaluation on a particular property. We look at the markets, we look at stocking levels, age class, growing cycles, species mix, cost inputs. Those are all taken into consideration when we assess the value, but also when we assess the fit for our broader portfolio strategy. So based on our experience in these markets and our expectations and what we've achieved as far as capturing value in the portfolio to date, we are very comfortable with how that sale fits into our broader strategy, and we're very pleased with the price we're receiving for the timberlands.

All right. Well, I believe that was the final question. So thank you to everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser Company.

Ladies and gentlemen, this concludes today's call. Thank you all for joining, and you may now disconnect.