Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Weyerhaeuser third quarter 2019 earnings Conference call. At this time all participant lines are in a listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question you will need to press star one onto a telephone please be advised to today's conference is being recorded I.
I would now like to have the conference over to Miss Basketball, Vice President of Investor Relations. Please go ahead.
Thank you good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's third quarter 2019 earnings. This call is being webcast at www Dot Weyerhaeuser dotcom.
Our earnings release and presentation materials can also be found on our website.
Please review the warning statement 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, our Devon stock fish, Chief Executive Officer, and Russell Hagen, Chief Financial Officer.
I'll now turn the call over to Devon stock fish alright, Thanks, Ben.
Good morning, everyone and thank you for joining US today. This morning, Weyerhaeuser reported third quarter net earnings of $99 million or 13 cents per diluted share on net sales of $1.7 billion.
Excluding the net benefit a $40 million from special items, we earned $59 million or eight cents per diluted share.
Adjusted EBITDA totaled $308 million.
Our businesses continued to deliver strong operating performance despite challenging market conditions in in a moment I'll dive into our business results, but first let me set the stage with some brief comments on the housing market.
U.S. housing activity continued to improve in the third quarter led by stronger activity in the important single family segment.
Single family permits and starts have now increased for five months in succession.
Additionally, seasonally adjusted single family starts exceeded 900000 units in back to back month in August and September , which we haven't seen since 2007.
Total U.S. housing starts have also strengthened totaling 1.28 million in third quarter compared with 1.26 million in the second quarter and 1.21 million in the first.
As we look forward mini indicators point to continued improvement in housing activity wage growth remained solid and the unemployment rate is that if 50 year low.
Mortgage rates are hovering near 3.5% significantly lower than late 2018.
Consumer confidence surveys indicate a positive view of current and future conditions.
On builder sentiment has increased for four straight months and sits at the highest level since February 2018, and builders continue to shift more product to serve the significant demand for affordable housing.
That said several supply side headwinds for housing remain builders continue to face a series of challenges, including labor and lot availability and regulatory burdens as they seek to bring affordable housing to market.
Additionally, there is a degree of uncertainty regarding the outlook for U.S. economic growth that could impact buyer sentiment.
Well these challenges will continue to affect the housing market. We believed that the supported fundamentals outweigh the headwinds entering the fourth quarter, our builder customers tell us their demand continues to improve and they intend to maintain strong building activity until winter weather no longer permits.
Going into next year, we continue to end pit anticipate increasing momentum in the single family housing market and a modest growth trajectory for U.S. housing.
Turning now to our third quarter business results I'll begin the discussion with timberlands charts four through six.
Timberlands contributed $72 million to third quarter earnings and $154 million to adjusted EBITDA.
Western Timberlands EBITDA decreased by $30 million compared with the second quarter due to seasonally lower harvest volumes and lower average realizations for domestic and export logs.
Western fee harvest volumes decreased 11% compared with the second quarter, and 5% compared with a year ago as we intentionally block brought less would the market during the seasonal peak in supply.
Log and haul costs also increased as we typically shift to higher elevation logging during the summer months.
In the western domestic market mills entered the third quarter with full inventories in preparation for summer fire season.
However, as summer weather in the Pacific Northwest was wetter than normal there was no notable fire activity and logging conditions remained favorable.
Log supply increase seasonally as private nonindustrial landowners brought their logs to market and mill log decks remained at comfortable levels through July and August .
Domestic log prices trended modestly lower through the summer months, but started to firm up at the end of August as demand and pricing for Douglas for lumber began to improve log supply tightened in September with the early arrival of the fall rainy season, and log pricing decreased in the quarter.
Moving to the export markets in Japan post and beam housing starts were up 1% year to date.
Demand for our customers Douglas for lumber products remained solid and our third quarter lots sales volumes to Japan were comparable to the second quarter.
Average sales realizations were modestly lower due to pressure from unfavorable foreign exchange rates and U.S. domestic pricing trends.
In China overall log inventories decreased by 15% during the third quarter and totaled 3.5 million cubic meters at the end of September .
Chinese demand for our Douglas spur and hemlock logs remain generally steady compared with the second quarter, our third quarter log sales volumes to Japan to China increased but this was primarily due to timing of vessels sailings.
Average realizations for our China export logs decreased modestly compared with the second quarter due to mix in competition from lower price species, which pressured pricing for our hemlock and Douglas for.
Overall third quarter log export revenues were lower than the year ago quarter due to lower realizations for our Japan, and China logs and moderately lower sales volumes to China.
For Western Timberlands as a whole EBITDA is significantly lower than a year ago due to lower prices for domestic and export logs.
Moving to the south.
Southern Timberlands EBITDA increased by $5 million compared with the second quarter as higher fee harvest volumes were partially offset by seasonally higher forestry spending.
Third quarter weather was generally drier than second quarter. This resulted in good operability and strong log production across our southern regions. Our fee harvest volume increased 7% as we benefited from the improved weather and also caught up on bidding activity postponed during the unusually wet conditions earlier this year.
Average realizations for our southern logs decreased 1% compared with the second quarter due to mix is the increasing spending activity resulted in a higher proportion of fiber logs.
Average realizations for our southern Sawlogs increased due to improved pricing in the mid south where markets remained relatively strong due to weather conditions.
Realizations for our fiber logs were comparable to the second quarter.
On the export side, we've been operating our southern export business at minimal volumes since Chinese tariffs were applied to southern yellow pine logs in 2018 less than one half of 1% of our southern fee harvest volumes are sold to export customers.
Comparing overall southern timberlands results with the year ago quarter, EBITDA increased by $11 million due to higher average log sales realizations and higher fee harvest volumes.
Northern Timberlands EBITDA increased by $3 million compared with the second quarter and was comparable to a year ago.
Compared with the second quarter fee harvest volumes increased seasonally as the northern operations emerged from spring breakup.
Real estate energy and natural resources chart, seven and eight.
Real estate in NR contributed $32 million to third quarter earnings and $60 million to adjusted EBITDA.
Third quarter, EBITDA was $11 million lower than the second quarter and $26 million lower than a year ago.
As expected the number of acres sold decreased significantly compared with the second quarter and the year ago quarter. As we previously indicated our 2019 real estate sales are 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 roughly two times that of the second quarter in the year ago quarter due to geographic mix approximately 85% of our third quarter acre sold were in the south and West in contrast over half the acres sold in the second quarter of 2019 and third quarter of 2018 were located in.
Montana, where timberland prices are regionally lower.
Wood products charts, nine and 10.
Wood products contributed $75 million to third quarter earnings before special items and $123 million to adjusted EBITDA.
Earnings and EBITDA were nearly comparable to the second quarter on flat average realizations for our commodity products.
EBITDA for lumber increased $5 million due to lower western and southern log costs.
Lumber pricing declined at the outset of the third quarter, then reversed course in mid August is improved housing activity drove incremental demand and previously announced mill curtailments began to reduce supply.
On average the framing lumber composite price increased 3% in the third quarter compared with the second.
Our average log.
Lumber realizations were comparable to the second quarter as our mix of production is weighted more heavily to southern yellow pine.
Third quarter sales volumes were flat with the second quarter, our lumber Mills ran very well again this quarter, even with some modest hurricane related downtime in our southern operations.
Unit manufacturing cost for lumber increased slightly due to that downtime as well as hurricane preparation activities.
Comparing third quarter results with a year ago quarter lumber EBITDA was significantly lower due to a 21% decrease in average sales realizations, partially offset by lower log in manufacturing costs.
EBITDA for the third quarter of 2019 includes charges of $4 million for countervailing and anti dumping duties on Canadian softwood lumber.
You know SB EBITDA increased by $5 million compared with the second quarter due to lower fiber and unit manufacturing costs.
As with lumber third quarter LSB pricing varied by region.
Although pricing in the benchmark north Central region increased significantly during the third quarter pricing in several other regions trended materially lower.
Deal SB composite price, which includes all producing regions was flat in the third quarter compared with the second.
Our third quarter realizations trended in line with deal SB composite price, which is a better proxy for our geographic mix.
Aerospace sales and production volumes were comparable to the second quarter.
Comparing our third quarter results to the year ago quarter, EBITDA was significantly lower due to a 33% decrease in average sales realizations, partially offset by higher sales volumes as our Grayling, Michigan Mill was down for scheduled press replacement in the third quarter of 27 2018.
Engineered wood products EBITDA decreased by $9 million compared with the second quarter average sales realizations for I joist products were flat with the second quarter and average realizations for solid section decreased by 1% due to product and geographic mix.
Sales volumes for I joist increased 4% and production volumes were comparable to the second quarter.
Sales volumes for solid section products increased 3%.
Solid section production declined 12% as we completed scheduled annual maintenance shutdowns at two mills and continued to drive down our first quarter inventory build.
Unit manufacturing cost increase due to lower operating rates and higher maintenance expense, resulting from these scheduled shutdowns.
Fiber costs declined due to lower cost for logs in oriented Strand Board web stock.
Compared with a year ago quarter EBITDA for engineered wood products increased due to lower cost for logs and oriented Strand board.
Distribution EBITDA was comparable to the second quarter and significantly higher than a year ago due to improved margins.
Third quarter results for wood products include one special item, a pre tax benefit of $68 million from insurance recoveries related to our flak jacket product remediation to date, we have received $93 million of insurance proceeds and we continue to expect a significant portion of the remediation costs will be covered by insurance.
I'd like to now turn to operational excellence.
Our businesses continue to make good progress on operational excellence and we're on track to achieve our 2019 target of $80 million to $100 million.
Year to date, our operational excellence initiatives and timberlands have been focused on log marketing and merchandising.
Optimizing silviculture spend reducing road costs, and improving log and hauling efficiencies across all geographies.
In wood products, our opex initiatives focused on reducing our controllable manufacturing costs, increasing our high value product mix and improving log recovery across our operations.
Real estate business is also on track to meet or exceed its targeted 30% premium to timber value.
Ill now turn it over to wrestle to discuss some financial items in our fourth quarter outlook, Thanks, Devin and good morning.
Key outlook items for the fourth quarter are presented on chart 13 of the earnings slides in our timberlands business. We expect our fourth quarter earnings will be comparable to the third quarter and adjusted EBITDA will be slightly lower western timberland operations, we expect domestic log sales volumes will decline modestly in the fourth quarter, what operating conditions reduced.
Doug supplied late in third quarter and inventories tightened we anticipate domestic log sales realizations will improve modestly in the fourth quarter as a result of steady domestic demand and the continued seasonal reduction in supply from non industrial land owners.
As is typical for this time of year, we expect our Western road and unit logging cost would be lower compared to the third quarter.
Demand for our Jeff Japanese export logs remains solid we expect fourth quarter sales realizations, we flat with the third quarter.
Fourth quarter sales volumes are expected to decline due to the timing shipping schedules.
Chinese export log sales volumes are expected to be comparable with the third quarter and we anticipate average sales realizations will decline modestly in the fourth quarter.
We're taking advantage of our ability to allocate volumes between the domestic in China markets to capture the highest margin opportunity.
In the south operating conditions have been favorable for the past several months in log inventories have returned to healthy levels. We expect fourth quarter average log sales realizations will be slightly lower than the third quarter and fee harvest volumes will decline.
In the North we expect fourth quarter EBITDA declined due to the seasonally lower fee harvest volumes and a partial quarter of Michigan results in September we announced an agreement to sell or 555000 acres of Michigan Timberlands for $300 million. This transaction is expected to close in the fourth quarter and these asset.
So now listed on our balance sheet as held for sale.
Turning to our real estate energy and natural resources segment as previously discussed the pace of our real estate sales is more heavily weighted to the first half of the year in 2019.
Market conditions remain positive and high net worth individuals' recreational and conservation buyers are all active.
We expect fourth quarter earnings for real estate energy natural resources segment will be approximately $10 million lower than the third quarter.
We continue to expect full year 2019, adjusted EBITDA of approximately $270 million and anticipate land basis as a percentage of real estate sales will be between 50 and 55% for both the fourth quarter and the full year.
For wood products, we expect lower sales volumes across most product lines.
As building activity typically declines in the fourth quarter as we move into the winter months.
While channel inventories of Titan buyers continue to limit purchases to immediate needs, we anticipate higher western log costs, partially offset by modest we improved operating costs as we continue to capture operational excellence improvements.
Fourth quarter earnings and adjusted EBITDA for Wood products segment are expected to be approximately $25 million lower than the third quarter before any benefit from improvement in sales realizations.
For lumber fourth quarter to date average sales realizations are $5 higher than the third quarter average current realizations are comparable with the third quarter average oriented strand board fourth quarter to date average sales realizations and current realizations are both $5 below third quarter average.
As a reminder for lumber every $10 change in realizations as approximately $11 million of EBITDA on a quarterly basis and for Opus fee every $10 a change in realizations as approximately $8 million of EBITDA on a quarterly basis.
Chart 11 outlines the major components of our third quarter unallocated items the contribution to earnings before special items improved $3 million due to a noncash benefit from elimination of inter segment profit in inventory in LIFO compared with the second quarter.
Third quarter special items include a $15 million pre tax legal charge stemmed from a judgment in the suit related flat jacket, we're appealing this ruling.
Our third quarter non cash non operating pension and postretirement benefit costs was comparable to the second quarter.
We continue to expect to record approximately $60 million of expense for the full year 2019.
Turning to our key financial items, which are summarized on chart 12, we ended the third quarter with the cash balance of $153 million cash from operations during the third quarter was $292 million.
Turning to cash from investing our capital expenditures in the third quarter totaled $98 million. We continue to expect total capex for 2019 will be approximately $380 million nearly $120 million for timberlands $250 million wood products and approximately $10 million for planned corporate IP system upgrades.
As a reminder, the fourth quarter is historically, the highest quarter of capital spending.
We also expect to receive 300 million of cash in the fourth quarter, because we closed on the sale of our Michigan Timberlands.
Moving on to financing in the third quarter, we paid $302 million to extinguish the debt variable interest entity that was established as part of the timber installment sale in the early two thousands.
This is the last of these entities and will receive $362 million of cash in the first quarter of 2020, when the related financial investment matures.
We ended the quarter with approximately $6.6 billion a total debt outstanding. This includes a $440 million balance on our line of credit a portion of which was used to bridge the temporary cash outflow associated with the variable interest entity debt maturity.
We have no debt maturities until two until 2021.
We expect our fourth quarter interest expense will be comparable to the third quarter, bringing the full year 2019 to approximately $370 million excluding special items.
Close my comments with taxes, excluding special items in the third quarter, we recorded a $10 million income tax benefit.
Year to date basis are effective tax rate before special items is a benefit of 15%.
We expect our full year 2019 effective tax benefit to be similar to the 15% we have booked year to date.
It will be somewhat sensitive to fourth quarter lumber and oriented strand board pricing.
Turning to cash taxes, we expect to pay minimum cash taxes in 2019 due to an anticipated fourth quarter refund for prior overpayments.
We've also filed and $90 million refund associated with our 2018 pension contribution.
That claim is still in process, so were unlikely to receive that cash in 2019.
Now I'll turn the call back to Devon and look forward to your questions. Thank you wrestle.
In closing I'm extremely proud of the work that our people are doing all across the company. Our teams are delivering strong operational performance in each of our businesses. Despite challenging market conditions. In every area that we can control our employees are driving solid execution, each and every day.
We remain intently focused on serving our customers and delivering operational excellence in every aspect of our business.
Looking forward, we continue to expect that US housing will follow a modest growth trajectory, which should ultimately support improved pricing across our commodity products and with our business is running well, we're well positioned to capture the full benefits of an improved housing environment.
But as we continue to improve our operating performance and optimize our portfolio. We will also position the company to deliver superior value to our shareholders across a range of market conditions and now I'd like to open floor for questions.
At this time I would like to remind everyone in order to ask your questions simply press Star then a number one the on your telephone.
And your first question is from the line of George Staphos with Bank of America. Please go ahead.
Thank you good morning, Russell Good morning, Devon, how are you hi, Beth.
For all the details.
A couple of questions here and then we'll turn it over first of all and this comes up.
Very honestly on the conference call what do you think at this juncture, we haven't seen that.
Expected uptick and southern timberland pricing or timber pricing.
You know, obviously, you're seeing a pickup in demand at your outlook for next year is moderately positive in terms of housing.
Canada has been having difficulty supplying logs into you asked why are we seeing that uptick in your view any updated thoughts on southern timber pricing here and what we can expect looking out into 2020.
Yes, sure George you know what I think I would note that we have seen it up tick in the first half of the year that really sort of translated all the way into Q3 on southern Sawlog prices. So we have seen a bit of an uptick this year now candidly some of that had to do with.
The rain that we had in the first part of the year that tension some of the wood baskets, but I think we have seen some improvement year over year, but ultimately what it comes down to supply and demand within the region and this has been a long story in terms of getting the southern sawlog prices up but ultimately what gives us confidence that ultimately we are going.
To see the improvement is the improved capacity that we're seeing coming into the into the U.S., south five and a half a million board feet of incremental capacity coming in when we look at the wood baskets, where the new mills have come in we have seen tension within those wood baskets and is that capacity continues to come in and get online you see that tenanting.
Correct.
Additionally, on the pulp side, we've seen a number of pellet mills come in in fact in Veeva just broke ground on a new pellet mill in Mississippi and so it takes time for each of those mills to come in get up to speed and start taking logs, but.
Again as we've seen these mills come in in the specific wood baskets, where we've seen incremental capacity you see attention in effect and overtime that brings up.
The demand across the system. The other thing I would just note is over time, we also think theres an opportunity for an export program to really develop out of the U.S. South pre tariffs, we were really working to build out that program and making some good headway in terms of exporting logs out of the U.S. South I think ultimately when the.
Tariff dispute.
Ultimately comes to resolution were going to see that opportunity open back up and so it takes time, it's been slower than we would've expected or like but I think we're on the right trajectory over time.
Okay, Devin I mean related Italy, and you're correct, there's been a little bit of a bump this year, but certainly timber prices are nowhere or anyone would have expected a few years ago at least I don't think and the sale. We're also where they are right now the capacity Thats gone and at five and a half million square feet for years ago is three and four so you are you seeing Morris.
Yes, converting capacity go and we haven't seen the price really lift.
At this juncture that just housing has been a little bit.
Slower to come back and that is the reason why you havent seen that tension and then related Italy.
And again, thanks for all the details you put in the slide deck you have one of the best in the industry.
It's kind of interesting how we've seen the western.
Timber timberland EBITDA declined almost in half relative to where it was to begin 18 from your vantage point, what are the big buckets and what changes that trajectory over the next.
Couple of periods and years is it really just trade getting back to normal or is there something else in your view that would be helpful. There.
Yes, I think a couple of things on the Western market you know ultimately the western system is a very tensioned market and so I think the biggest driver that you see in terms of western log prices is what's going on with western lumber prices and so when you have mills that see lumber prices reduced dramatically.
There's a limit to how much they can pay for logs and keep those a cash flow positive. So I'd say that's been the biggest driver there have been a couple of other things around the margins the trade dispute with China. We've continued to ship logs to our customers in China, but I do think a number of other landowners in the Pacific northwest of kept some of that supply.
Why in the domestic market a little bit around the margins. There was some wind damage in south or again, and so there's been a little bit of salvage activity. There that's been a little bit of headwind down in that market, but overall the big drivers really just been western lumber prices and so as we look forward.
Sitting where we are today, we're moving into the rainy season here in the Pacific Northwest in fact last few weeks, it's been pretty rainy up here.
And that typically we will take the non industrial land owners out of the system. It will reduce log flow and so provided that we can keep western lumber prices at these levels or even get some uptick I think that that bodes well for improved log prices in the west.
Okay last quick one for me just timberland transaction had been again, a little bit slow this year from at least from our vantage point, what do you think if you agree with the premise. So maybe you disagree what do you think spin been driving that thanks, and good luck in the quarter.
Yes, George this is Russell I'll take that question.
I don't think much has changed since last time, we talk to you last quarter in the timberlands market, we're a little closer to the year end I think we saw we've seen about $750 million, where the transactions close as we look in the pipeline, there's probably another $750 million that will close to the full year, we'll expect to see.
In the us about $1 billion and a half worth of transactions as definitely lower than kind of what we would expect on a run rate of two to two and a half billion that doesn't include any large transactions like the potlatch Deltic transaction last year. So definitely were a little later this year than I think we would have expected given what we've seen.
In prior years, but I really don't think that.
Reflection on the market per Se I think it's just a timing issue.
There's still a lot of demand for quality timberlands.
The transactions that are coming out get a lot of attention and so I would expect to see us returned to a more kind of normal run rate.
Basis going forward.
Alright, Thank you very much guys.
Thank you.
Your next question is from the line of Brian Maguire with Goldman Sachs. Please go ahead.
Hey, good morning, guys.
Good morning, Brian just a follow up on those comments Russell and the at the prior comments on the lower western log.
Price realizations why or why is that what do you think that we havent seen some of the western land transaction prices come down to.
Mira the lower log price realization is it.
Is it just not as tethered to like current EBITDA and cash flows is a lot of other asset classes or do you think we're just seeing maybe lower interest rates and cap rates kind of offset the lower EBITDA that you're getting off that land leases.
Brian This is kind of two points. The first is timberland values typically don't trades.
Kind of correlated to log pricing when you're going into acquired timberland asset you're thinking over a longer term.
Creative time than just the immediate log price dynamics, and so I think thats factored into the overall investment and valuations.
The second is in the west.
As David mentioned Thats, a very attention market and part of that is the ownership structure is very different than say in the south.
Theres fewer private owners in the west there's more federal and state ownership and so you really just don't have the same on a number of available transactions in the market, but you see.
In the south plus the west as it is really.
Excellent.
Labor base, the trees are high value Doug for primarily.
Good for a sawlogs type product and so they really are of a have a high value and I think again as you see any western timberlands come to market, you're going to see a lot of demand, particularly if they are high quality timberlands.
Okay I appreciate that.
Just to switch over to wood products, just wondered if you could provide some comments on your thoughts on were inventory sits in the channel and.
In light of some of the recent capacity closure announcements in both lumber I know as the now.
Any thoughts on if thats enough potential in the market.
Especially if the kind of recent starts activity continues.
Yes, well starting off with the question on on inventories in the channel.
It's really been the story of the year, we've seen customers carrying relatively low inventories I would say that's the case now generally speaking across the system.
I really in lumber LSB any WP fairly lean inventories across the system and I think thats just a reflection of the fact that for the majority of the year. The supply has been adequate so people can buy on an as needed basis and it really hasn't force people to carry.
Material inventories and so thats currently the case.
And I would say from a broader perspective I think there is reason to believe that youre going to see some upward pricing pressure, we've seen a fair amount of curtailment activity over the course of this year, even some more.
Announced just recently and importantly, we've seen the continued improvement in housing and importantly, the single family segment, and so you know to us to the extent that you see this building activity continue.
In the strong level that we've seen here of late and we can keep that going for a while longer before the winter weather sets in combined with the capacity curtailments that have been announced I think that really bodes well for pricing as we head into the ended the year, but certainly I would say even over and above that is we think about the 22.
Many building season, which is a little ways out, but but it's always we're thinking about I think we're setting up really well to have a materially different view next year on what pricing looks like than what 2019 look like.
Okay. Thanks, very much we'll turn it over.
Thanks.
Your next question from the line of Anthony Pettinari with Citi. Please go ahead.
Hi, good morning.
This morning, and following up on Hey, following up on Brian's question, and maybe just zooming in on our should be you do have a number of competitors that are taking curtailments I did your production is kind of moved up over the course of the year.
I'm wondering if you could talk about where your operating rates are and I'll just be where you think you may be on the cost curve and just generally how you're positioned in our speed market.
Given there are some pretty significant regional differences.
I think that you talked about earlier.
Yes, sure you know from an operating perspective, we're sort of in that mid to upper ninetys percent range, which is.
More or less where we were in Q2 as well.
I think it at a high level, it's important to remember when you're thinking about our O SB business number one we typically are little bit more heavily weighted to the higher value products and so a little less of a participant in the commodity sheathing.
Portion of the business and I think importantly, we've been very very focused on our cost structure and that's true across all of our manufacturing assets certainly that's the case in our LSB business as well and so.
To the extent that you've got a higher value products and you've got a lower cost structure I think thats really what.
Gives you the ability to continue to run and generate cash where that may not be the case for for some others and that was certainly the case for US you know SP. In Q3, we were cash flow positive and all of our mills in each of the months, except for one mill that had some scheduled maintenance downtime and so we're thoughtful about our.
Operating posture, we're always looking to match, our supply with profitable demand and generate appropriate returns over time.
But I think as I mentioned, just the product mix and the cost structure give us a little bit more flexibility in that respect.
Okay, Thats really helpful. And then you announced the Michigan sale during the quarter I'm I'm wondering if there's any detail you can give us on that property in terms of species H class earnings contribution relative to other northern region Timberlands that you have and then do you see further opportunities to that or.
Comparable.
Whether it's in the north or or in other regions.
Yes. Thank you. This is Russell so we did announce the 555000 acres sale to align timber for $300 million of 540 acre.
That represents our total Michigan ownership, we have a mix of hardwood logs in pulpwood. So we service both some saw milling and then also pullback devotees up there and then there's also a softwood component.
We're on target to close in the fourth quarter and so we're very pleased with the overall transaction.
Outcome as far as other northern Timberlands I won't comment on specifics, but as we've demonstrated we continue to look at the portfolio. Our goal is to optimize the portfolio over time and the Michigan sale was was part of that ongoing effort. So it's a it's a key strategic driver of ours to make sure that we have the.
Right mix of acres that will drive the highest return to the shareholders over time and so we're constantly looking at all of our regions and it's something we're always evaluating both on the buy side and on the sell side. So as part of that process, we're going to identify certain timberlands and that may not be strategic for us and we'll act on those approach.
Currently on the buy side, we can be very patient. We have 12 million acres were in every operating region in the United States and so we can be patient and make sure that anything that we contemplate create shareholder value over time.
Okay. That's helpful I'll turn it over.
Your next question is from a line of Mark will be with BMO capital markets. Please go ahead.
Morning.
Good morning.
I'd like to just come back on that Michigan landfill.
Can you just can you help us at all.
Thinking about the earnings impact from that sale my own work would suggest.
25% of your land base, but as I understand it's probably a bigger portion of the earnings in that segment.
Yeah, Mark we don't break out the specific earnings on that segment, but you're right. It's about 25% of the total acres in the north I think for context.
Last year, we generated $19 million to $20 million of EBITDA out of the northern turbulent operations, so and that can kind of give you an idea of generally what the contribution was.
So are you, saying the contribution last year would have only been about.
$4 million.
Probably a little higher than that.
Okay, all right and just again the kind of come back on the issue of how further timberlands fit and if I will give a south in the west.
Really plantation Forestry company and much of what you've got kind of across the north is just kind of natural regeneration. So does that make the north.
Different for you from I've kind of a strategy standpoint.
You know Mark as we've said in the past our focus has definitely been kind of than the west in the south when you think of the north it's it's on the west it's a pretty.
Consistent I guess.
Growing areas, primarily Doug for primary as Sawlog outcome in the south at southern yellow Pine Pine plantation. When you look in the north we really have four distinct kind of areas. We have Montana in Michigan main and then west Virginia, and each one of them have distinct products distinct customers distinct strata.
Ladies and so I would say that you do need to look at it on an individual kind of region basis in the north or in the north it's not as.
Comparable clearly to the west to the south.
Okay and the last one on these northern timberlands interest we have a lot of carnage right now in the hardwood lumber business and I'm understanding some really underperforming properties on a timberland side in hardwood.
What effect is that having on you and also how does that create any potential opportunities.
Yes, Mark this is Devin no question the China trade dispute has had a negative impact on the hardwood.
Saw timber market and I think you're seeing that really across the board.
I think certainly as we think about going forward.
To the extent that the trade dispute can get resolved I think that will be alleviated, but it's going to be some tough sledding in that market until that ultimately does happen.
In terms of specific opportunities I don't know that there is anything that we would highlight right now we're watching the market across the board.
That's true both in the hardwoods business and really the rest of our ownership so nothing specific to highlight on that.
Right now.
Okay, and then Kevin just last one from me just over on the wood products side of your portfolio.
Then hearing for several months more positive commentary and results from the homebuilders, but it really hasn't to this point.
Flowed through to the suppliers to the homebuilders.
How do you interpret that.
Yes, Mark I think part of this earlier in the summer when we really started to see a little bit of pickup in the activity was there was a bit of Destocking I think there was probably a bit more spec home inventory in the system that had to be work through and so not all of that pickup in activity really translated into.
Actual wood products demand pull through I think you're starting to see that get more into balance and as we see the starts activity in the new home sales activity continued to improve.
That should have more pull through the other thing I think thats been really hard in terms of dialing in the supply demand dynamic is with all of the curtailment activity that we've seen.
That introduces noise into the system and so when you see some of these mills take indefinite or permanent shutdowns theres, an inventory flushing that typically occurs in the system and I think thats part of what we saw in Q3 as some of these mills closed down and.
And we are really a limited eliminating the inventory you probably saw a little bit more of that flushing through that had a bit of a dampening effect on pricing, but ultimately theres. No question as we continue to see housing improve and if this trend continues which we think it will that ultimately will result in more wood products demand and you combine that with the curtailment activity.
Put the noises side.
That will be I think a positive for commodity pricing across the board.
Yes, definitely looks like it when we look at these.
The last couple of weeks, Kevin I'll turn it over.
Yes, thanks Mark.
Your next question from a line of Mark Weintraub of with Seaport Global. Please go ahead.
Thank you.
One or two follow up first just on the Michigan fell so you've got to 50 on assets for sale, you're selling it for 300 million. So can we concluded that $50 million gain on that fell and I assume that's not included in any of your guidance I assume youre going to take that out as a nonrecurring item. When you report for the fourth quarter.
Mark that's correct.
Okay and then.
There's been some chatter about opening federal farce to logging any perspective.
On the likelihood of dot happening and or potential impacts work too.
Yes, Mark honestly I don't think were overly concerned about that there are a lot of impediments to rapidly increasing logging on federal land the litigation environment frankly, the capacity in the system to do that so it's not something that we're particularly concerned about I think even if we do.
A little bit of an uptick it's not going to have a material impact on any of our businesses.
Okay, and then lastly, obviously this year the tax rate's been pretty unusual.
Kind of on a go forward basis is there a formula or way that.
We should be thinking about.
Does it go back to the way it used to be or if there were kind of a different way to be thinking about the tax rate for 2020 as well.
You know mark the provision for income tax is this year has been primarily driven by the performance in the Trs since you know in primarily.
Wood products performance.
As you're aware, we calculate the estimated annual tax rate on a consolidated basis. So combining the reads in the taxable REIT subsidiary, because we don't pay taxes on the read income you get a lot of volatility in the effective tax rate, particularly when you know the proportion earnings between the reason the Trs changes, which is really what you're seeing this year. So.
You know as we've said.
The fourth quarter rate is going to be highly dependent on which products pricing just as a function of that proportion I think as we come into 2020, we should start seeing that tax rate normalizes, we have improved performance.
Particularly in the and the wood products operations.
So is it fair to basically you.
Zero on the timber earnings and 20% or so for the whatever we estimate the trs might be which will be largely the wood products business.
Yes, I mean, we don't pay tax coming out of the read so yes on the Trs probably more of all in rate of around 25%.
Right, but again, we'll provide guidance in February when we update our guidance for 2024.
Super Thank you.
You bet.
Your next question is from a line of Collin Mings with Raymond James. Please go ahead.
Thanks, Good morning, everyone.
Good morning, calling and call it.
First question for me, just Devon going back to your prepared remarks on the Japan market can you just maybe expand on the demand trends you're seeing there it looks like wouldn't construction starts actually fell there year over year in August and then with the consumption tax increase it would just be helpful. Let me get your latest read on that market, maybe how you expect that to a ball.
Yes, sure I think the important thing for us when we think about the Japan housing market is the post and B market and so that really is where our product feeds into the construction activity and thats been up 1% year to date and so that has remained pretty strong market for us.
Our customers in Japan had steady demand and we continue to see that.
I think you know as you think overtime. The the one piece that is always a little bit of a variable is just with currency that market is served by European supply in U.S supply, but you know our customers are doing well they've had strong demand good activity there and so.
We're seeing good good solid activity into that market and anticipate that continuing.
Okay. Thank you and then switching to real estate Russell just given some of the recent headlines in both Florida and main as it relates to Weyerhaeuser and zoning can maybe just update us on your thoughts on how important pursuing entitlements is in select markets to your strategy of creating value and extracting a premium decor timberland.
Sure.
So specific to the Florida.
Headline that's a relatively small development area. It's about 1700 acres, we have been pursuing entitlement over a number of years.
As you're aware.
The entitlement process can be a bit of a bumpy road and so I think thats really what you're seeing but that really is not significant contributor to our overall performance on the overall real estate program as far as Maine, we completed that entitlement back in 2012.
Since that time, we really haven't seen that market materialize for development and so we are opting to.
Seek to convert that back into timberlands and manage it kind of on a sustainable basis like we manage all of our timberlands again that really isn't a significant contributor to the overall.
Real estate performance kind of going forward as far as the entitlement I mean, it's a relatively low cost way of taking properties the value curve and so where we see an opportunity to entitle the property and then divested into a developer or another party, we're going to pursue that and we think through every one of our opportune.
Netease pretty clear idea understanding that it does take time.
But ultimately we are trying to seek the highest value for those lands that we've identified for development outcomes and then also for each fuse sales.
Got it so it sounds like again, it will be it basically selective process of what you actually decide to pursue as far as the entitlement fraud.
But I guess to your point, it's a relatively low cost way of maybe adding some value in select markets that fair.
Yes, that's fair again as it is a various it's a relatively small subset of our overall.
Oh portfolio.
And again, it's a low cost way of taking that property up the value curve.
Okay. Thank you.
You bet.
Your next question is from a line of Mark Connelly with Stephens Inc. Please go ahead.
Just a couple of things.
How much of the additional small milling capacity that still to come in the South is in places where it's going to have a direct impact on you. My recollection is that we've already seen a pretty good portion is going to directly.
Right.
Yes, I think.
As you think about the five and a half billion board feet that are coming in I would say, we're good way down the path on on that starting up operations and its differential as you mentioned by region. I think there are still a few mills that are coming in that will have an impact on us others less so.
But generally speaking we have operations in all major wood baskets, and so we may be a little bit more heavily weighted to some states versus the other but there will be some impact really across the board in each of those new mills coming into place.
Okay. That's helpful. Just one last thing Russell, you mentioned that buyers to limiting inventory and we're clearly seeing that.
Last quarter, you characterized the inventory level is fairly normal would you still see it's relatively normal.
Yes.
Yes, just to clarify are you talking about within the would plot products channel, Yes, yes, sorry, sorry, yes, yes, I would say that there's still relatively lean across the system.
And that's true for lumber LSB and DWP.
Super Thank you.
Thank you.
Your next question that's from the line of Chip Dillon with vertical research partners. Please go ahead.
Yes, good morning, Devin Russell Beth Thanks for all the details.
Good morning.
First question is I will say that you know our base case is that.
The wood products business will certainly not be as good as it was last year, but better than this year next year and that should allow you to pretty much cover your dividend just with cash flow, but I am encouraged and just want to make sure im on the right path.
It's about $1 billion a year at the current rate and it looks like if I'm doing my numbers right that you've you are probably three quarters or the way. They are not that this is how we should look at it but with the Michigan sale the last tranche of the.
The variable entity payment next year that gives us $302 million you mentioned 90 million I think you're looking for from 2018 in terms of a tax refund, so I'll add that up and I'm.
700 range I. My question is what what is the refund that you're looking to get for the overpayment This year.
For this overpayment, it's about $40 million to $45 million.
Okay, Okay, and I take it the path just went down is the right way to look at things that you you are looking at north of 700 million of inflows from all these activities.
Yes, correct.
Okay. All right. That's helpful. And then just shifting gears I noticed.
Two of the businesses that six seven years ago that seem to really be struggling.
Had basically where the bright spots for the quarter from what I could tell and that of course should be.
The distribution business, and especially engineered wood products and I didn't know if there was anything unusual in this quarter or if we should sort of hanging our hat on how well these businesses are performing.
I note that both.
Can receive certain cost benefits from.
The timing of raw material changes so I Didnt know for example, the low SP prices were boosting MWP unusually and maybe the same in distribution if yet inventory gains.
Yes, I would say, there's always a minor benefit when LSB prices go down to our EPS MWP business because the web stock is one of the products that goes into.
The end use but I wouldnt say data at a higher level. This is the case really across all of our manufacturing businesses. We have been doing a lot of work to improve our operating performance and to improve our cost structure and that's true in EDA BP, It's true in our distribution business and although we've seen product prices.
A bit challenge this year I would say that's equally true for lumber and LSB. These businesses are operating as well as they ever have and that has been a really important focus for us in our overall business strategy and so you're seeing that now I I think as we alluded to earlier when the businesses, our operating well and.
We're continuing to prove improve every day when we do see an uptick in the housing activity in the commodity prices were really well positioned to generate a lot of value from these assets.
Great. Thank you very much.
Thank you.
Your next question is from a line of Steve It sure cover with <unk> Davidson. Please go ahead.
Thanks, Good morning, everyone.
Good morning, So just just a quick one on ESP I have a sense. Your system is low cost and I'm. Just wondering is that due to your fiber baskets in which you operate the equipment or maybe the proximity to markets and I understand that.
Our making some premium products.
Yeah, what I would what I would really attribute that to you is all of the work that we've done to improve efficiencies improved recovery. The operating performance. The continued focused on cost generally I mean, amongst our various manufacturing assets, some or maybe a little bit better located relative to fiber than others.
I wouldn't say that in of itself is the key driver. It's really just been the continued focus on improving our operations and keeping a very tight control on costs and that ultimately has been the big driver for us.
Okay and then.
In honor of the World series of got to.
The ball for you when it does kind of center on control. So in Oregon, you have an office manager install four and a half million from you over 15 years and I assume it's an isolated incident, but are you putting in safeguards to ensure that this can't happen again.
Yes, well as you can imagine this cases is currently.
Under criminal investigation by the U.S. attorney So Theres limited amount, we can really comment Tom but what I would say is it's very disappointing the employee obviously no longer works for us.
We've instituted appropriate controls to ensure that this doesn't happen again and so that's really what we can say, they're very disappointing situation.
Okay. Thanks.
Yes. Thank you.
Today's final question will come from a line of Paul Quinn with RBC capital markets. Please go ahead.
Yes. Thanks morning, guys, just just what's going on.
Yes, so catalog.
Pricing and Devin you mentioned, the 5.5 billion Board board feet of lumber capacity adds when I take a look at W.W.P. a data on on set with production over the last five and half years, it's kind of about three and a half. So just wondering where that disconnect is that these at 2 billion.
You know expected to come over the next couple of years and what's your weyerhaeuser's done a number of upgrades to what I'm hearing from other companies is that it's taking longer than the somo ramp ups to get to the design capacity of you experience the same thing.
Yes, I think the important thing to remember on that $5.5 billion, that's announced capacity and so that's just been coming in in tranches over the last several years and we still have a little bit left to go into your point. Once you actually commission a saw mill to the point, where it's running full and you start adding the second shift that's a process that can take six to 12 months frankly.
So we've seen certain of our competitors that have put in mills and.
It can take a little longer at times I will say for our two mills in particular mill Port and Dirks, we've actually done a really nice job and getting those mills up the startup curve ultimately that will add around 300 million board feet of incremental capacity to those two mills and so it's a complex process to get.
Mills up and running after you get them started and really get them fully operational and that does take some time.
But we're confident that all of that 5.5 billion is ultimately going to come in.
This is one of the wet best wood baskets to manufacture lumber certainly in North America, if not the world and so we think thats going to continue to happen here in the near term.
Alright.
Thanks.
Alright, thank you.
Alright, well I think that was the last question.
So I'll just say thanks to everyone for joining us this morning, and thank you for your interest in Weyerhaeuser and have a great day.
Ladies and gentlemen, this does conclude the Weyerhaeuser third quarter 2019 earnings conference call. Thank you for your participation you may now disconnect.