Weyerhaeuser's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.25.14 | About: Weyerhaeuser Co. (WY)

Weyerhaeuser Co. (NYSE:WY)

Q1 2014 Earnings Conference Call

April 25, 2013 10:00 AM ET

Executives

Kathy McAuley - VP, IR

Doyle Simons - CEO

Patty Bedient - CFO

Analysts

Mark Weintraub - Buckingham Research Group

Mark Connelly - CLSA

George Staphos - Bank of America Merill Lynch

Gail Glazerman – UBS

Alex Ovshey - Goldman Sachs

Paul Quinn - RBC Capital Markets

Steve Chercover - D.A. Davidson

Chip Dillon

Colin Ming - Raymond James

Operator

Good morning. My name is Carmen, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2014 Earnings Conference Call. (Operator Instructions) I will now turn the conference over to Kathy McAuley, Vice President, Investor Relations. The floor is yours.

Kathy McAuley

Thank you, Carmen. Good morning. Thank you for joining us today to discuss Weyerhaeuser's First Quarter 2014 earnings. This call is being webcast at www.weyerhaeuser.com, our earnings release and presentation materials can also be found at our website.

Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in earnings materials on our website.

On the call this morning are Doyle Simons, Chief Executive Officer; and Patty Bedient, Chief Financial Officer. Now, I will turn the call over to Doyle.

Doyle Simons

Thank you, Kathy and good morning everyone, earlier today we reported first quarter net earnings of a 183 million or $0.31 per diluted share on net sales of 2 billion. Excluding special items we achieved solid first quarter net earnings of a 153 million or $0.26 per diluted share as our businesses delivered strong operating results despite unusually severe winter weather throughout much North America in the quarter. Special items in the quarter included a gain resulting from an amendment to a post retirement health care plan, a gain on sale of a non-strategic asset and restructuring charges associated with our previously announced SG&A cost reduction initiative.

I will begin this morning with a few comments on the housing market and overall economic conditions before turning to a discussion of our business results. The unusually severe winter weather dampened market momentum early in the year and housing starts in January and February declined slightly on a seasonally adjusted basis compared with year ago levels. As the winter weather is moderated markets are improving, in March single family housing starts increased to 635,000 on a seasonally adjusted annual basis, 2% higher than a year ago. Single family also comprised a greater percentage of total housing starts in March, compared with February.

Prices for existing homes are 13% higher than last year, and fundamentals of job growth and improving household formation support our expectation for continued recovery in the housing markets. Although the weather’s disruption experienced during the past few months has slightly diminished the overall housing outlook for 2014, the market consensus continues to forecast significant growth compared with 2013 and we are planning for approximately 1.1 million starts including over 700,000 single family starts. Globally Chinese demand for our logs and pulp remains strong as the pace of orders rescinds following a normal seasonal slowdown associated with the Lunar New Year.

Orders from our Japanese customers weakened slightly at the conclusion of the first quarter due to uncertainty regarding the effect of the increased consumption tax. However Japan remains a very strong customer for our logs and we expect that demand will remain generally solid overall.

Let me now turn to our business segment starting with Timberland, charts three to five, Timberlands had an outstanding quarter, contributing a 164 million to earnings, an improvement of more than 20% compared with last quarter, demand for western logs was strong in the quarter and prices rose in export and domestic markets. Operating margins improved due to higher harvest volumes and our operational excellence initiative. The strong performance of our western Timberlands business also reflects increasing benefits from the Longview timber acquisition which contributed 53 million of EBITDA in the quarter an improvement of 18 million from the fourth quarter.

In the south, log prices rose modestly, continuing the slow upward trajectory we observed in the fourth quarter. Wet weather resulted in lower southern sea harvest volumes as well as reduced silviculture spending. First quarter earnings from disposition and non strategic Timberlands are usually minimal and as expected, dispositions declined to 4 million in the quarter. Excluding dispositions, the segment earned a $160 million. This is the highest quarterly Timberlands’ earnings excluding land sales since the second quarter of 2006.

Wood products, charts 6 and 7. Wood products earned 64 million, an improvement compared with the fourth quarter despite the effect of severe winter weather. Weather resulted in reduced sales volumes for most products as demand stalled and transportation challenges related to Canadian rail car and trucking availability made it harder to deliver products to our customers. Adjusted EBITDA in the quarter improved to 93 million, compared with 88 million in the fourth quarter. In lumber, EBITDA improved by 17 million. This improvement is primarily attributable to increased lumber sales realizations which more than offset lower sales volumes and higher western log cost.

Operating rates improved and the business did a good job of controlling cost in the quarter despite weather related disruptions. In OSB, EBITDA declined by 10 million, as our prices fell by 3% and sales volumes declined by approximately 5%, manufacturing cost rose slightly as the business incurred higher energy and maintenance cost as a result of the extreme weather.

EBITDA for engineered wood products fell slightly compared to the fourth quarter due to cost associated with the startup of the Evergreen Alabama mill, and EBITDA for the distribution business improved by a $1 million despite a significant number of lost days due to weather related closures. Operational excellence efforts for all our wood products businesses remain on track and we expect to see additional benefits as the year progresses.

Cellulose fibers, chart 8 and 9, cellulose fibers contributed 54 million to earnings down from 65 million in the fourth quarter, despite the harsh weather, the mill system ran very well in the first quarter, average pulp price realizations rose as markets tightened due to lower levels of supply.

Energy costs were higher as a result of the weather and pulp sales volumes declined due to timing of shipment and Canadian transportation issues similar to those that affected our wood products businesses. As expected, maintenance expenses also rose due to an increase in a number of scheduled annual outage days.

Real estate – charts 10 to 12. WRECO contributed 12 million to first quarter earnings, down from earnings from four special items of 71 million in the fourth quarter. First quarter earnings included 2 million from land sales. The first quarter is typically the weakest quarter for our real estate business and home closings declined seasonally, this is partly offset by an 8% increase in average prices and lower selling expenses due to the decreased closing volume.

Gross margins were approximately 21%. During the first quarter we made significant progress against our SG&A initiative to reduce costs by 75 million by 2014 year end. We incurred 18 million of restructuring charges in the quarter primarily for severance as efforts to simplify and streamline our processes and operations reduce our staffing needs, we are highly confident we will achieve our target run rate by year end 2014.

I will now turn it over to Patty to discuss our second quarter outlook.

Patty Bedient

Thanks Doyle, and good morning everybody. Although the housing market has gotten off to a slow start in 2014, we expect to see demand pick up as we move to the quarter. The harsh winter weather has now dissipated and the strength of underlying market fundamentals should begin to yield better results in the second quarter. The outlook is summarized on chart 14 and I’ll begin my comments with Timberlands.

In the west, export prices are expected to soften somewhat but overall, demand and prices remained at favorable levels. The effect of the increased consumption tax is causing Japanese demand to weaken compared to the first quarter. However we expect that volumes to China will increase in the second quarter as activity returns to pre-holiday levels. Demand from domestic sawmills is also anticipated to increase as home building picks up, although prices will likely be somewhat softer. We expect increased log and haul costs as we begin to harvest sites with higher elevations and longer hauling distances. Silviculture costs are also expected to increase.

In the south we expect pricing to continue its slow but steady upward direction. Volumes are expected to increase slightly offset by higher silviculture costs. Dispositions of non-strategic land sales will be higher in the second quarter compared to the first with anticipated Q2 sales at approximately $20 million which will be substantially completed by the end of this month. Including the effect of these land sales, we expect that second quarter earnings in the Timberlands segment will be comparable to the first quarter.

In wood products, we expect that the seasonal pick up in home building will result in increased sales volumes across major product lines resulting in improved earnings in all businesses. Lumber sales realizations have softened thus far in the quarter, however they should stabilize as demand improves throughout the quarter. OSB prices appear to have bottomed out and we anticipate slightly improved realizations for the second quarter compared to the first.

Demand in engineered wood products is improving and we expect higher sales realizations during the quarter. In addition, our Evergreen Alabama plant is scheduled to begin shipping commercial product, high choice and microlam in May.

In our distribution business, customers are continuing to express signs of optimism and channel inventories are still at relatively low levels. On the cost side of the equation, we expect lumber manufacturing cost to improve with the higher production volumes and log cost will likely increase marginally due to seasonally higher log cost in Canada offsetting favourable variances in the west and south. OSB manufacturing costs are expected to remain flat as the positive effect of higher productivity is offset by slight increases in resin in some planned annual maintenance downtime.

Engineered wood products manufacturing cost should improve especially for veneer cost, which were negatively impacted by adverse weather in the first quarter. Cost should also decrease as our Alabama plant moves from start-ups to production next month. Weather related transportation issues should moderate now that the extreme winter weather conditions are behind us. We anticipate overall earnings in our wood product segment to increase significantly in the second quarter compared to the first depending on the strength of the spring building season.

Sales realizations in our Cellulose Fibers segment are expected to continue to improve. Global softwood pulp inventories were below normal at the end of the first quarter. Liquid packaging realization should also improve primarily due to higher grade mix. We expect lower energy and fiber cost given more favourable weather conditions compared to the first quarter. Maintenance costs are also expected to be slightly lower this quarter. Earnings in our Cellulose Fibers segment should increase significantly in the second quarter compared to the first.

We expect improved results in our Real Estate segment as we move into the seasonally stronger second quarter and weather improves. We expect to close approximately 650 single family homes in the quarter, up from the 508 closed in Q1. We anticipate higher average home prices with margins similar to the first quarter of around 20%. Selling cost will increase due to the higher closing volume. Earnings from land and lot sales are also expected to improve moderately compared to the first quarter income of $2 million. Overall earnings in our Real Estate segment are expected to increase in the second quarter compared to the first.

The earlier announced combination of our single family home building business with TRI Pointe Homes is on track and we anticipate closing just after the end of the second quarter. The decision of whether to distribute the shares using a spin or split will be made by the Weyerhaeuser Board likely later this quarter. We remain excited about the benefits of this transaction which should create an even more powerful homebuilder with additional long-term growth potential.

Now, I would like to refer you to chart 13 and make some comments regarding unallocated items. As discussed in our earnings release three special items in the first quarter accounted for $49 million of pre-tax earnings. These items included a restructuring reserve of 18 million for our SG&A and R&D cost reduction initiative that we announced in December. Most of the first quarter reserve is for severance for identified personnel reductions across the company. The majority of these reductions are taking place over the remaining quarters of this year. As a result, very little benefit is in the first quarter operating result.

We expect additional restructuring expenses of approximately $10 million to $15 million as we complete the overall cost reductions and we expect to achieve our targeted run rate by the end of this year. Special items also included a benefit for $45 million for one quarter of the amortization of the reversal of liability associated with the postretirement amendment. We expect each quarter of this year to have a similar amount.

The final special item was a $22 million gain related to the sale of nonstrategic property. Unallocated G&A expenses for the first quarter as shown on chart 13 totalled a positive $1 million. The change when compared to the fourth quarter is primarily the result of income from changes in share based compensation which is driven by the change in order in stock price well as a shift from unallocated pension expense to pension credits due to the performance of the pension assets and a change in the discount rate. Unallocated function expenses were also somewhat lower than normal.

I’ll wrap up with some overall financial comments and I’ll refer you to chart 15 for these comments. We ended the quarter with a cash balance of $780 million down from the $835 million at yearend. The first quarter is typically our lowest cash generation quarter due to the seasonal build in working capital as well as lower housing market activity. Cash flow from operations was $109 million which included income tax related receipts of approximately $60 million. Capital expenditures for the quarter were $65 million and we expect total expenditure for the year of approximately 400 million. Our long term debt was unchanged from yearend and we have not maturities until 2017.

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

Doyle Simons

Thank you, Patty. I am pleased with our first quarter results as we delivered strong operating performance despite unusually severe winter weather, significantly increased EBITDA from our Longview Timber acquisition and took actions against our commitment to reduce SG&A cost. We are beginning to realize the initial benefits of our operations excellence efforts and I look forward to sharing additional progress with you as the year progresses. We are relentlessly focused everyday on growing a truly company by driving superior operational and financial performance to increase cash flow, grow our dividend, and generate additional shareholder value.

With that comment, I think, we will open it for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mark Weintraub with Buckingham Research Group.

Mark Weintraub - Buckingham Research Group

Thank you. Congratulations on a very good quarter. You ended the first quarter with 780 million of cash and I believe you’re going to have some more cash coming in as part of the TRI Pointe acquisition as well. Can you give a sense as to what you think is the necessary or the right amount of cash from a longer term basis to run the business that you would tend to want to have recognizing where the first quarter might be different than a different quarter? What order or magnitude? What type of cash level do you typically like have to run the company?

Patty Bedient

Good morning, Mark. It’s Patty and I’ll take that one. I think as we think about the cash balance, there are a number of considerations to think about. One of course is where we are in the cycle and we believe we are still in the early innings of the homebuilding recovery, but also what we need for our working capital to support the increased activity.

The other thing of course is what is the level of liquidity? And we have very good liquidity. One of the things I didn’t mention was that we have our line of credit for $1 billion that we have no borrowings outstanding. So as we look at cash going forward, we wouldn’t anticipate that we would need the level of cash that would be indicated by the $780 million that you’ve referenced at the end of the first quarter as well as additional receipts from the TRI Pointe acquisition.

The other thing that we will not have going forward of course is the cash generated from income from WRECO, so that’s the other offset to that. So a lot of things that go into that number and so those are the things that we are looking at in terms of what is the best use of that cash going forward to build shareholder value.

Operator

Your next question is from the line of Mark Connelly with CLSA.

Mark Connelly - CLSA

Thank you. Doyle, as we think about operational excellence, should we expect there to be any meaningful impact in your Timber rotations or your harvesting plants in general. Obviously Longview has caused me to have some optimization, but if we leave Longview out of it, is there a meaningful effort that’s going to change in the way you’re managing your Timberlands?

Doyle Simons

Mark, we’re applying our operational excellence within lands across our entire company including Timberland both the Legacy Timberland as well as the Columbia Timberland what we called Columbia Longview Timberland. And just as an example Mark, I would say that in this quarter while we clearly benefited from the higher volume and prices in the quarter, part of the strong quarter in Timberland was a result of the operational excellence initiative that we have put in place specifically in logging and trucking cost improvement and merchandising. And also making sure we get the right log to the right customer to capture the full value.

So we’re looking across through an operational excellence lens across all of our businesses including Timberland. And while I can’t speak specifically to the exact impact on the harvesting and that type of thing, I can tell you we have already started to see improvement in our timberland operation as a result of our operational excellence initiatives and a little bit of that showed up in the first quarter.

Mark Connelly - CLSA

Okay, that’s very helpful and just one thing. It sounds like you’re going to see the log shift towards China away from Japan a little bit overall year-over-year. What’s happening to the China margins? You’ve talked about improvement in some of your China margins in past quarters. Is this shift going to push the overall margin down or are we seeing China pick up?

Patty Bedient

So, Mark, this is Patty. As we think about China, the difference in margins I would say come from some softening in Japan, so as you know, a grade mix that goes to Japan is a little richer grade mix. That also in terms of their competition for that log goes into the overall volume that goes into Asia. So we expect the China margins will see some pressure in terms of just the overall amount and I think I referenced that in our outlook comments, but from a perspective of overall demand from China, we believe that will continue to stay strong. And then as we go forward and get more of the pickup in housing domestically, that domestic log, saw log competes with the China demand, so those two will put tension on each other in terms of the pricing.

Operator

Your next question is from the line of George Staphos with Bank of America Merill Lynch.

George Staphos - Bank of America Merill Lynch

Thanks. Hi guys, good morning. Congratulations on the progress. I guess first question on RICO, what would be your interpretation for us in terms of the fact that you do have closings now picking up and cancellations down. And in particular, are you seeing, Doyle, a pick-up in the first time home buyer in the market because that seems to be what's been missing here in the cycle, in terms of extending it going forward?

Doyle Simons

George, I agree with you. I think that is what's been missing and for this housing to get back to the 1.5, 1.6, 1.7 level that we've seen historically, we're going to need to see the first time home buyer start to gain some traction. I think we're starting to see a little bit of that, but there's still some challenges in the mortgage market regarding loan availability and the amount that's required to be put down and just the credit scores that are currently required.

Encouragingly I think we're starting to see a little bit of loosening of some of those standards which I think is healthy and that will prompt more first time home buyers into the marketplace. So we are cautiously optimistic that we're going to start to see more and more first time home buyers stepping into the market and we think that's what's going to take this housing starts to the next level.

Patricia Bedient

Yeah, George, kind of the other things that is just holding back a little bit that first time home builder or buyer is the fact that the FHA limits have also been reduced somewhat, so I think that's putting a little pressure on that marketplace as well, but as Doyle said overall, as we look forward for housing, we're optimistic about what will happen for the rest of 2014.

George Staphos - Bank of America Merill Lynch

Patty, the FHA limits has been a much discussed topic and it's a good thing you are bringing it up. Do you think that that won't be a burden or an in pediment for a year or do you think if you're through a quarter or two down the road, we should have already had the impact of that in terms of demand?

Doyle Simons

Well, I think it's yet to be seen and I think it's one factor in the first time home buyer. I think the other pieces of the overall mortgage availability, as well as just what's happening with consumer confidence and economic activity overall. So, I think if that continues to improve even slowly, but subtly that will overcome some of that pressure that comes from the FHA limits.

George Staphos - Bank of America Merill Lynch

Thanks. My last question and I'll turn it over. Within EWP, can you comment or maybe provide a little bit more granularity on why you feel you're on target with some of your operational improvement programs. And Doyle you mentioned you expect or Patty mentioned you expect sales realizations to be up, I guess marginally in the quarter. Is that because of the tail effect from last year or is that because there's some new price increases in the market? Thanks. And good luck in the quarter.

Doyle Simons

Good question, George. And on ELP specifically, what we saw in the quarter was we had some start-up costs as we mentioned associated with our evergreen, Alabama mill. We also had some weather impacts in the quarter. We, like I said, remain confident that we're going to increase the earnings in that business by $30 to $40 million EBITDA in 2014 compared with 2013. We also to your point are encouraged and confident, we're going to see some price increases and are already starting to see those in the second quarter versus the first quarter, some of that due to mix, but some of that due to just overall improvement in prices as we move into the stronger spring seasonal period.

Operator

Your next question is from the line Gail Glazerman with UBS.

Gail Glazerman – UBS

I guess before I ask my question, Patty, just want to acknowledge the retirement best of luck and I guess we'll have you for another quarter on the call, but thanks for all your help.

Patricia Bedient

Thank you.

Gail Glazerman – UBS

I guess just starting with timber, results were higher than what you might have suggested last quarter and I'm just wondering what surprised you in the quarter, where the upside came from relative to what you might have expected?

Doyle Simons

Gail, we were encouraged by our results in our timberlands business in the first quarter and I would basically point to three things. One thing was we clearly had higher prices as prices strengthened in the quarter versus the fourth quarter that resulted -- as a result we had a little bit higher volumes to capitalize on those higher prices in the quarter.

The second thing is as I mentioned earlier, we had some benefit from our operational excellence initiatives, specifically in some cost improvement on logging and trucking, and also did a good job of merchandising and what I mean by that as I mentioned earlier is getting the right log to the right customer at the right time to fully maximize the value.

And then third and importantly, we saw a really nice improvement from our Longview acquisition in the quarter. As I mentioned or as we mentioned, that was up approximately $18 million from the prior quarter. We saw about 6 million of synergy benefit or let me put it this way, in terms of the synergies from Columbia, we are at a run rate as of the first quarter about 6 million a quarter, which would translate into about $24 million of synergy benefits on an annual basis. And as you know that’s well ahead of our original target of 20 million in synergy. So those are the three buckets that contributed to the Timberlands improvement in the quarter versus the prior quarter and maybe versus some expectations.

Gail Glazerman - UBS Investment Bank

Okay and I don’t suppose you could quantify the operating excellence contribution there?

Doyle Simons

As we’ve said before, Gail, we will quantify that on an annual basis because it will be lumpy. But, I will tell you, it did have an impact in -- a significant impact, I guess, it depends on how you define significant, but it did have an impact on the bottom line in the first quarter versus the fourth quarter.

Gail Glazerman - UBS Investment Bank

And can you talk about maybe the weather impact in the quarter both potentially, if you can quantify what it might have done to you and just maybe taking a step back and what it might mean for the market for instance, lumber seems to have accrued up in Canada. Are you starting to see that come back? So if you could just maybe talk about both, I guess, the financial impact and direct impact as well as how you think it might impact some of the markets as everything unfolds in the second quarter?

Doyle Simons

Sure, so let me start off by saying I was proud, we were proud the way our people managed through the tough weather conditions in the quarter. As you know, there was a lot going on. In terms of quantifying the impact, its differential by business as you would expect, but I would say in Timberlands, it was minimal. In our Wood Products business if you look across our Wood Products businesses, the impact by business was somewhere in the $2 to $5 million range per business.

This had to do with things like closures, and lumber for example, we lost 27 days due to closures and distribution. We lost over 50 days due to weather closures. In addition, we had slow backs, as you know when you have frozen logs in a saw mill you can’t run as fast, so that was part of the issue. We had transportation issues in Canada and in the US. And we even had a couple of mills for a short period of time specifically in one of our OSB Mills we're able to get logs to the mill to run. So those were some of the challenges that we had. Again, I thought our people did a really nice job of managing through that in our Wood Products business.

And then in our Cellulose Fibers business, Gail, the impact there from weather was approximately $4 million, and that was primarily due to higher energy cost and some railcar availability specifically regarding our Grand Prairie Mill.

In terms of going forward, most of these issues we think are behind us. There we still have transportation challenges that we'll work through specifically in Canada as you talked about, but all-in all we think most of it's behind us and we’ll be able to work through it as we move through the second quarter.

Gail Glazerman - UBS Investment Bank

Okay. And just from the market perspective any worries that production build up in Canada as the transport issues unwind will have an impact on the market, is that why you’re looking for fairly muted lumber prices in the quarter?

Patty Bedient

So, Gail, I think as we referenced, our realizations thus far in the quarter were softer. I think that likely part of that is due to that issue, but I think now we see them starting to stabilize and think they will move up from this point. So, I think we’ll work through that nicely. Again, it is dependent upon how housing activity comes back, but the underlying fundamentals for housing and now with the improved weather, things look good at this point.

Gail Glazerman - UBS Investment Bank

Okay. And just one last question, can you talk about, I guess, looking at WRICO and the activity you’re seeing there and as it suggests for housing activity more broadly, are you seeing, can you kind of quantify and give examples of any seasonal pick up you’re seeing and also you operate in regions that would have been affected by weather but also ones that probably weren’t? And did you note a difference in trend beyond just the underlying market fundamentals that gives you confidence, some of the sluggishness in housing or a lot of the sluggishness in housing in the first quarter was weather related versus something else?

Patty Bedient

Sure. I think there are a couple of things as we look at our own markets. If you think about our Winchester subsidiary, which is in the Washington D.C. area was really hammered by weather, even the first part of the second quarter hammered by weather, so it’s a little tough to see exactly the impact that weather had, how much of it, but it was significant and we’re starting to see that now come back around.

I think the other in the first quarter markets that were a little rougher were not surprisingly those that were potentially a little overheated in the prior year and I would reference Phoenix and Las Vegas there. Phoenix is now stabilizing as well so that’s a good thing, California, Los Angeles is doing well and here in the Puget Sound of course, the market did not go down as far as some of the other markets that we had.

Texas also continues to remain strong, so I think again as we look forward, a lot of that's behind us, I think the other thing that has put a little bit of a dampening effect on the marketplace is sort of a good news bad news, we had some pretty significant price increases over the course of last year and I think that has slowed that a little bit, so we don't have as many closings as we'd like but they're closing at higher prices, so one sort of helps to offset the other one, but as I said before, we are much more excited now about homebuilding as we look forward with this really harsh weather in so many geographies behind us.

Operator

Your next question is from the line of Alex Ovshey with Goldman Sachs.

Alex Ovshey - Goldman Sachs

Can you remind us how much incremental capacity the Evergreen, Alabama plant will add to the EWP business and where your utilization rates will be once that plant starts up?

Patty Bedient

You know, in Evergreen, which is, it has started up now and it will be shipping product the first of May, it produces two products primarily, I-joist and microlam and we have about 61 million Lineal feet would be the capacity that we would note for I-joist and about 4 million cubic feet for microlam solid sections.

In terms of its moving into commercial production now, it won't be operating at full capacity to start with as we move that product into the marketplace. I think overall if we were to discount the Evergreen mill we're operating across that part of the business in engineered wood at around 70% but it's very differential by product line. For example, our microlam product is operating at very, very high operating rates. That's one of the reasons that we're excited about having the availability from Evergreen coming online.

Alex Ovshey - Goldman Sachs

Appreciate that detail, Patty and then pulp, there's been recent price erosion on the softwood side in China even though inventory seems to be in pretty good shape. Do you have any thoughts on why we've seen prices move lower in China and any visibility into the pulp price environment in China over next couple of months?

Patty Bedient

Well I think as we look at one of the things that puts pressure on paper grade softwood is of course the additional hardwood capacity that is coming online, but China does need softwood to go with the hardwood so I think even though prices may soften here later that we still are feeling good about pricing overall moving up in the second quarter and that would certainly include our fluff pulp price going up as well.

Doyle Simons

Yes, Alex if you look at the -- as we mentioned first quarter and fourth quarter clearly fluff prices were up and we anticipate that trend will continue into the second quarter and part of that has been the disruption in the overall supply side of the equation due to the weather but we do think that's going to carryover clearly into the second quarter overall.

Operator

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

Paul Quinn - RBC Capital Markets

Thanks very much, good morning. Just a couple questions on Timberlands exports. My understanding is Chinese log and lumber inventories are actually pretty high right now. I guess a question is are you seeing the same thing and then just on your reference to the consumption tax increase in Japan and the slower refile there. Can you quantify that? Do you expect that down 5-10% in Q2?

Doyle Simons

From the Chinese perspective, I think inventories did build a little bit during the Lunar New Year period as I referenced in my comments. We anticipate as that gets behind us that demand will in fact continue to increase in China and that will be helpful in decreasing the overall log inventories in China.

In terms of Japan, if you look at it historically when there's been a change to the consumption tax, you normally see a little bit of pre-buying and then you see a little bit of weakness as it goes in and then stabilization. And it's hard to tell exactly how that's going to play out this time but our guess is it's going to be a similar type pattern. We probably did see a little bit of pre buying, now we're in the period where there may be a little bit of weakness due to the adjustment to the consumption tax, but long term, we continue to be very encouraged by the demand out of Japan.

Paul Quinn - RBC Capital Markets

Okay. And then just on operational excellence, it looks like you're getting some traction there. Just wondering, if you're able to share at some point in the future your targets, your timing and sort of the CapEx required to get where you want to get to?

Doyle Simons

Yeah. So let me talk generally about OpEx across all of our businesses and I would tell you we're encouraged by the progress that we've made against the targets that we laid out in December. As we previously said we will quantify the benefits on an annual basis but let me give just a little bit of color directionally on some of the benefits that we're starting to see. I already hit on Timberlands a little bit, but clearly part of our good quarter in Timberlands was a result of our operational excellence initiatives. And specifically, as I mentioned earlier regarding cost improvement on logging and trucking and also on merchandising, again making sure we get the right log to the right spot.

In terms of lumber, our manufacturing costs were lower than the prior quarter. That as you know is the key focus of our operational excellence efforts. I will tell you that was somewhat hampered in quarter by weather, but I can tell you plans are in place to start to really capture the benefits from our efforts there in the second quarter and we're confident we'll see the benefit of that in the second quarter and going forward.

And our OSB business, the reliability, was a challenge our key focus areas, it’s improving our reliability again as we laid out on December 17th, that was challenged during the quarter, due to weather but we start to see an improvement late in the quarter and that improvements continued into the second quarter. And then the other initiative there is to improve our mix of high value products or enhanced products and just as an example there, we're starting to make our flooring product at our Hudson Bay mill.

In ELP, as I mentioned earlier, we had some weather impacts, but we are confident that we will see the improvements that we've laid out in ELP. And similarly in distribution, where we are there, as I mentioned had over 50 days of closure due to weather in the first quarter, but I can tell you, all of our sites has completed, an extensive analysis of the customers, the products lines, pricing, the warehouse cost and delivery cost and I can tell you one by one those sites are turning to profitability and we are encouraged by what we're seeing there.

In sales Fibers -- we can give you a number of examples of operational excellence but I think the one that I would highlight for the first quarter is we had record production at a number of our mills, despite the very severe winter weather and that's not the case across the board, if you look at what happened in that business overall and when I say in that business, I mean in that industry overall in the quarter, so we did a good job of running those mills, despite the tough weather. And then we talked about SG&A and we're making great progress on our SG&A. I'm confident we're going to get where we need to be.

So I think the summary is we're on track. We're working hard on this operational excellence every day. We're starting to see some benefit and much more to come and we'll like I said we will update you on an annual basis on exactly where we are versus the targets that we laid out on December 17th.

Operator

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

Steve Chercover - D.A. Davidson

Just two quick questions. First of all, can you just tell us what criteria would determine whether a split or a spin is preferable?

Patricia Bedient

Sure, Steve. As we think about those, we think about the spin as being like a special dividend and the split is more akin to a share repurchase. So if you think about the criteria that you would use for each of those. In addition, one of the things that we look at when we look at the spin versus the split is, of course, in the spin you're just issuing the shares pro-rata to the existing Weyerhaeuser shareholder base. In a split, shareholders are given a choice to exchange their Weyerhaeuser shares for the shares of what we think is a very strong home builder going forward. So the split gives the investor base the opportunity to choose which one. And we think that it has the added advantage of then placing the stock with its more -- its natural investor base. Whereas there may be some people who are Weyerhaeuser shareholders who would say I don't really want to own homebuilding long-term, I want more of a forest products exposure, and so it really is the fact that one is simpler, certainly the spin is much simpler, and the split though a little more complex, does have the ability to place the stock with more of its investor base and it is the split is what we did in when we did the downtown transaction in 2007, although it is a little more complex to execute, it is something we have done in the past.

Steve Chercover - D.A. Davidson

It does make sense I guess to get it in the hands of those who want it. From a tax perspective, is one more advantageous than the other?

Patty Bedient

No, there really isn’t any difference from one versus the other.

Steve Chercover - D.A. Davidson

Okay, thank you for that. And then the second question was you’ve elaborated on why you remain confident in the housing recovery, so can you just tell us how you position the Wood Products business? Is your operating stance predicated on an 18% increase in starts which is the difference between 2013 and the 1.1 million that you expect or is it based on your order filed from week to week?

Doyle Simons

Well, I would say it’s both of the above. We clearly are matching our supply with our demand but we’re also as we look forward, we continue to anticipate an improvement in housing as we said. So you factor in all of those equations as you look to the future for our wood products business, but I like the way we’re positioned in our Wood Products business. Our focus as mentioned earlier is just running the capacity that we have better. And we’re starting to make improvements in doing just that. And in terms of our overall, if you look at it, any of our mills that we closed have either been started up so which was evergreen or permanently closed. We do not have any mills sitting idle at this point. And like I said, I like where we’re positioned in Wood Products and think we’re very well positioned to fully capitalize on the continued improvement in housing going forward.

Steve Chercover - D.A. Davidson

So you’re ready to serve 1.1 million starts but you’re not going to run for practice, right.

Doyle Simons

That is correct.

Operator

Your next question is from the line of Chip Dillon.

Chip Dillon

Three quick ones. Good morning, Doyle and Patty, and Kathy. And again good luck to you Kathy as you later this year move on into retirement. I wanted to you ask first on the land sales now that we have a reconfigured Timberland business with the Longview properties, is sort of the second quarter, is that an usually high level land sales you would expect going forward? And I know it's erratic or would that represent kind of a normal level?

Patty Bedient

Well, it is lumpy from quarter-to-quarter, sort of historically if you can call it seasonality to it. The first quarter is usually a little lower. The second quarter at 20 million does not involve Longview land sales. So, it’s not that activity is not coming as a function of Longview. So I would say that 20 million probably is more on the high side from a quarterly perspective so that would give you a run rate of around 80, but it’s going be lumpy from quarter-to-quarter and from year-to-year really based upon the opportunity that we see. So we look to upgrade the portfolio through the land sales because those are for the most part, exchanges that we are doing. So it’s a function of continuing to look for the best opportunity and that’s why you see the lumpiness, we're not trying to hit it a particular target in any one quarter, it’s really opportunistic.

Chip Dillon

I see and then I guess the second one is, I know in December that kind of the two sub-businesses within Wood Products had sort of need the improvement, obviously our EWP and distribution, and I was wondering sort of when do you get to a point where they need to show the kind of improvement you expect them to versus maybe making of a decision from those businesses? In other words would that be a couple of years or maybe a year?

Doyle Simons

Chip, as we very specifically said on December 17, we anticipate and fully expect both of those businesses or each of those businesses, let me be very clear, each of those businesses to improve EBITDA about $30 million to $40 million in 2014 versus 2013. At this point, we remain confident that that’s in fact exactly what’s going to happen and we’re taking a lot of very proactive steps to make sure that is in fact the case. So that’s the timeline we’ve played out and that’s the timeline we’re committed to.

Chip Dillon

Okay, very clear, and one quick one for Patty. The interest expense for the first quarter at 83 million was a little less than we thought, is that a good run rate to use for that the rest of year assuming nothing big -- well forgetting the -- even with split off, would you assume not to change much?

Patty Bedient

Yes, I think that that should probably be a pretty good. That is net of capitalized interest. So a few million can change quarter-to-quarter depending upon what projects we’re doing, but there shouldn’t be anything particularly different in that number going forward.

Operator

Your final question will come from the line of Colin Ming, with Raymond James.

Colin Ming - Raymond James

Hey, good morning, just real quick, going back to the question about really the cash balance, in the past you guys have talked about using some of your cash position to continue to grow that Timberland portfolio. Can you maybe just update us on what you’re seeing from your perspective on the acquisition environment and are there, any other deals you guys are looking at on that front.

Doyle Simons

I would just say, we are constantly looking at opportunities to grow our Timberland base, now we will as we have historically we’ll be very disciplined in doing that and we’re not going to grow just for the sake of growing, if we can find acquisition opportunities like the Longview acquisition where we can drive value for shareholders that’s something we will pursue going forward, so, we’re, as we’ve have been historically and we continue to be, we look at lots of different acquisition opportunities but we will be continue to be very disciplined in the way we approach those going forward.

Colin Ming – Raymond James

Okay, thanks Doyle, and then Patty maybe can you just remind us are there any sort of restrictions tied to the proceeds coming from WRECO, the $700 million plus or minus, just given the way that the homebuilder unit was in the TRS and then just the nature of the transaction, are there going to be any near term restrictions related to that incoming cash?

Patty Bedient

Yes, Colin as you think about that cash, it is unrestricted but as you referenced, it is coming into the TRS, so there are no additional restrictions as a result of it coming from the home building business other than the fact that would be the same as any other cash that is in the TRS in terms of moving at around between the REIT and the TRS but it is totally unrestricted other than that.

Colin Ming – Raymond James

Okay, well, can you maybe just remind us like some of the mechanisms to get that, that amount of cash out of the TRS and up to the REIT?

Patty Bedient

Well one of the things that certainly you can do is dividend cash from the TRS to the REIT, there are limitations as to how much cash can be dividended in any particular year and that’s really a function of the earnings in Timberland business.

The other thing that you can do, there is no restriction in terms of borrowing cash from the TRS, although you do need to pay interest income on that borrowing from one to the other. Certainly if you want to move cash down you can make a capital contribution, but I think your question is more about moving cash from the TRS up to the REIT, so you can loan it up without restriction, you just have to pay interest income on that down to the TRS.

Colin Ming - Raymond James

Okay, and then just, you guys referenced in kind of you, I think your 2Q outlook in some of the prepared remarks just about some of the momentum you’re starting to see in the US south as far as log pricing there, can you guys quantify that at all, I mean we’ve kind of heard mixed messages depending upon which specific region you’re in, generally the Gulf south not being as strong but kind of Georgia, Florida, the Carolinas being a little bit stronger, can you just maybe put a little additional color on that, maybe quantify the type of movement you’re seeing in the south.

Doyle Simons

You know, I would answer that by saying, if you look at 2013, prices in the log prices in the south were up roughly 4%. As we said in our comments and as shown on the slides, prices were up again modestly in the first quarter versus the fourth quarter and what we anticipate is a slow but certain increase in log prices in the south going forward, yes, by quarter by quarter it will vary by region and you’ll see one move up more than the other but overall we are encouraged by the trend that we see and are confident that over time prices will continue to improve in the south as we see housing continue to rebound.

Colin Ming – Raymond James

Okay, great, congrats on the quarter.

Doyle Simons

Thank you.

Okay, as I understand it that was our last question, I’d like to just end by thanking everybody for joining in this morning and thanks for your interest in Weyerhaeuser.

Operator

Thank you for joining us today, you may now disconnect.

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