Weyerhaeuser (WY) Doyle R. Simons on Q2 2016 Results - Earnings Call Transcript

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Weyerhaeuser Co. (NYSE:WY)

Q2 2016 Earnings Call

August 05, 2016 10:00 am ET

Executives

Elizabeth L. Baum - Director-Investor Relations

Doyle R. Simons - President, Chief Executive Officer & Director

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Analysts

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

George Leon Staphos - Bank of America Merrill Lynch

Collin P. Mings - Raymond James & Associates, Inc.

Mark William Wilde - BMO Capital Markets (United States)

Chip Dillon - Vertical Research Partners

Mark Connelly - CLSA Americas LLC

Gail S. Glazerman - Roe Equity Research, LLC

Mark Weintraub - The Buckingham Research Group, Inc.

Operator

Good morning. My name is Ginger, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Weyerhaeuser Company's Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

I will now turn the call over to our host, Beth Baum. Ma'am, Please go ahead.

Elizabeth L. Baum - Director-Investor Relations

Thank you, Ginger. Good morning, everyone, and thank you for joining us today to discuss Weyerhaeuser's second quarter 2016 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website.

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

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

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you, Beth, and welcome, everyone. This morning, Weyerhaeuser reported second quarter net earnings of $157 million or $0.21 per diluted share on net sales from continuing operations of $1.7 billion.

Second quarter results include after tax earnings of $38 million from discontinued operations and $11 million of after tax charges for merger and legal expenses. Results for our entire Cellulose Fibers segment are reported as discontinued operations. Excluding discontinued operations and special items, we're into $130 million or $0.17 per diluted share. Second quarter adjusted EBITDA from our continuing operations was $413 million and this represents an improvement of $77 million or 23% compared with first quarter results.

I'm proud of our second quarter operating performance. Our teams continued to execute well and deliver solid operating results including Wood Products strongest second quarter in over a decade. In the quarter, we also announced the sale of our pulp mills and liquid packaging board facility for collective proceeds of $2.5 billion or approximately $1.8 billion after tax.

Closed the Twin Creeks transaction receiving $440 million in cash and in transaction value and 260,000 acres of Southern Timberlands at $2,150 per acre. We purchased over $830 million worth of our common shares, and made strong progress on merger integration and activities as we work together to successfully integrate Plum Creek and fully capture the cost and operational synergies that will drive superior value for our shareholders. Before I turn to our second quarter business results, let me make some brief comments about the housing market.

Single family housing starts continued to grow at double-digit rate, and year-to-date activity remains in line with our expectations. Through June, single family starts had improved 15% compared with 2015 on a seasonally adjusted basis, and total US starts were up 8%. Although supply side constraints such as skilled labor, permitting delays and fees and rising land and construction costs dampened the market's acceleration during the second quarter, solid economic fundamentals including job growth and historically low mortgage rate continued to drive improving housing demand. We continue to anticipate approximately $1.2 million housing starts for 2016 in line with consensus estimates.

Let me now turn to our business segment. I will begin the discussion with Timberlands, charts 3 to 5. Timberlands contributed $125 million to second quarter earnings. Adjusted EBITDA for Timberlands increased by $21 million to $220 million. Non-cash depletion and amortization costs increased by $25 million following a full quarter of higher depletion rates, resulting from acquisition accounting.

Western Timberlands contributed $114 million to second quarter EBITDA compared with $118 million in the first quarter. Western fee harvest volumes increased but average realizations for Western logs declined modestly primarily due to a greater proportion of sales to domestic and Chinese markets.

As anticipated, sales volumes to Japan declined in the second quarter as first quarter post forward (05:01) demand in advance of a scheduled consumption tax increase which was later delayed. Pricing for our Japanese logs moderated slightly in the quarter. Volumes to China rose due to seasonally higher construction activity and average log realizations were essentially flat.

Log inventory to Chinese ports were a little changed during the quarter and remain at normalized levels. In western domestic market, log supply and demand remained balanced during the quarter. Average realizations declined slightly due to mix and per unit logging cost increased seasonally as second quarter harvest includes a greater proportion of higher elevation white wood.

Southern Timberlands contributed $99 million to the second quarter EBITDA, $22 million more than the first quarter. Southern (05:51) increased by 40% due to a full quarter of Plum Creek operations. Realizations for Southern logs declined slightly due to mix, as second-quarter sales included a higher percentage of pulp wood. Silviculture and forestry costs increased due to catch-up on first-quarter activity and has been delayed due to wet weather. Northern Timberlands' EBITDA improved slightly compared to the first quarter.

The Timberlands business remains relentlessly focused on capturing operational excellence and is on track to achieve its $30 million to $50 million operational excellence targets for 2016. During the quarter, internal benchmarking teams completed an initial survey of operational synergy opportunities and prioritized areas with the greatest potential value. A deep-dive comparison of each company's practices in the highest-value areas is under way. We are pleased with the progress to-date and look forward to capturing these opportunities later this year and into 2017.

Real Estate, Energy and Natural Resources, charts 6 and 7. Real Estate and ENR contributed $12 million to second quarter earnings compared with $15 million in the first quarter. EBITDA for the second quarter totaled $28 million. For Real Estate, the number of acreage sold declined slightly due to the timings of transaction closings. Average price per acre increased as second quarter included the sale of a high value parcel in Cannon Beach, Oregon.

EBITDA from Energy and Natural Resources operations improved slightly. Our Real Estate team is running full out as they apply a concrete to asset value optimization or AVO process to the legacy Wayerhaeuser Timberlands. This work is proceeding well, and we continue to anticipate the process will be substantially complete in early 2017.

We expect real estate activity will ramp up significantly in the fourth quarter of this year, and into 2017 as this process moves toward conclusion.

Wood Products, charts 8 and 9. Wood Products contributed $156 million to second quarter earnings, an improvement of 80% compared with first quarter. By effectively capitalizing on improving market and ongoing operational excellence initiatives, the business delivered its strongest second quarter since 2005. Adjusted EBITDA increased to $189 million, $72 million more than the first quarter.

EBITDA from lumber grows to $96 million. This is an improvement of $45 million or nearly 90% compared with first quarter. Average realizations improved nearly 10% and sales volume increased by 8%. The business also had another strong quarter operationally. Western log costs declined and recovery improved and manufacturing costs net of logs decreased due to the continued benefit of operational excellence initiatives.

OSB contributed $43 million to EBITDA, $12 million more than the first quarter. Average sales realizations increased 12% and our mills continued to run well.

Engineered Wood Products EBITDA increased to $45 million, $14 million more than the first quarter. Sales volume rose due to seasonally higher demand and a full quarter of Plum Creek, MDF and plywood operations. Average realizations for solid section and (09:27) declined slightly due to mix.

In Distribution, EBITDA rose $5 million compared with first quarter due to improved sales volume, higher margins and ongoing cost control. The business have increased EBITDA about $14 million year-to-date against the 2016 full year target of $15 million to $20 million.

Late in the third quarter, we announced changes to improve the profitability of our Montana wood product operations. In the third quarter, we will permanently close the lumber and plywood mills in Colombia Falls. These moves will allow us to align the available logs supply with our manufacturing capacity including adding shift at our Kalispell facilities and best position our Montana operations for long-term success.

Wood products remains relentlessly focused on OpEx initiatives and is on track to achieve its 2016 target. During our first quarter earnings call, we indicated we thought the second quarter Wood Products results could be comparable to second quarter of 2013. A time when we were just beginning our OpEx journey and lumber and OSB pricing were significantly higher than it is today.

In fact, we've exceeded second quarter 2013 EBITDA by $23 million despite the fact that average lumber realizations in the second quarter were $35 per 1000 (10:46), lower than three years ago and average realizations for OSB were more than $90 per 1000 (10:53), lower than they were in the second quarter 2013. This overall improvement highlights the significant contribution, operational excellence is making to our business results.

I will now turn to discontinued operations, chart 11. As I previously mentioned, beginning this quarter our entire Cellulose Fibers segment has been reported as discontinued operations This includes results from our pulp mills, liquid packaging board facility, and a printing papers joint venture. Discontinued operations contributed $52 million to pre-tax earnings compared with $29 million in the first quarter.

Average sales realization for pulp and liquid packaging rose compared with the first quarter. And sales volumes for liquid packaging increased. Maintenance and energy cost declined slightly. Second quarter results also reflect accounting changes resulting from the reclassification as discontinued operations. Non-cash depreciation expense decreased by $23 million compared with first quarter due to a requirement to seek depreciation on asset held for sale, and corporate overhead expense previously allocated to Cellulose Fibers is now reported in unallocated items. This change affects both current and prior periods. These expenses total approximately $9 million per quarter or approximately $35 million on an annual basis.

The effect of these accounting changes was largely offset by charges associated with the strategic review process and other transaction expenses. Yesterday, we received Hart-Scott-Rodino clearance in the US for the announced sale of our pulp mills to International Paper. We continue to make progress, remaining regulatory approvals, primarily competition clearance in several foreign jurisdictions. We anticipate closing the transaction in the fourth quarter. Similarly, we have received Hart-Scott-Rodino clearance for the sale of our liquid packaging business and continue to progress with remaining approvals. We expect to close the liquid packaging transaction in the third quarter.

The process for our premium paper joint venture is proceeding well. We are actively working with prospective buyers and we will update you when that review is complete.

I want to thank our Cellulose Fibers' employees who are maintaining their focus on operating safely and delivering strong results throughout the strategic review and sale processes.

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

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Thank you, Doyle, and good morning. The outlook for the third quarter is presented in slide – chart 14 of the earnings slides. For Timberlands, we expect third quarter adjusted EBITDA will decline slightly or roughly 5% compared to the second quarter due to seasonality and lower export prices.

In our Western Timberlands operations, overall, we expect harvest volumes to be similar to second quarter levels. Although Japanese housing activity remained strong, we anticipate crisis will soften as markets adjust to the delayed increase in the consumption tax.

In China, seasonally slower construction activity and continued currency headwinds will result in lower sales volumes and moderately lower pricing.

Domestic log volumes and prices are expected to remain stable. Operating conditions throughout the Western region have been favorable as the risk of fire has been low. Western logging costs will be seasonally higher in the third quarter as summer weather allows us to shift harvest activities to higher elevations, which have a higher percentage of cable logging and longer haul distances. In the South, fee harvest volumes are expected to be slightly higher than the second quarter but on a lower grade mix as third quarter activity typically includes a higher percentage of a thinning volume.

Silviculture and road spending will also be seasonally higher. In the North, third quarter harvest volumes will be significantly higher than the prior quarter. Note that second quarter harvests are the lowest of the year because of logging and hauling limitations due to spring breakup, or as we like to say in the Northern Woods, the mud season. We expect average sales realizations will be similar to second quarter levels.

In Real Estate, and Energy and Natural Resources segment, we expect significantly higher earnings and adjusted EBITDA from real estate sales during the second half of the year. Nearly all this improvement will occur in the fourth quarter. Third quarter real estate activity will be primarily focused on continuing work on the AVO process, in building our inventory of higher and better used properties. We expect third quarter adjusted EBITDA will increase slightly compared to the second quarter, but the mix of real estate sale is slightly heavier to higher basis lands.

In the fourth quarter, we expect EBITDA will be more than double the third-quarter level as the first results of AVO assessments in the portions of the US South are taken to market and begin to move through to closing.

The Wood Products, inventories throughout the supply chain remain tight as buyers continue to only purchase product to meet their immediate needs, which has been pushing lumber and OSB pricing higher as we enter the third quarter. We're anticipating comparable sales volumes and continued strength in lumber and OSB pricing in the third quarter as housing starts, especially single family, continue to improve and builders move into the late summer building season. We expect to see continued solid performance in Engineered Wood Products.

Overall, we expect third quarter adjusted EBITDA and earnings for the Wood Products segment will be considerably higher than the second quarter. Lumber and OSB prices improved throughout July. If prices stabilize at current levels for the balance of the quarter, the segment is on track to improve EBITDA and earnings by roughly 10% compared with second quarter. However, we believe there's continued upside for both lumber and OSB prices and anticipate earnings could exceed this level.

Now, let me direct your attention to chart 10 which details the major components of our unallocated items. The contribution to earnings before special items was $1 million, $9 million lower than the first quarter results, which included a $13 million gain on foreign exchange. Note that unallocated corporate function expenses now include approximately $9 million of costs that were recorded in Cellulose Fiber segment prior to the discontinued operations reclassification.

Chart 12 summarizes our key financial items. We ended the quarter with a cash balance of $485 million, up $74 million from the first quarter. Cash flow from operations including Cellulose Fibers was $492 million for the second quarter. This is an increase of $445 million over the first quarter, which is typically the lowest cash flow quarter of the year.

In addition to increased cash flows from Wood Products and Timberlands segments, we saw positive variance in our working capital due to the seasonal decrease in inventory levels quarter-over-quarter. Cash from investing activities was a positive $350 million for the quarter, as we received $440 million in cash proceeds from the Twin Creeks transaction, which closed on April 1.

Capital expenditures for the second quarter totaled $101 million, including $12 million of our discontinued operations. We expect 2016 CapEx for our continuing operations will be approximately $425 million, with Timberlands' capital spending expected to total $125 million for the year, and Wood Products' spending of approximately $300 million.

Financing cash flows included $831 million for share repurchases, and $228 million for common dividends. As of June 30, we had drawn $1.4 billion of the $2.5 billion available under the term loan facilities. Long-term debt, not including the term loan balance of $1.4 billion, was $6.6 billion at the end of the second quarter. We intend to pay down the term loans for the proceeds from our recently announced asset sales.

Interest expense of $114 million for the second quarter reflects a full quarter of interest for both the Plum Creek legacy debt and the new term loans. We expect interest expense will be comparable in the third quarter. For our continuing operations, the company anticipates the full-year tax rate will be between 18% and 20% based on the expected mix of REIT and taxable REIT subsidiary income.

I'll wrap up with chart 13, which provides some additional detail on our share count and repurchases activities. Through the end of the second quarter, we have repurchased 58 million shares of common stock under our February 2016 share repurchase program at an average price of $29.18 per share.

We have continued our repurchase activity during the third quarter and as of August 1, our cumulative repurchases totaled $1.98 billion or nearly 67 million shares at an average price of $29.45. The company did not repurchase shares during the period June 1 through June 28 because of the measurement period for our mandatory convertible preference shares.

The mandatory convertible preference shares converted to common shares on July 1 at a rate of approximately 1.69 common shares per preference share. As a result, common shares outstanding increased by approximately $23.2 million shares subsequent to quarter-end.

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

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you, Russell. I will wrap up this morning with some brief comments on integration, synergy and SG&A. We continue to make strong progress on merger integration. I'm encouraged about the teamwork I see among employees at all levels as we work together to service our customers, identify best practices and implement improved processes for our merged company.

We have fully identified the sources of the $100 million of hard dollar cost synergies. As of the end of the second quarter, we are capturing about one-third of these reductions on a run rate basis.

I'm highly confident we will reach our $100 million run rate cost synergy target by the end of year one. In addition to capturing merger synergies, we must address the $35 million of corporate costs, formerly allocated to the Cellulose Fiber segment. To ensure our businesses remain competitive, we will eliminate these costs just as we did following the divestiture of our Home Building business.

We have been planning for the reductions as part of the strategic review process, and anticipate eliminating these costs within 12 months after closing the International Paper transaction.

In closing, I will mention that the move to our new Seattle headquarters remains on track for mid-September. I'm also pleased to announce that we will be holding an Investor Day in New York on Tuesday, December 13. We will send out the details in a press release later this morning.

At that meeting, we will provide specific updates on progress against the key targets for our merged company, and you will have an opportunity to hear firsthand from each of our business leaders about their key initiatives as we work together to drive superior value for our shareholders.

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

Question-and-Answer Session

Operator

Your first question comes from Anthony Pettinari from Citi. Please go ahead with your question.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Good morning. Timberlands – as you think about 3Q in the South, I think you talked about softer price mix. If you take the impact of mix shifts away and you just look at same product prices. I was wondering what you're seeing in July and August. Are prices just flat or you're seeing any kind of improvement in Southern log prices?

Doyle R. Simons - President, Chief Executive Officer & Director

Now, Anthony, what we're seeing is if you take it – and you're thinking about it exactly right on what I'd like to say, an apples-to-apples basis, prices we anticipate will be essentially flat in the third quarter versus the second quarter.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. And I guess, what do you attribute that to? I mean, presumably lumber mills can pay more for fiber and housing starts are growing double digits. Is there just too much inventory out there? Why aren't log prices improving or inflecting as I think some of us thought that they might now by now?

Doyle R. Simons - President, Chief Executive Officer & Director

Yes. Anthony, and the question, and we've all talked about it is as what is the inflection point where you see significant improvement in pricing. And we remain confident, as housing continues to improve as you said, as additional lumber capacity comes online in the South we remain confident we're going to hit that inflection point based on where supply and demand reach equilibrium. And at that point, well, we believe we'll start to see Southern log prices begin to return to the levels they were prior to the recession. However, we don't think we're going to see that in the third quarter. We're set to wait as we move forward to hit that inflection point.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. Okay. And then, just in Wood Products, you mentioned the Columbia Falls announcement and adding shifts elsewhere. Was Columbia Falls – will it end up being kind of net neutral from a capacity standpoint? And then just generally, if you could talk about your Wood Products footprint. Are you adding capacity with the increase in starts or how should we think about for the year?

Doyle R. Simons - President, Chief Executive Officer & Director

Yeah. So for the year, Anthony, overall, we're running our facilities close to 95%, 96% 97% operating rate due to these good markets. So, you always have a percent or two of Creek (25:46), but we don't anticipate adding any significant capacity in the near term.

Columbia Falls net-net, you will have lower capacity but higher profitability. As we stated when we announced that, the reason for that move was to align the available fiber with the productive capacity, and by doing this, we are able to run the remaining mills full out with additional shifts, which will ensure the long-term success of our Montana operations and improve the overall profitability of our Montana operations on a go-forward basis.

Anthony Pettinari - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. I'll turn it over.

Operator

Our next question is from George Staphos from Bank of America. Please go ahead with your question.

George Leon Staphos - Bank of America Merrill Lynch

Hi, everyone. Good morning. Thanks for all the details. How you doing? Doyle, first question in Wood, obviously, very strong result, better than your guidance. As we look out the next couple of quarters, where do you see the most cost pressure? And you're doing a great job on SG&A relative to the revenue base in the business. That's obviously part of the program at Weyerhaeuser, but where do you start to see some tension here? How long can you hold the line here within Wood? And then I had a couple of follow-on questions on SG&A.

Doyle R. Simons - President, Chief Executive Officer & Director

In terms of cost pressures, George, at this point in time, we don't see any significant cost pressures now. It all runs up, you clearly would have some freight cost pressures and people continue to anticipate that happening at some point, but in the near term, don't see any significant cost pressure. We'd love to see some cost pressure from a log perspective, but not seeing that as we just referenced in the near term.

George Leon Staphos - Bank of America Merrill Lynch

Okay. Yeah. That was part of the question behind the question. The second question I wanted to get into is on Engineered Wood. It sounds like from your commentary that you're pleased with the performance there. And looking at the slide deck, if I thought correctly, we've seen price is drifting a bit lower. If that's correct, what's driving that? Is it again lack of cost push? Is it perhaps somewhat more competitive markets? Single-family starts are obviously doing well, which you would think would be beneficial for Engineered Wood supply, demand and market trend. So, how would you frame that for us?

Doyle R. Simons - President, Chief Executive Officer & Director

Yeah. So, what I would say from a pricing perspective, a big part of that slight downward pressure we've seen is just having to do with mix. As we move forward, George, I would say that there are some price increases. Or a price increase that will be playing out in the West, but a portion of that price increase will be offset by some pricing pressure in the East as you have the dealer consolidation and all the different things that are happening from a customer perspective overall. But going forward, we would anticipate prices would be flat to maybe up slightly.

George Leon Staphos - Bank of America Merrill Lynch

Okay. And then the last one if, again, we did our math right. Again, you've done a very good job on SG&A over the last number of years across the businesses. If I look at Timberland, if I look at Real Estate & ENR versus year-ago levels that ratio has ticked up a bit. Obviously, some of that's probably just mixed in Plum Creek. Again, can you help frame what the opportunity there is for cost reductions in the next couple of quarters as you come out of 2016 and head into 2017? Thanks and good luck in the quarter.

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you, George. And the way we look at these cost reductions is pretty straightforward. We say, what was the SG&A and R&D for both combined companies in 2015, and as we said, our goal, and we're confident in reaching that goal, it's about the first quarter of 2017, we will be at that run rate. So, we're modeled – we're as you would anticipate, George, we're on top of that. We know exactly where we are. We've identified the source of those synergies, and we're starting to realize some of it, more to come as we run through the balance of this year and into early next year. But that's the way we're monitoring it to make sure it does, to your point, in fact, show up on the bottom-line.

George Leon Staphos - Bank of America Merrill Lynch

Okay, Doyle. Thank you. Good luck in the quarter.

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Collin Mings from Raymond James.

Collin P. Mings - Raymond James & Associates, Inc.

Good morning, Doyle. Good morning, Russell.

Doyle R. Simons - President, Chief Executive Officer & Director

Good morning, Collin. How you doing?

Collin P. Mings - Raymond James & Associates, Inc.

Good. Good. A few questions here. First, just maybe big picture, talk a little bit more or update us on how you think the softwood lumber negotiations are going to play out, and just kind of your update as far as thoughts if no deal is reached in the standstill period, comes and goes without a deal.

Doyle R. Simons - President, Chief Executive Officer & Director

Sure. And as you know, we are very actively involved with and aligned with the position of the US Coalition, and there is an ongoing dialogue between the Coalition and our US Trade representative. I do believe participants send from both sides are interested in a resolution. And I'm frankly encouraged the governments – each of the governments are continuing to have discussions.

As you know, this is a really important issue for Weyerhaeuser, and we remain hopeful that an agreement can be reached prior to the deadline. But we're prepared to move forward if that doesn't happen in follow trade days (31:21). That's kind of where we are.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. Thanks for the update there. I think, one thing as far as in the prepared remarks, roughly you talked about CapEx, the $425 million. I think that's down from a comparable $450 million, I think, that's what you had got it to earlier. Is that right? And, maybe, what caused the change there?

Doyle R. Simons - President, Chief Executive Officer & Director

Yes, it's correct. We did lower our CapEx spend. We brought it down a little bit on the Timberlands side as we look at the combined operations for the Plum Creek and Weyerhaeuser. We've just refined that number as we move into the second half of the year.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. And then just thinking about some of the commentary around the expected ramp in real estate sales, maybe just talk a little bit more about order of magnitude, what you're think in the fourth quarter could be as far as the amount of step-up. Again, I know, we talked on prior calls about the overall ramp showing up more in 2017, but just from a modeling standpoint, how should we think about the fourth quarter?

Doyle R. Simons - President, Chief Executive Officer & Director

Sure. So, Collin, as we look at the third quarter, we'd expect the third quarter to be pretty similar to the second quarter. And then again, as we bring more of the AVO (32:27) properties into the market and we started ramping up that program, you would expect the fourth quarter to really increase probably double the third quarter volume.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. That was very helpful. And then just one last one and I'll turn it over. Just going back to Anthony's question on Wood Products. How much of your EBITDA is generated from Canada operations at Wood Products?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Collin, I don't know that number exactly off the top of my head, we'll follow up. But most of our revenue is generated out in the US, although Canada is an important part of our overall Wood Products operation. So, I'll have to get back – we'll get back with you on that.

Collin P. Mings - Raymond James & Associates, Inc.

Okay. Great. I'll turn it over. Thanks, guys.

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Mark Wilde from BMO Capital Markets.

Mark William Wilde - BMO Capital Markets (United States)

Good morning, Doyle. Good morning, Russ.

Doyle R. Simons - President, Chief Executive Officer & Director

Good morning.

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Good morning, Mark.

Mark William Wilde - BMO Capital Markets (United States)

Russ, is it possible to get a go forward look at annual harvest volumes in the South and in the West?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

As we have guided to our total year volumes, we're at about 40 million tons to 42 million tons. So, as you look at our harvest volume to-date, and then you can extrapolate out to what you think the third and fourth quarter will look like, but we don't provide specific guidance for the volumes on a quarter-to-quarter basis.

Mark William Wilde - BMO Capital Markets (United States)

Okay. And is there likely to be a difference between what you'll do, say over the next three to five years in terms of harvest volumes, and then what you might define as kind of long-term sustainable? It seems to me both Longview and some of those (34:13) properties offered opportunities for accelerated harvest in the near years.

Doyle R. Simons - President, Chief Executive Officer & Director

So, Mark, what I would tell you is, as you would anticipate, we're spending a lot of time updating our strategic harvest plans for the combined land base. So, we're right in the midst of that, so we'll give you some – in the future, we'll give you some look at how we think that'll play out in the time horizon that you just laid out. We're right in the middle of that process currently.

Mark William Wilde - BMO Capital Markets (United States)

Okay. All right. And then, Doyle, can you just give us something of what you're expecting from Japan over the next couple of quarters?

Doyle R. Simons - President, Chief Executive Officer & Director

Sure. So, Japan has been interesting in terms of how this consumption taxes has played out in the second quarter. As we talked about, the volume s down due to the latest consumption tax and prices decline. In the third quarter, Mark, our best guess is that volumes will be kind of flattish. And prices could be down slightly again as consumption tax plays out and also from the competition from the European laminators due to the strong dollar.

And then as we look in our crystal ball and the crystal ball isn't always right, but as we look in our crystal ball for the fourth quarter, we would expect some rebound in prices in both Japan and China. That's kind of how we see it playing out.

Mark William Wilde - BMO Capital Markets (United States)

Okay. All right. And then, final question, just when we think about the SLA, Doyle, is it – would we be correct if we think the sort of the biggest issue for you guys in how this plays out is really the impact and sort of value of timber coming off of your Southern and your Western Timberlands?

Doyle R. Simons - President, Chief Executive Officer & Director

There's no doubt, Mark, that that is an important component of getting the SLA right on a go-forward basis.

Mark William Wilde - BMO Capital Markets (United States)

But if we get tougher restraints, could we see you actually increasing the amount of capital you'd put in the saw mills?

Doyle R. Simons - President, Chief Executive Officer & Director

Yeah. Mark, as you know, we have an ongoing – a game plan to – that we've shared with you and others about the capital that we'll be spending in our Wood Products operation on a go-forward basis to make sure we're positioned well, to fully capitalize on the upturn and get our costs to where they need to be. So, spending capital in our Wood Products operation at about the $300 million level that we've done over a past year or two, we think is going to be the right level, at least in the near term going forward.

Mark William Wilde - BMO Capital Markets (United States)

Okay. Thanks, Doyle. Good luck.

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you.

Operator

The next question is from Chip Dillon from Vertical Research Partners.

Chip Dillon - Vertical Research Partners

Yes. Thank you, and good morning, Doyle, Russell and Beth.

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Good morning.

Doyle R. Simons - President, Chief Executive Officer & Director

Good morning, Chip.

Chip Dillon - Vertical Research Partners

So first question – a couple of just accounting things. One is, I know that when you sold the Cellulose business, and congrats on getting that approval, they at least said that the EBITDA in 2015 was $350 million. And I'm just wondering, would that have really been $386 million or does that $350 million not include that corporate cost number for them?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Chip, I'm not – that $350 million is really based on their calculations and based on their models. And so, while we did see that number, you definitely want to look – we're reporting up to the point of where it's going to be out of our system. I really can't comment on how they came up with that particular number.

Chip Dillon - Vertical Research Partners

So, that's what, it was for 2015? But I guess another way to ask the question is if I look at last year's EBITDA, as you reported it for the segment, then obviously about $36 million of the EBITDA would've been $36 million higher without these corporate cost allocations, is that fair?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Yes. That is correct.

Chip Dillon - Vertical Research Partners

Okay. And then the second question is, I know – I believe it's just typically the case, but when you make it a discontinued operations, I believe the number you present in your slide includes all the cash costs, but not depreciation. In other words, you said that it made $52 million, but that, I would assume, does not include depreciation or does that bear any depreciation, or for that matter, any interest expense?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Yes. So we – there's $23 million of depreciation associated with that that was – we stopped, mid-quarter. If you looked at prior quarters, it would be about – the equivalent would be about $38 million of depreciation.

Chip Dillon - Vertical Research Partners

Okay. So, you actually had $38 million per quarter going into the second quarter, but then you did $23 million in the second, and it'll be zero in the third. Is that fair?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Correct.

Chip Dillon - Vertical Research Partners

Okay. That's very helpful. And then just a more broader question, thanks for those details, is when you look at Eastern Canada, I've been hearing that – and I don't think you guys are terribly active there, but as you think about the lumber market, it seems like Eastern Canada, I'm hearing that their harvest or their growth of timber has actually come back in recent years and that there would be more activity there in lumber and perhaps even plywood, but lumber in particular. If there is any market for off take, OSB plants or pulp mills. And do you agree with that? In other words, do you think that you could see potential supply, leaving aside any kind of trade issues, coming from Eastern Canada or do you think that's not likely?

Doyle R. Simons - President, Chief Executive Officer & Director

Yes. Chip, I would say, at least from our standpoint, it's in the not likely category. We have not seen what you're referencing and don't think additional capacity or additional capabilities are going to be available in Eastern Canada.

Chip Dillon - Vertical Research Partners

And would you say it is fair in the Eastern half of the country, I'm not so sure about the West part of the continent that your residuals can often by a very material percentage of your profit?

Doyle R. Simons - President, Chief Executive Officer & Director

That's a – it's an important part. That's right.

Chip Dillon - Vertical Research Partners

Understood. Thank you.

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you.

Operator

Your next question is from Mark Connelly from CLSA.

Mark Connelly - CLSA Americas LLC

Thank you. Doyle, is it safe to say that with the better lumber prices and very successful asset sales that you're feeling pretty good that Weyerhaeuser has addressed the rating agencies issues and that at this point, you've got room to execute on your buybacks the way you want to rather than to make them happy.

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Yeah. Mark, this is Russell. We definitely spend time at the rating agencies to make sure that they understand our deposition and our EBITDA generation. And we're very comfortable with where we're at with the rating agencies and our current investment grade rating.

Doyle R. Simons - President, Chief Executive Officer & Director

And Mark, as you referenced the share repurchase – we have, as we said, we were going to do it on an accelerated basis. We've essentially completed the $2 billion in, I guess, less than six months and did it in what we think has been a attractive value from our shareholder perspective of less than $29.50 per share. So, pleased with the progress that we've made on the share repurchase.

Mark Connelly - CLSA Americas LLC

That's super. And just one quick comment or question on the log realizations. We've heard that smaller land owners in the South had been more aggressive. Do you think that's one of the reasons why we haven't seen log prices keeping up? Or is that not as widespread as we're hearing?

Doyle R. Simons - President, Chief Executive Officer & Director

I think that is a component of what has happened on the log pricing. Small land owners, you never exactly what motivates them or when they bring things to market. But clearly there, we have seen some of that happening over the past year or two.

Mark Connelly - CLSA Americas LLC

Okay. Thanks very much.

Doyle R. Simons - President, Chief Executive Officer & Director

Thank you.

Operator

The next question is from Gail Glazerman from Roe Equity Research.

Gail S. Glazerman - Roe Equity Research, LLC

Hi. Good morning. A quick question...

Doyle R. Simons - President, Chief Executive Officer & Director

Hi, Gail.

Gail S. Glazerman - Roe Equity Research, LLC

A quick follow-up on the buybacks. If I remember correctly, it was initially going to be $2 billion of the $2.5 billion was going to be accelerated, and I'm just wondering if you could give some perspective on your approach to that remaining $500 million?

Doyle R. Simons - President, Chief Executive Officer & Director

Yes.

Gail S. Glazerman - Roe Equity Research, LLC

Will that be also accelerated or more opportunistic?

Doyle R. Simons - President, Chief Executive Officer & Director

Yes. So, you're exactly right, Gail. What we've said is that the authorization for the $2.5 billion, if we will do $2 billion on an accelerated basis, and as I just mentioned, we have essentially completed that. We've also said consistently that once we do, we'll take a pause and we'll work closely with our board to determine the timing of the additional $500 million. So, that's what we'll be doing.

Gail S. Glazerman - Roe Equity Research, LLC

Okay. This might be a little off the wall, but (43:14) used to talk about trying to build an export market out of the South? And is that something, an effort that you're continuing, and what your view would be from that, on the long-term?

Doyle R. Simons - President, Chief Executive Officer & Director

Sure. We are, as you would anticipate constantly evaluating our markets and the way to grow markets. As you also know, the South is very small in terms of export market currently, but we'll continue to look at opportunities as we move forward, and we think that market will in fact develop over time.

Gail S. Glazerman - Roe Equity Research, LLC

Okay. And just one last one, yesterday, your partner with some of the development plans, and around the Carolinas is talking about an accelerated monetization. And I was just wondering if you could give some perspective on how that might affect Weyerhaeuser?

Doyle R. Simons - President, Chief Executive Officer & Director

Yeah. So those are the joint venture partnerships that Plum Creek entered into. And we have been in discussions with them, and we're aware that they're seeking to do an accelerated program to divest to some of those properties. Given that's a joint venture, we treat that as equity accounting. We'll see the benefit of that as they execute on that plan.

Gail S. Glazerman - Roe Equity Research, LLC

Okay. Thank you.

Operator

The next question is from Mark Weintraub from Buckingham Research.

Mark Weintraub - The Buckingham Research Group, Inc.

Thank you. Just wanted to follow-up on the real estate, and the stepping up of activity there later this year and into next year, is that primarily going to be on legacy Weyerhaeuser lands or would we – should we expect it to be a mix of legacy Weyerhaeuser and Plum Creek? Because obviously the Plum Creek land presumably were stepped up, but the Weyerhaeuser lands haven't been.

Russell S. Hagen - Chief Financial Officer & Senior Vice President

So, Mark, this is Russell. We'll see a mix, but we may see some more Plum Creek lands coming in, in the third and fourth quarter, which will result in a little higher bases because of that step-up. As we look at the combined portfolio, obviously, we're focused on getting to the Weyerhaeuser lands through the AVO process. But in conjunction with that, we're looking at all the opportunities on the combined portfolio. And it really does provide us with a lot of optionality as far as which lands to bring to market.

Mark Weintraub - The Buckingham Research Group, Inc.

Okay. And then, shifting gears a little bit, but any kind of big picture thoughts on how you'll be going about the dividend recognizing you had a lot of improvement in your Wood Products business. It's kind of underlying earnings there. Yet, Timber has maybe been a little bit slow to see the price improvement in the South. How – what might be a kind of a helpful way of thinking through how you'd be approaching the dividend at this point and if it's changed at all as your mix of businesses have changed quite a bit in the last year or so?

Doyle R. Simons - President, Chief Executive Officer & Director

Yeah, Mark. As you know, we're committed to a growing and sustainable dividend. 2016 is going to be very noisy as we continue to move forward and lots of moving pieces. As we look into 2017, we're going to continue to benefit from cost and operational synergies, continued OpEx improvements, strong housing market, all those types of things.

We will be spending time with our board as we move forward to figure out exactly how to think about the dividend on a go-forward basis with the mix of assets that we now have with the much more stable earnings stream that comes from Timberlands and then the improvements that we've made in our Wood Products to take some of the volatility out of that, and most importantly probably to eliminate some of the downside in our Wood Products operation on a go-forward basis. So, all things that would be factoring in to what the appropriate level of our dividend is on a go-forward basis.

Mark Weintraub - The Buckingham Research Group, Inc.

Okay. And one last one if I could, the tax rate guidance, 18% to 20% I guess a little higher than I would have anticipated. And maybe, what one question would be, does the interest expense – can that get allocated to taxable – the taxable REIT subsidiary or does some of that actually run through the – not get that benefit?

Russell S. Hagen - Chief Financial Officer & Senior Vice President

Yeah. So, Mark, we're guiding the 18% to 20% for our full year tax rate. As far as the allocation of the interest expense between the taxable REIT subsidiary and the REIT, we actually have debt that is associated with taxable REIT subsidiary. So, that's allocated and tax effected accordingly. And then, there's debt associated with the REIT assets. So, you'll get a blended rate.

Mark Weintraub - The Buckingham Research Group, Inc.

Okay. I'll circle back. Thank you.

Operator

That is all the time we have for questions today. Presenters, do you have any closing remarks?

Doyle R. Simons - President, Chief Executive Officer & Director

Yes. Thanks everybody for joining. As indicated, that was our final question, and I'd just like to close by thanking everybody for their interest in Weyerhaeuser. Take care.

Operator

This does conclude today's conference call. Thank you for your participating. At this time, you may now disconnect.

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