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Weyerhaeuser Company (NYSE: WY)
Q2 2018 Earnings Call
Jul. 27, 2018, 2:00 pm ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser Second Quarter 2018 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. If you would like to ask a question during this time, simply press star then the No.1 on your telephone keypad. If you would like to withdraw your question press the pound key.
I will now turn the call over to Ms. Beth Baum, Senior Director of Investor Relations. Please go ahead maam.
Beth Baum -- Senior Director of Investor Relations
Thank you Dennis. Good morning everyone and thank you for joining us today to discuss Weyerhaeuser's second quarter 2018 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call.
We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are the Doyle Simons, Chief Executive Officer and Russell Hagen Chief Financial Officer. I will now turn the call over to Doyle Simons.
Doyle Simons -- Chief Executive Officer
Thank you Beth, and welcome everyone. This morning, Weyerhaeuser reported second quarter net earnings of $317 million or $0.42 per diluted share on net sales of $2.1 billion. Second quarter results include net after-tax charges of $15 million per special items, excluding special items we earned $332 million or $0.44 per diluted share. This is an improvement of 21% compared with the first quarter and 57% higher than a year ago. Adjusted EBITDA for the company totaled $637 million, 17% more than the first quarter and 26% more than a year ago.
I'm very pleased with our second quarter results. Our business has delivered solid operating performance and capitalized on very favorable markets for Lumber, OSB, and Western logs. This enabled us to drive a highest Wood Products EBITDA on record and Weyerhaeuser's highest quarterly EBITDA since 2006 when the company's operations were nearly three times larger than they are today. Before I discuss our business results in more detail, let me make a few comments regarding the housing market.
Housing market fundamentals remain strong, employment growth continues, wages are rising, and consumer confidence has surpassed pre-recession highs. Although mortgage rates have risen, housing affordability remains very favorable compared with historical averages. First-time and entry-level buyers are eager down at the market and builder sentiment remains positive. As has been the case through this entire recovery housing data remains volatile. Total starts surged to a 11 has in May, then pulled back in June and those variations will likely continue as heat, wet weather, and many other factors affect monthly construction activity.
However, year-to-date trends it's a steady upward trajectory we anticipated. Through June, total housing starts have averaged approximately 1.3 million on a seasonally adjusted annual basis, an improvement of nearly 8% year-to-date. Single-family stats have improved by over 8%. Permit activity remains strong with total permits averaging over 1.3 million year-to-date. Our builder customers telling they're effectively navigating labor and lot availability and cost and are well-positioned to continue meeting turn up demand. For 2018, we continue to expect approx-.
Approximately, 1.3 million total housing starts with single-family starts of nearly 10%. Let me now turn to our business segments. I will begin the discussion with Timberlands charts four to six. Timberlands contributed a $161 million to second quarter earnings compared with a $189 million in the first quarter. Adjusted EBITDA totaled $240 million, $28 million lower than the first quarter, but $18 million more than a year ago. Western Timberlands delivered a $152 million of second quarter EBITDA, $13 million lower than the first quarter but $28 million higher than a year ago.
Demand for Western domestic logs remained favorable throughout the quarter as record lumber prices both continued purchases and average log sales realizations improved slightly. Pricing in some regions softened late in the quarter due to a seasonal increase in log supply from non-industrial landowners. However many Oregon markets remained tensioned as mills built log decks in the advance of the third-quarter fire season which has begun earlier-than-usual. Fee harvest volume declined slightly compared with the first quarter. Unit logging and hauling costs increased due to rising fuel cost and longer hauling distances as snow diminished and cruse began to harvest higher elevation stands. Silviculture and road expenses also increased, this activity typically accelerates in the second quarter due to improved weather.
Turning to our export markets. In Japan, demand bar logs remained solid and average log sales realizations were comparable to the first quarter. Log sales volumes declined slightly due to timing of shipments. Compared with the year-ago quarter, sales volumes were moderately higher and realizations improved substantially. In China, sales volumes increased nicely compared with the first quarter and average realizations were slightly higher. Construction activity and daily log takeaway remains very solid and log inventories at Chinese ports declined during the quarter. Overall, Chinese demand for our logs remains very favorable and our volumes and realizations were significantly higher than a year ago.
Moving to the South. Southern Timberlands contributed $84 million to second quarter EBITDA compared with $98 million in the first quarter. Average log sales realizations decreased slightly due to a heavier mix of pulpwood and slightly lower pulpwood realizations. Average realizations for Southern sawlogs were flat. Fee harvest declined 2% versus the first quarter and per unit harvest and hauling costs increased due to additional spending activity and higher fuel cost. Other revenue also declined seasonally. Compared with the year-ago quarter, EBITDA declined due to higher fuel cost and lower average pulpwood realizations. Northern Timberlands contributed $3 million to EBITDA, $3 million less than the first quarter but a million more than a year ago. Fee harvest volumes declined seasonally and spring breakup limited activity in some areas. Average realizations improved compared to the first quarter as strong lumber prices drove demand for hardwood sawlogs.
The Timberlands business is making good progress against its 2018 operational excellence initiatives and is on track to achieve its 40% to $50 million OpEx target for the year. Key focus areas include improving the productivity of harvesting, and hauling operations, reducing load cost, optimizing forestry spending, and maximizing the revenue from every log we harvest. Real Estate Energy and Natural Resources, Charts seven and eight. Real Estate and ENR contributed $22 million to second quarter earnings and $47 million to adjusted EBITDA. EBITDA was $6 million higher than the first quarter and $10 million more than a year ago. Contribution to earnings decreased slightly compared with first quarter due to a higher average land basis for the mix of properties sold.
In average price per acre increased significantly compared with the first quarter due to mix. Our acreage sales when in Montana where timberland prices are regionally lower. EBITDA from Energy and Natural Resources increased compared with first quarter due to seasonally higher sales of construction materials. The real estate business is solidly on track to meet or exceed its targeted 30% premium to timber value for 2018.
Wood products, charts nine and 10. Wood products contributed $349 million to the second quarter earnings before special items, nearly a $100 million more than the first quarter. Adjusted EBITDA totaled $385 million. This is the highest quarterly EBITDA ever for this business, an improvement of over 40% compared with a year ago. EBITDA for lumber totaled a $195 million, $55 million more than the first quarter and over 50% more than a year ago. Compared with the first quarter, our average sales realizations improved 9% and sales volumes increased by nearly 11%. This was partially offset by higher Western and Canadian log cost. Lumber prices increased through much of the second quarter as strong building activity drove consistent demand and rail supply issues continued to constrain shipments for many Canadian producers.
As rail service began to normalize late in the quarter, industry shipment volumes increased with framing lumber usage typically model as the second quarter concludes. Pricing is sailing while channel inventories recalibrate. Although the worst Canadian rail disruptions had been resolved, transportation logistics remained challenging for both rail and truck shipments due to tight supply and strong summertime shipping demand. Our wood products team has done an outstanding job identifying options such as direct tracking, additional reloads, and railcar repositioning to flow product customers and as of today, we have cleared all of our shipment backlog.
Second quarter charges for countervailing and anti-dumping duties on Canadian softwood lumber totaled $6 million compared with $5 million in the first quarter. As of the first quarter 2018, these duties are no longer reported as a special item. OSB contributed $129 million to EBITDA, 37 million more than the first quarter and nearly 50% more than a year-ago. Pricing rose throughout the quarter due to continued strong demand and average sales realizations increased by 17%. Sales volumes increased 2% and fiber costs increased slightly. Engineered wood products contributed $58 million to EBITDA, $13 million more than the first quarter and $6 million more than a year ago.
Average sales realizations improved approximately 3% compared with the first quarter as we continue to capture the benefit of our early 2018 price increase and sales volumes improved due to seasonally higher demand. Unit manufacturing costs were comparable to the first quarter as improved operating rates offset higher prices for oriented strand board. Distribution contributed $12 million to the second quarter EBITDA, $3 million more than the first quarter and slightly lower than one year ago due to higher bills and labor costs. This business remains highly focused on managing costs and product margins.
Second quarter wood products results include one special item, a net pre-tax charge of $20 million per finalization of remediation costs associated with our flag jacket product. Wood products is on track to achieve its OpEx target of $40 to $60 million in 2018. Teams are highly focused on reducing controllable cost, increasing fiber recovery, improving mill reliability, enhancing product margins, and maximizing the benefit of focused capital investments. I will now turn it over to Russell to discuss some financial items and our third quarter outlook.
Russell Hagen -- Chief Financial Officer
Thank you Doyle, and good morning? The outlook for the third quarter is presented in chart 13 of the earnings slides. In our Timberlands business as is customary, we expect our third quarter earnings and adjusted EBITDA will be seasonally lower than the second quarter, slightly higher than the third quarter a year ago. In our Western Timberlands operations we expect third quarter fee harvest volumes, will be comparable to the second quarter. Domestic log demand is expected to be stable during the third quarter, with third quarter average sales realizations at levels slightly below the second quarter average.
Third quarter realizations could be higher if a severe fire season limits regional log supply during the quarter. Japanese export log volumes are expected to be comparable to the second quarter, while average sales realizations are expected to be slightly lower. Overall we're seeing continued steady demand from our Japanese customers. Chinese export demand remains strong. However, sales volumes are expected to soften which is typical during the summer months.
Log realizations are expected to be slightly lower. Western road costs are expected to be seasonally higher. Log and haul costs will also increase as we continue to harvest at higher elevations, through the summer months, resulting in longer haul distances. Fuel costs are also expected to increase. In the south, we anticipate third quarter average sales realizations will be comparable to the second quarter, and fee harvest volumes will be seasonally higher.
Silviculture and forestry spending, in the south is expected to increase as we perform more hardwood management, and site prep work during the drier weather, and continue our thinning activity. We also anticipate higher fuel costs and per unit log and haul expenses. In the North, we anticipate third quarter harvest volumes will be significantly higher than the second quarter, as we move past the spring breakup season. Real Estate, and Energy and Natural Resources, earnings and adjusted EBITDA for the quarter, are expected to be 35% to 40% higher than the second quarter.
As a typical real estate business, markets are most active in the summer and four months, with the largest portion of sales closing in the fourth quarter. We continue to expect approximately $250 million of adjusted EBITDA, from our Real Estate and Energy and Natural Resources business in 2018. Second-quarter land basis, as a percentage of real estate sales, was slightly higher than our full-year guidance of 40% to 50%, due to the mix of acres sold.
We now anticipate that land basis will be at the higher end of this range for the full year 2018. For Wood Products we expect third quarter earnings before special items and adjusted EBITDA will be 10% to 15% lower than second quarter, the significantly higher than a year ago, this includes a $25 million impact, from extended maintenance downtime at our Grayling OSB mill, as we undertake a scheduled press replacement.
Although pricing is often from record highs, we anticipate lumber and OSB prices will stabilize over the next few weeks, and average realizations for the third quarter will be moderately lower than the second quarter average. Sales volumes for lumber, should be comparable to the second quarter, sales volumes for engineered wood products should increase. Third-quarter OSB volumes will be approximately 10% lower than the second quarter due to the Grayling press replacement.
Chart 11 outlines the major components of our unallocated items. The $26 million favorable variance and earnings before special items, compared with the first quarter is primarily attributable to the non-cash elimination of intersegment profit in inventory and LIFO reserve. During the first quarter, we incurred an expense as we built inventory of logs, and lumber, at higher prices. In the second quarter we began to deplete those inventories, are unallocated pension and postretirement benefit costs also decreased. Each year in the second quarter, we finalized prior year and estimates for pension plan assets and liabilities. As a result of this work, we now expect to record a total of approximately $75 million in non-cash, non-operating pension, and postretirement expense for the full year 2018.
A reduction of $25 million from our prior guidance should result in a non-operating pension and post-retirement expense of approximately $19 million for each of the remaining quarters in 2018. Chart 12 summarizes our key financial items. We ended the quarter with a cash balance of $901 million. Cash from operations during the second quarter was $597 million, an increase of $461 million over the first quarter, which is typically the lowest cash flow quarter of the year. Capital expenditures for the second quarter totaled $97 million. We continue to expect total CAPEX will be approximately $420 million, $300 million for Wood Products and $120 million for Timberlands.
Moving on the debt, we ended the quarter with approximately $5.9 billion of debt outstanding. We have no remaining maturities in 2018. Moving on to taxes, we continue to expect our 2018 effective tax rate to be between 11 and 13% based on the forecasted mix of earnings. Finally, I'd like to update you on our share repurchase activity. During July, we have purchased $75 million, or approximately $2 million shares at an average price of $34.82 per share. As of yesterday, we have $425 million remaining on our share repurchase authorization. I'll turn the call back to Doyle and look forward to your questions.
Doyle Simons -- Chief Executive Officer
Thank you, Russell. Our second quarter financial performance was the strongest in over a decade, and I'm incredibly proud of the effort our teams have put into achieving these results. They reflect several years of hard work to capture OPEX opportunities, improved relative performance in each of our businesses, and position us to capitalize on the markets we are experiencing today. At the same time, we have significant runway ahead. Our operational excellence work is not complete and with favorable housing fundamentals, strong market outlooks, and a relentless focus on improving our relative performance, we will be well-positioned to drive as much value as possible for shareholders. Now, I'd like to open the floor for questions.
Operator
At this time, I would like to remind everyone, in order to ask any question simply press star, then the No.1 on your telephone keypad. We'll pause for a moment to compile the Q and A roster. Your first question is from the line of Anthony Pettinari with CITI. Please go ahead.
Anthony Pettinari -- Citi -- Analyst
Good morning.
Doyle Simons -- Chief Executive Officer
Morning Anthony.
Anthony Pettinari -- Citi -- Analyst
Doyle, you're generating record cash from Wood Products, you were very conservatively levered coming into the quarter and now you're more under-levered. I was wondering if you could talk about capital allocation. There are properties out there in the market that are potentially good value, are there parts of your portfolio that could be augmented through acquisition? Or, Russell talked about your share repurchases in July, are there opportunities to accelerate your buybacks? Is that a sign of things to come? Any thoughts you could share would be helpful.
Doyle Simons -- Chief Executive Officer
Sure. So let me talk about how we think about capital allocation in our financial priority. First and foremost, as we've talked about it as returning cash to shareholders, as you alluded to, as we continue to capitalize on strong market conditions and our OPEX improvements, we're generating lots of cash. We're committed to returning cash to shareholders primarily through a growing dividend, but also through opportunistic share repurchase.
As Russell just mentioned in the last week or so, we have repurchased $75 million of shares and we will continue to work very closely with our board review opportunities to continue to return cash to shareholders through a growing dividend, share repurchase, or both. In terms of other uses, our CAPEX is going to be roughly $420 million this year, probably, similar level next year and then it'll start to trend down. We will also look for growth opportunities, Anthony, and as we've said, those will be.
Primarily in Timberlands, but we will be very disciplined in finding opportunities that we think create incremental shareholder value on a go-forward basis, and with our land base that allows us to be very disciplined and very choosy as to what opportunities we look at from a growth perspective. Then finally, in terms of capital allocation and you already alluded to it, we're committed to maintain a strong balance sheet, but our balance sheet is in very good shape currently.
Anthony Pettinari -- Citi -- Analyst
Okay, that's helpful. Then just on the wood products side, do you still expect to complete the black at the bottom initiative by year end, and then where do you think Wood Products CAPEX could shake out moving forward kind of relative to the 300 million you expect this year, and do you see opportunities after the work at the auction mill port for CAPEX investments in your Lumber Mills?
Doyle Simons -- Chief Executive Officer
So, in terms of the CAPEX, Anthony, as you know we're about $300 million this year, I would anticipate a similar number next year and then start to trend down probably an ongoing number, round numbers would be in the 250 range in terms of CAPEX. In terms of additional opportunities, we'll continue to find opportunities to spend capital in our Wood Products operation primarily to focus on continuing to drive down costs and some of that $250 million will be spent on exactly those type of projects.
In terms of Black at the bottom and just remind everybody what that is, is when you go back and recreate the situation that occurred back in the last downturn, we model that and we figured out what our cost structure needed to be to, if we have that type of situation again none of us anticipate or hope that we do but if we do go through another recession at that level we wanted to make sure that our Wood Products operation would be positive cash flow. By the end of 2018 when we accomplish our $40 to $60 million of OPEX, we will be at the level where we would be black at the bottom if we went back into what we referred to as the great recession.
Anthony Pettinari -- Citi -- Analyst
Okay, that's helpful. I'll turn it over.
Operator
Your next question is from the line of Brian Maguire with Goldman Sachs, please go ahead.
Brian Maguire -- Goldman Sachs -- Analyst
Hey, good morning everyone.
Doyle Simons -- Chief Executive Officer
Good morning Brian.
Brian Maguire -- Goldman Sachs -- Analyst
Hi Doyle, just wanted to ask on some of those inflationary cost pressures you talked about seemed like fuel and transportation in general is the part of the worst one, but labor I suppose also propositions of tightness, just wondering if you could comment on what trends as you exited the quarter and head into 3Q and the outlook for the back half of the year are you expecting some pickup in those inflationary pressures and are there any opportunities to put in surcharges or other things to offset it or do you just let the market prices take care of that?
Doyle Simons -- Chief Executive Officer
So, as you just referenced, our experienced cost inflation is primarily related to fuel and transportation, labor and input costs are also rising, but to a much lesser extent just to give you a sense those cost own that from a fuel and transportation were up less than $5 million in the second quarter versus the first quarter. So there are numbers, but we're doing everything we can to manage those and offset those that primarily through our OPEX efforts and things like improving our efficiency, our truck scheduling, capital and non-capital improvements to the efficiency of our materials usage, all those types of things are things we're focused on to try to offset the inflationary costs that we are experiencing and probably will continue to experience for the next few quarters.
Brian Maguire -- Goldman Sachs -- Analyst
I appreciate that. Obviously, the quarter lumber and OSB prices got pretty high, it's corrected some lately. Just wondering maybe you can share your thoughts on where you think that the correction needs to eventually rebased out at, and how much of it is just tied to seasonality, and how much of it is tied to the better rail availability, and logistics and better supply availability in general?
Doyle Simons -- Chief Executive Officer
Sure. We spend a lot of time thinking about this. So, let me give you our perspective on what's happened in the lumber market this year. So, if you start back in Q1, we had lane inventories, we had continued growth in demand driven by housing, that was partially offset by weather. You had supply constraints primarily due to transportation. So, you had a positive pricing environment, and prices were up nicely in the first quarter as we all know. You then moved into the second quarter, we did have lean inventories.
Had strong demand driven by continued improvement in housing and seasonality, you had continued supply challenges. Although those- the transportation got better late in the second quarter. But in the second quarter, you had a very positive pricing environment, and prices were up sharply. As we moved into the third quarter, inventories are still in good shape, but you had slower demand seasonally, you had the transportation challenges abating, resulting in more suppliers.
So, not surprisingly pricing is pulling back, which normal seasonally. Looking forward to your point while we continue to see some volatility, we anticipate for the remainder of 2018 and 2019 that lumber prices will continue to be at favorable levels, supported by lean inventories, strong U.S. housing demand, and a lagging industry supply response. In connection with what's happening right now as Russell said in his comments, prices are solved, we anticipate that they will stabilize over the next few weeks. That's what we have built into our third quarter projections.
Brian Maguire -- Goldman Sachs -- Analyst
So, stabilizing around current levels, or maybe just modestly lower than where we're at today, is that about about right?
Doyle Simons -- Chief Executive Officer
Correct. That is correct.
Brian Maguire -- Goldman Sachs -- Analyst
Okay. That makes sense. Just one last one for me. The June housing starts where we don't want to make too much out of one month, a lot of noise in the numbers. But some people will call it out maybe impacts of higher lumber prices. Maybe given some of the home builders pause with caution, did you see any signs of that? Do you think with this correction back in lumber prices we might see some pickup back in that starts activity now?
Doyle Simons -- Chief Executive Officer
We've heard some of that. You've got to remember that only roughly 2% of the cost of a new house is attributable to lumber prices. So, while I think it may have some effect on the margin, both when it's up and when it's down, I don't think that's a big catalysts for what happens on the housing stats or housing sales numbers.
Brian Maguire -- Goldman Sachs -- Analyst
Okay, thanks very much.
Doyle Simons -- Chief Executive Officer
Thank you.
Operator
Your next question is from the line of George Staphos with Bank of America Merrill Lynch. Please go ahead.
George Staphos -- Bank of America Merrill Lynch -- Analyst
Thanks everyone. Good morning and thanks for all the details to Doyle and team. Doyle, maybe starting up big picture I had a couple of nuts and bolts to follow. You've been through more than one cycle, what gives you comfort given your many years of experience and a lot of that in wood products, that this isn't based on what we're seeing in the markets concern, isn't the beginning of a bigger downturn? What gives you comfort based on your experience? Putting aside, we know what the longer term housing stat numbers shouldn't be based on demographics. What based on your experience tells you this is a part that still has a lot of runway?
Doyle Simons -- Chief Executive Officer
I think it's all the things or some of the things that you just referred to. If you're talking specifically about housing George, it just is the demographics, it's the wages, it's all the things that ultimately drive demand for housing and all of those continue to be very positive. We spend a lot of time with our home builder customers and they continue to be positive and are seeing good activity.
If you're talking about the lumber or OSB, if I've learned anything and I think, what you said is a nice way of saying, "I've been around a long time and I'm getting old." That's correct but all [inaudible] . Exactly. The one thing I've learned George and I think you've learned as well is; supply and demand ultimately is what matters.
If you look at, let's just take lumber for example, while there is additional supply coming on the South, the additional supply that's coming over our own overall from a lumber overall perspective is less than is going to be needed to meet the demand, if housing continues to grow at the rates we think it's going to. Supply and demand ultimately matters and that's why we made the comments I made a little bit earlier that we feel optimistic about lumber prices being generally favorable for the foreseeable future.
Gail Glazerman -- Roe Equity Research -- Analyst
All right. Thanks for that Doyle. I guess maybe to the point you were mentioning on supply and demand as one of the question has a good segue. Can you comment at all what your operating rates look like over the back portion of the year again, within the key wood products businesses and whether there's been any significant change in your outlook or the rates you're running at in the first half of the year adjusted for seasonality if you could?
George Staphos -- Bank of America Merrill Lynch -- Analyst
Then two quickies and I'll turn it over: One, how do you define modestly down in terms of your pricing sensitivity? Would that be like within 5% from current levels? Then, there's capacity going in panels but it's obviously not an OSB, it's an MDF in other parts that don't really compete against yours and Grayling as well. But does that create any kind of labor competitive issue for you as you're operating there and bringing that new press on? Thank you guys. Good luck in the quarter.
Doyle Simons -- Chief Executive Officer
Thank you George. What I would tell you on operating rates is; for the first half of the year, lumber's running the mid-90s, pretty much full out, OSB is running in the mid-90s in ELP lowing running in the high 80s low 90s and I would anticipate continuous strong markets as we talked about and those type of rates going forward excluding our scheduled maintenance. Of course, including scheduled maintenance of our Grayling mill being down the entire third quarter as we had previously announced.
In terms of your last question regarding additional capacity, coming online, and what the impact that has on labor. Labor is a constant struggle. It's something we spend a lot of time on. We feel like we've done a pretty good job on finding the labor that we need. But if additional capacity comes online, that will continue to be a challenge going forward.
I think your other question George, referenced what we think's going to happen with lumber and OSB prices and what we mean by moderately. I guess I would say, as I think as we said earlier, we do think and have built into our third-quarter numbers, that prices will stabilize over the next few weeks. So that's what we have built in. I think it's also important to realize we're talking about averages to averages.
So, if you look at it right now, our third quarter to date averages for lumber and OSB are basically in line with the second quarter. Now clearly, spot prices are down as we've talked about, but as you look at quarter-to-quarter, I think it's important that you realize that there is some averaging that happens there in terms of what we built into those numbers.
George Staphos -- Bank of America Merrill Lynch -- Analyst
Thank you very much, Doyle.
Doyle Simons -- Chief Executive Officer
Thank you.
Operator
Your next question is from a line at the Gail Glazerman with Roe Equity Research. Please go ahead.
Gail Glazerman -- Roe Equity Research -- Analyst
Hey. Good morning. Maybe just sticking on pricing for second. You're looking for pretty near-term stabilization and I'm just wondering, given that the recent trend is actually if anything acceleration of the decline. Are you seeing that? Are you seeing signs emerge or is that still somewhat hopeful that over the next few weeks incremental supply coming out of Western Canada or whatever will have worked it's way out?
Doyle Simons -- Chief Executive Officer
Yeah, I think.
Gail, as you said, at least in the last week, the decline has accelerated, so we are not yet seeing signs of that but as we step back and look at supply and-demand fundamentals, and who knows but we are hopeful and we do anticipate that prices will stabilize. If they don't then, we'll need to adjust the numbers for that but based and on everything we know today, prices ran up more than I think anybody anticipated in the second quarter, they're now recalibrating, we'll see where that is but the fundamental supply and demand balance has not changed the timing issues.
Gail Glazerman -- Roe Equity Research -- Analyst
All right. Maybe shifting to Southern and I guess those log and lumber market. As last quarter you talked about seeing some pockets of tension perhaps starting to build in some of your log markets. Taking a step back, lumber production, the data is pretty large but it's only up about 2% in the south through April but it was up 10% in the west and I'm just wondering, does that surprise you and I know you're seeing other enough outputs starting to respond or do you think that's really just capacity-constrained that doesn't seem consistent with the operating rates being reported on an industry level?
Doyle Simons -- Chief Executive Officer
I think in the South, Gail, our sense of what's happening there is there is a lot of additional capacity that you know that's been announced but it's taking a while to get that built and get that fully up and running. So, I think that number will continue to grow as we move forward but it's just going to take a little time to get there.
Gail Glazerman -- Roe Equity Research -- Analyst
On the log side, are you still seeing some pockets attention around where there has been announcements?
Doyle Simons -- Chief Executive Officer
Yeah. Gail, we are, we're encouraged by what we've seen, where some of the pockets on where new mills have started up and there's a miller and viewer Mississippi where it started up and we've seen some tension in there. Then in Georgia, there's a couple of mills that have been specifically announced, not yet started but we've seen some tensioning in that wood basket. So, we are starting to see pockets of tensioning in wood baskets where additional capacity has either come online or been announced.
Gail Glazerman -- Roe Equity Research -- Analyst
Then just one last quick one. There's been a lot of headlines lately on labor negotiations in the West, just wondering if you can give some insight into where that stands?
Doyle Simons -- Chief Executive Officer
Yeah. So, there have been some headlines regarding labor relations. We are negotiating with our labor union out here in the West, we're continuing to work with union leaders and we look forward to reaching an agreement on that front.
Gail Glazerman -- Roe Equity Research -- Analyst
Okay. Thank you.
Doyle Simons -- Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Collin Mings with Raymond James, please go ahead.
Collin Mings -- Raymond James -- Analyst
Thanks. Good morning all?
Doyle Simons -- Chief Executive Officer
Morning Collin.
Collin Mings -- Raymond James -- Analyst
Morning. Going back to Anthony's question just on the capital allocation front. Just as you think about the after-mentioned strengthened in wood products, the balance sheet and the progress toward the black at the bottom initiative, has the thinking regarding tying a more sizable dividend bump to Southern log prices evolved at all?
Doyle Simons -- Chief Executive Officer
Collin, as we said, we're generating a lot of cash in the company. Right now, we're spending a lot of time with our board regarding how to best deploy that cash we as Russell talked about have lost $75 million of shares back and we'll continue to work with our board regarding the proper level of a dividend going forward, southern sawlog will be a factor. Clearly that is considered in an important factor but it's one of many factors that we and the board think about regarding the appropriate dividend level going forward.
Collin Mings -- Raymond James -- Analyst
Switching over to Wood Products recognizing there is some seasonality, but on EWP just how you think about the sustainability of kind of recent EBITDA generation?
From that segment in particular, because again it's a very strong results during the quarter and some outside strength there.
Doyle Simons -- Chief Executive Officer
Yeah. We're encouraged by what we see in EWP. As you know Collin, we had a price increase announced in early 2018, we captured about half of that, we anticipate capturing the other half through the fourth quarter. Demand continues to be good for that product. Our teams have done a really nice job of figuring out ways to lower cost and run more efficiently and more effectively, in our EWP operations. So, we're encouraged by what we've accomplished but we think we still have some runway ahead of us.
Collin Mings -- Raymond James -- Analyst
Okay. Just one last one from me, and I will turn it over. Can you expand on, just prepared remarks on Japan? It appears wooden construction starts there have been trending down year-over-year for several months. Just, what are you hearing from your customers in that market? How they respond, what's really the strength in log pricing in the Pacific Northwest over the last several months? If you could put a little bit more color on the Japan business, just given how important that is to your export platform.
Doyle Simons -- Chief Executive Officer
Sure. I will try to do that, and it is important. What I would tell you is, Japanese demand remained steady. Log inventories are moderate, posting being while general housing starts are down I think 4% year-to-date, posting being, which is our market is relatively stable, I think down 1%, 1.5% so far this year. Our outlook for third quarter is for stable volumes and slightly lower pricing. The other thing you should probably start to think about, is there is another consumption tax increase schedule for the fall of 2019. We do typically see some demand pulled forward and advance as such increases, assuming that actually plays out. So, that's kind of how we think about Japan.
Collin Mings -- Raymond James -- Analyst
That's helpful color. Thanks, Doyle.
Doyle Simons -- Chief Executive Officer
Thank you.
Operator
Your next question is from the line of Mark Wilde, with BMO Capital Markets. Please go ahead.
Mark Wilde -- BMO Capital Markets -- Analyst
Good morning Doyle. Good morning Russell.
Russell Hagen -- Chief Financial Officer
Morning.
Doyle Simons -- Chief Executive Officer
Morning, Mark.
Mark Wilde -- BMO Capital Markets -- Analyst
Just to kind of start out here, I'm wondered, can you give us an update on your first half Southern log exports. I mean, you have some pretty aggressive targets for this year in terms of kind of year-over-year improvement in Southern log exports.
Doyle Simons -- Chief Executive Officer
Yeah. We're encouraged by what's happening in the Southern export markets. We're continuing to grow our export business out of the South. As you know, we've been exporting Southern Yellow Pine from the Atlantic Coast. That's the India and China, and then early this month in July, we expanded our operations by starting up another program out of the Gulf South, specifically New Orleans, where we're shipping to China from New Orleans. As we had originally said, we expected triple the size of our export program in 2018 versus 2017, and we're on track to do that. As you look further out, we think there is potential for significant additional upside as we move into 2019 and beyond.
Mark Wilde -- BMO Capital Markets -- Analyst
Okay. Then, switching over to distribution, do you have any kind of read from your distribution business and what you're kind of you hear from others. Just in terms of how full that distribution channel is right now. I know we've been lean in recent years, but I've been hearing when supply was tight in the first and second-quarters, that maybe some distributors we're placing multiple orders and now that product is starting to flow, the system is a little fuller.
Doyle Simons -- Chief Executive Officer
Yeah. I would say from inventory levels, is kind of lean to normal. In that range is how I would characterize from a distribution perspective.
Mark Wilde -- BMO Capital Markets -- Analyst
Okay. Then, if we look at not only your kind of I-Joist and LVL volumes, but the industry numbers out of the APA. They're kind of flattish for the first half of this year. Which is a little bit hard to reconcile with that housing start data that is out there. You got any thoughts on that?
Doyle Simons -- Chief Executive Officer
Yes. What I would say is, I think from a weather perspective and some other things, there's been some challenges in your part of the world, in the East. If you look at break it down between the East and West as we do, the West has been strong, East has been a little weak I think over time, that will rectify itself Mark. But you're right, the numbers look a little out of sync, but I think it's much more of a timing and weather-related issue than anything fundamental.
Mark Wilde -- BMO Capital Markets -- Analyst
Okay. Then, the last one for me, there's a Timber MLP out around Puget Sound that's got a large shareholder that's agitating for a sale. I'm just curious, are there any kind of practical or regulatory issues with you expanding your land position around Puget Sound?
Russell Hagen -- Chief Financial Officer
Mark this is Russell. There's no constraints as far as us being able to expand our ownership in the West.
Mark Wilde -- BMO Capital Markets -- Analyst
Just any kind of any thoughts on the attractiveness of kind of the Northwest versus other parts of U.S. like the South?
Russell Hagen -- Chief Financial Officer
Well, in the West is very attractive given where current log prices are at and we're timber values are, but the South is also very attractive from a long-term investment perspective. So we looked at both of those areas very closely as Doyle mentioned, we're in really every wood basket in the United States, and we're very familiar with all the transactions that are out there, and we look at everything and if it makes sense, and add shareholder value, we'll pursue that.
Mark Wilde -- BMO Capital Markets -- Analyst
Okay, fair enough. Good luck in the second half.
Doyle Simons -- Chief Executive Officer
Thank you.
Operator
Your next question is from a line of Mark Connelly with Stephens. Please go ahead.
Mark Connelly -- Stephens Inc. -- Analyst
Doyle, just one question. How do you think about the cyclicality of the real estate business these days and housing's obviously strong but, I'm trying to get a handle on how much of a secular tailwind do you think you have in that business given the reemphasizing you've done over the last couple of years?
Russell Hagen -- Chief Financial Officer
So this is Russell, as far as our real-estate business, we do have some tie-in with just the cyclical nature of the housing market as we see some of our properties sold to developers, but a lot of our real estate activity is driven by higher and better uses: recreational uses, conservation uses, alternatives to commercial type timber operations. So, while we do see a little bit of that, I think the overall trend really sits with the availability of discretionary spending from the buy-side and we're seeing the strong markets in the South and in the West for our real estate program.
Mark Connelly -- Stephens Inc. -- Analyst
So Russell, do you think that's going to be a continued source of growth or steady performance?
Russell Hagen -- Chief Financial Officer
Our target is for $250 million of EBITDA from the Real Estate Energy and Natural Resources Business. We've really positioned this business to run it for the long term. As we've mentioned, we've gone through our AVO process which is really our methodology of identifying that subset of acres that have a higher value than commercial Timberland operations, and we positioned that portfolio really to sell-through over the next 10 to 15 years. So, Mark, I think that's going to be steady-state business with some upside as we see continued pricing appreciation.
Mark Connelly -- Stephens Inc. -- Analyst
Sure. Super. Thank you.
Operator
Your next question is from the line of Mark Weintraub with Buckingham Research. Please go ahead.
Mark Weintraub -- Buckingham Research Group -- Analyst
Thank you. I just wanted to just talk a little bit, you kind of been grouping OSB and Lumber together and some of the comments in terms of expecting stabilization, et. cetera, but it strikes me that maybe there are some different dynamics in the markets as well. I wanted to get your feel on it. In particular, there's been a lot of OSB capacity that has started up in the first part of the year, and I'm curious as to whether or not you think that production is now being felt in the market, and whether or not there's the likelihood of there being potentially divergent behavior between OSB and Lumber at least over the short to medium term given, maybe some different dynamics on the capacity side even if the demand drivers tend to be the same.
Doyle Simons -- Chief Executive Officer
Mark, good question. I think short-term not medium-term or long-term but short term, there is the possibility for divergence for the reasons that you outlined. There has been additional capacity that's come online. It's been slower to come online than anybody expected but it seems to now be happening. So I think in the very short term you could see as we've said all along, when it comes on it tends to be lumpy and you could see one of those lumps happening in the short term, but if you look at it a little longer term.
Essentially, our demand is growing at about a billion board feet a year. Supply is ramping up at roughly the same rate. Yes, we going to have these towns where it gets chunky, and you have a big chunk coming on at the same time, but if you just step back again, and like I said in number and look at the supply and demand equation and the amount of growth and the amount supply that's coming online, operating rates very high, it feels like we should experience favorable pricing for OSB going forward.
Mark Weintraub -- Buckingham Research Group -- Analyst
Okay. Thank you. Then obviously, lots of talk on trade wars and China in particular, as you think about potential implications for Weyerhaeuser, what would you highlight?
Doyle Simons -- Chief Executive Officer
Market has a lot of uncertainties, you very well know regarding trade policy in China tariffs. What I would tell you at this point is now the proposed tariffs on U.S. goods did not affect our export logs, thus far we've not seen any impacts to our business. If something does change, we'll figure out a way to manage through this. The bottom line is China does need to source some percentage of their logs from the United States on go-forward basis.
Mark Weintraub -- Buckingham Research Group -- Analyst
Okay, that's helpful. Just lastly, I know the tax rate seem to be, if I'm doing my math right, it was a fair bit higher in the second quarter, and what is that just because you made more money in the Wood Products business than you were expecting, and then it comes back down in the second-half of the year because again, it looked like it was two or three sense from a higher tax rate in the second quarter than what I would've expected.
Russell Hagen -- Chief Financial Officer
Mark, this is Russell. Yeah, that's correct, we just generate more income in our taxable subsidiary, basically, the Wood Products business, but the full-year guidance is still at the 11% to 13%.
Mark Weintraub -- Buckingham Research Group -- Analyst
Thank you.
Operator
Your next question is from the line of Chip Dillon, with Vertical Research. Please go ahead.
Chip Dillon -- Vertical Research -- Analyst
Yes. Good morning Doyle. Good morning Russell. My first question has to do with the strong cash generation in the quarter. I think, you mentioned that the second quarter was, if I heard you right, was technically not one of the stronger cash generations, I guess working capital builds up and it's taking your leverage down to 2.2 times. I guess the question is this, do you see more of that cash generation in the in second half? Secondly, as you think about the buyback situation versus acquisition, are we to read into the 75 million and the fact that you're looking to do more on the buyback front as pretty much saying that it's more attractive to buy timber by buying your stock at current levels versus going out and buying land?
Russell Hagen -- Chief Financial Officer
So, this is Russell. On the cash-generation we did have a strong quarter and is our strongest quarter, I would say. It's pretty consistent with our prior-year trends as far as how that cash flow generation will look going forward. As far as the share repurchase as Doyle said, we're committed to the return on the cash order and we'll do this either through dividends and share repurchase so we had an opportunity in July to get into the market and buy 75 million worth of shares. This is part of our overall capital allocation strategy. So, whether it'll be dividends or share repurchase or investing in our business, they're all tied together.
Doyle Simons -- Chief Executive Officer
Chip, we're constantly weighing the benefit of share repurchase versus potential acquisition that they constant analysis that we do and we'll continue to do because just as Russell said, it's all tied together and we're trying to figure out how to allocate capital to create the most value for shareholders going forward.
Chip Dillon -- Vertical Research -- Analyst
Then the second quick question is I think Russell mentioned in his comments that EBITDA and OSB would be down at a 10%, sequentially due to the downtime tied to the press replacement. Did I hear that correctly? Was that a way of saying that it would have been 10% lower in this past quarter or are you guiding us to a $110 million number? If that's the case, how confident are you given the volatility that we typically see in OSB prices?
Russell Hagen -- Chief Financial Officer
Let's be very clear on this. What we said was that the impact from the grayling being down for the entire quarter on EBITDA would be $25 million. We also said that volume out of OSB would be 10% less than it was a year ago based on grayling being down for the quarter.
Chip Dillon -- Vertical Research -- Analyst
Okay. That's very clear, thanks for that clarification. Thank you.
Operator
Your next question is from a line of Steve Chercover with D.A. Davidson, please go ahead.
Steve Chercover -- D.A. Davidson -- Analyst
Thanks. Good morning. I have got a couple of questions and I guess the answer for No.2 was contingent on No.1. So, first of all, does the high levels earnings generated by wood products and maybe real estate too, does it jeopardize the REIT status? I mean, as I recall there used to be some threshold that the TRS couldn't exceed, I think it was 15%.
Russell Hagen -- Chief Financial Officer
So Steve, this is Russell, we have plenty of room in our retail, overall retail, from the incoming asset test even with the elevated income generation in the taxable REIT subsidiaries, so that's not a concern of ours.
Steve Chercover -- D.A. Davidson -- Analyst
Okay, terrific and even if we were to keep going at current levels, it would remain that? That will remain the case?
Russell Hagen -- Chief Financial Officer
Yes. We really don't have a concern with that.
Steve Chercover -- D.A. Davidson -- Analyst
Okay, let me get to No.2. Have you looked into expanding your wood products beyond EWP and perhaps into cross-laminated timber or some of the panelized construction that I think Rico used to actually do?
Russell Hagen -- Chief Financial Officer
Yes, this is Russell. As far as the wood products portfolio, we're very happy with the way it's configured in the Fed that it has with our timber lands, as far as expanding even further downstream into CLT or some of these other emerging wood products businesses. Again, we're very focused on what we do well, in each one of our wood products businesses we're performing very well. We definitely welcome the emergence of those new products in the industry, if CLT will pull on lumber demand, which also improves overall log demand. So, but it's not an area that we would expand into readily.
Steve Chercover -- D.A. Davidson -- Analyst
Great. Thanks Russell.
Operator
Next question is from the line of Paul Quinn with RBC.
Paul Quinn -- Royal Bank of Canada -- Analyst
Yeah, thanks very much. Good morning guys.
Russell Hagen -- Chief Financial Officer
Good morning, Paul.
Paul Quinn -- Royal Bank of Canada -- Analyst
I just have one question. Just wanted to dive in a little bit on the supply demand on lumber side. Lots of announcements have been made on capacity additions to the market and just what your feeling is on whether they'll all come up and your sense from the equipment side when you deal with equipment vendors, what their order files are like, and how easy it is to bring on capacity?
Doyle Simons -- Chief Executive Officer
So Paul, I think they will, all of them is as strong word but I think nearly all of them and I think we probably will see additional announcements as we move forward just because we as an industry are going to need the additional supply to meet the demand. So, pretty encouraged by what we see there and I think nearly all of the ones that have been announced will in fact happen and we could even have additional announcements as we move forward.
With that said, I think you to your second point, it's going to take longer than most people factored in to get those up and fully running. Fortunately, our two big projects; Dierks and Millport, we're ahead of the curve. So, we were able to secure the contractors and as you know, we'll be starting both of those are fairly shortly and in good shape. But I can tell you in talking to contractors and just getting fill for order files they are full. They are very full. So, as a result, I think some of our competitors who have announced these mills, it's potentially going to take longer than the number, longer and maybe cost a little more than originally anticipated.
Paul Quinn -- Royal Bank of Canada -- Analyst
All right. Thanks for that. That's right.
Doyle Simons -- Chief Executive Officer
All right, thank you. I understand it that is our last question, I want to thank everybody for joining us on the call and for your interest in Weyerhaeuser, and hope everybody has a good day and good weekend. Take care.
Operator
Ladies and gentlemen this does conclude the Weyerhaeuser Second Quarter 2018 Earnings Conference Call, you may now disconnect.
Duration: 57 minutes
Call participants:
Beth Baum -- Senior Director of Investor Relations
Doyle Simons -- Chief Executive Officer
Russell Hagen -- Chief Financial Officer
Anthony Pettinari -- Citigroup -- Analyst
Brian Maguire -- Goldman Sachs -- Analyst
George Staphos -- Bank of America Merrill Lynch -- Analyst
Gail Glazerman -- Roe Equity Research -- Analyst
Collin Mings -- Raymond James -- Analyst
Mark Wilde -- BMO Capital Markets -- Analyst
Mark Connelly -- Stephens Inc. -- Analyst
Mark Weintraub -- Buckingham Research Group -- Analyst
Chip Dillon -- Vertical Research -- Analyst
Steve Chercover -- D.A. Davidson -- Analyst
Paul Quinn -- Royal Bank of Canada -- Analyst
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