Weyerhaeuser Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Weyerhaeuser Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer session. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Taylor, Vice President of Investor Relations.

Operator

Thank you, Mr. Taylor. You may begin.

Speaker 1

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's Q2 2023 earnings. This call is being webcast at www.weyerhaeuser. Our earnings release and presentation materials can also be found on our website.

Speaker 1

Please review the warning statements in our press release And on the presentation slides concerning the risks associated with forward looking statements, as forward looking statements will be made during this conference call. We will discuss non GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer and Davey Wold, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Speaker 2

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported 2nd quarter GAAP earnings Of $230,000,000 or $0.31 per diluted share on net sales of $2,000,000,000 Excluding special items, We earned $238,000,000 or $0.32 per diluted share. Adjusted EBITDA totaled $469,000,000 in the 2nd quarter. This is a 19% increase from the Q1 and was largely driven by an increase in Wood Products commodity pricing and strong EWP sales volumes.

Speaker 2

Notwithstanding elevated mortgage rates, we've been encouraged by resilient demand for new homes this year, which provided a nice tailwind for our Wood Products business in the second We delivered solid results in the quarter, and I'd like to thank our teams for their collective efforts and focus on safety, operational excellence and continuing to serve our customers. Before moving into our business results, I'd like to comment briefly on a Timberlands transaction we completed earlier this month. As we reported yesterday, we acquired 22,000 acres of high quality Timberlands in Mississippi for approximately $60,000,000 This acquisition is comprised of highly productive timberlands strategically located to deliver immediate synergies with existing Weyerhaeuser Timber and Mill Operations. With the mature age class and well stocked timber inventory, we expect these timberlands to generate strong cash yields. Additionally, the acquisition offers incremental real estate and natural climate solutions opportunities in the future.

Speaker 2

This transaction is a great example of our ongoing efforts to enhance our portfolio with high quality, well managed timberlands that generate solid returns for our shareholders. As highlighted on Page 22 of our earnings slides, we continue to make great progress against our target to grow our Timberlands portfolio through $1,000,000,000 of disciplined investments between 2022 2025. To date, we've deployed approximately $360,000,000 against this target, including the recent Mississippi transaction and the acquisitions in the Carolinas and Washington, which were completed in 2022. Turning now to our Q2 business results, starting with Timberlands on pages 6 through 9 of our earnings slides. Timberlands contributed $104,000,000 to 2nd quarter earnings.

Speaker 2

Adjusted EBITDA was $172,000,000 A $16,000,000 decrease compared to the Q1. This was largely driven by lower average sales realizations for export logs in the West. Turning to the Western domestic market, favorable weather conditions during the quarter supported increased log supply across the region. Log demand improved as mills returned to more normalized operating levels in response to strengthening lumber prices and later in the quarter, took precautionary measures to bolster log inventories ahead of wildfire season. These dynamics kept log prices fairly stable during the second And as a result, our average domestic sales realizations were comparable to the Q1.

Speaker 2

Our fee harvest volumes were slightly higher than the Q1 As a result of favorable operating conditions, domestic sales volumes were significantly higher as we intentionally shifted logs to the domestic customers to capture higher margin opportunities. Per unit log and haul cost improved in the Q2 and forestry and road costs were seasonally higher. Moving to our Western export business. In Japan, log markets continued to soften in the second quarter in response to elevated inventories of European lumber imports as well as lower consumption driven by reduced post and beam housing activity. As a result, our average sales realizations for export volumes Japan were lower compared to the Q1, and our sales volumes were comparable.

Speaker 2

As we look forward, we expect European lumber inventories in Japan to normalize in the coming months, which should increase demand for our Douglas fir logs into the Japanese market later in the year. In China, log markets softened in the 2nd quarter in response to an influx of log supply from New Zealand, combined with the reduction in log takeaway at the ports. As a result, our average sales realizations for export volumes to China were lower compared to the Q1. Our sales volumes were significantly lower as we intentionally flex logs to the domestic market. Turning to the South.

Speaker 2

Adjusted EBITDA for Southern Timberlands was $79,000,000 A slight reduction compared to the Q1. Southern sawlog markets remained fairly balanced in the Q2 as log supply improved with drier conditions And mills bolster log inventories following weather related challenges in the Q1. In contrast, Southern fiber markets softened in response to elevated inventories of logs and finished goods at mills as well as lower overall demand for pulp and paper End products. Given favorable operating conditions, our thinning activity increased in the 2nd quarter, resulting in a higher mix of fiber logs. As a result, our average sales realizations were slightly lower compared to the Q1 And our fee harvest volumes were comparable.

Speaker 2

Per unit log and haul costs were slightly lower, primarily due to lower fuel prices, And forestry and road costs were seasonably higher. In the North, adjusted EBITDA decreased by $4,000,000 compared to the Q1 due to significantly lower sales volumes associated with seasonal spring breakup conditions. Turning now to Real Estate, Energy and Natural Resources On Pages 1011, Real Estate and ENR contributed $52,000,000 to 2nd quarter earnings. Adjusted EBITDA was $70,000,000 a $19,000,000 decrease compared to the Q1, largely driven by the timing and mix of properties sold. Average price per acre increased significantly in the Q2 and remains elevated compared to historical levels.

Speaker 2

We continue to benefit from healthy demand for HBU properties, resulting in high value transactions with significant premiums to timber value. I'll now make a few comments on our Natural Climate Solutions business. We continue to make progress on our Forest Carbon pilot project in May. In the Q2, we completed the 3rd party audit process and submitted the project to the American Carbon Registry for final approval. Once approved, we expect an initial issuance of approximately 30,000 credits in year 1, and we're currently developing 2 additional projects in the U.

Speaker 2

S. South. We remain focused on positioning our credits to capture the highest value possible in the marketplace. Moving to Wood Products On Pages 12 through 14, Wood Products generated $218,000,000 of earnings in the 2nd quarter and $270,000,000 of adjusted EBITDA. 2nd quarter EBITDA was an 82% improvement from the 1st quarter, largely driven by an increase in lumber and OSB sales realizations and strong sales volumes for Engineered Wood Products.

Speaker 2

Starting with lumber, adjusted EBITDA was $51,000,000 in the 2nd quarter, a $43,000,000 increase over the prior quarter and largely driven by improved sales realizations. Benchmark pricing for lumber held fairly stable in April to May as sentiment remained cautious. Buyers mostly limited orders to necessity purchases despite lean inventories. By mid June, overall sentiment and benchmark pricing improved In response to stronger housing activity, perceived risk to supply from Canadian wildfires and announced mill curtailments also bolster buying activity in June. For the quarter, the framing lumber composite was comparable to the Q1, while our average sales realizations increased by 6%, With the relative outperformance driven by our regional mix and product mix, our sales volumes were moderately higher compared to the Q1 As our Northwest Mills returned to more normalized operating levels, log costs were slightly lower, primarily for Western Logs and unit manufacturing costs were slightly higher during the quarter.

Speaker 2

Adjusted EBITDA for OSB increased by $15,000,000 compared to the Q1, primarily due to the increase in commodity pricing, slightly offset by higher unit manufacturing costs related to planned and unplanned downtime. Benchmark pricing for OSB entered the 2nd quarter on an upward trajectory, largely driven by lean inventories and steady demand from new home construction activity. As the quarter progressed, buyer sentiment and benchmark pricing continued to improve as Canadian wildfires disrupted supply in response to improving residential construction activity. As a result, the USB composite pricing increased By 21% compared to the Q1, our average sales realizations increased by 11%. This relative difference was largely due to our Extended order files, which result in a lag effect for OSB realizations.

Speaker 2

Our production and sales volumes were moderately lower in the second quarter Unit manufacturing costs were moderately higher due to planned downtime for annual maintenance and a temporary period of unplanned downtime related to wildfire activity Increased by $62,000,000 or 76% compared to the Q1. This result is directly tied to improving demand for EWP products, Which are primarily used in single family homebuilding applications. As a result, our production and sales volumes were significantly higher That said, our average sales realizations were lower for most products as supply and demand continued to rebalance across the broader EWP market. It's worth noting that our current EWP prices remain above pre pandemic levels. Raw material costs decreased for all products in the 2nd quarter.

Speaker 2

In distribution, adjusted EBITDA increased by $12,000,000 compared to the Q1, a 55% improvement, as the business benefited from strong EWP sales volumes in the Q2. With that, I'll turn the call over to Davey to discuss some financial items and our

Speaker 3

Thank you, Devin, and good morning, everyone. I will be covering key financial items and second quarter financial performance Before moving into our Q3 outlook, I'll begin with key financial items, which are summarized on Page 16. We generated $496,000,000 of cash from operations in the 2nd quarter and ended the period with approximately $1,800,000,000 of cash, Cash equivalents and short term investments. Total debt at quarter end was approximately $5,800,000,000 In May, we took advantage of attractive capital market conditions and issued $750,000,000 of debt due in 2026 At a coupon of 4.75 percent, this debt issuance pre funded the majority of our 2023 maturities And due to the shape of the yield curve, we were able to reinvest these cash proceeds in the interim at interest rates in excess of the bond coupon. As a result of this transaction, our full year 2023 interest expense will increase by $10,000,000 to approximately $280,000,000 That said, this increase will be more than offset by the interest income earned on the invested issuance proceeds.

Speaker 3

In mid July, we used a portion of the debt issuance proceeds to repay our $118,000,000 7.8 percent note at maturity, and we intend to use the remainder of issuance proceeds towards our December 2023 maturity. Capital expenditures for the quarter were $81,000,000 We returned $139,000,000 to shareholders through the payment of our quarterly base dividend, which was increased in the Q1 by 5 point 6 percent to $0.19 per share. In addition, we returned $50,000,000 to shareholders through share repurchase activity in the 2nd quarter. These shares were repurchased at an average price of $29.59 and as of Looking forward, we will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. As highlighted on Page 18, adjusted funds available for distribution for the 2nd quarter totaled $415,000,000 And we have generated $470,000,000 of adjusted FAD year to date.

Speaker 3

Looking forward, key outlook items for the Q3 are presented on Page 19. In our Timberlands business, we expect 3rd quarter earnings and adjusted EBITDA will be approximately $25,000,000 lower than the Q2 of 20 Turning to our Western Timberlands operations. Domestic log demand was steady at the outset of the 3rd quarter in to improved pricing and takeaway of lumber and as mills continue to build inventories ahead of wildfire season. That said, absent fire related disruptions in the region, log supply is expected to remain ample as the quarter progresses, largely driven by a seasonal influx of logs from nontraditional timber owners. As a result, our domestic sales realizations are expected to be moderately lower compared to the As is typical during the warmer and drier months, we have transitioned in a higher elevation operations, which generally have lower productivity.

Speaker 3

As a result, our fee harvest volumes will be moderately lower in the Q3. Forestry and road costs are expected to seasonally higher as we do a significant amount of this work during the summer months. And per unit log and haul costs are expected to be lower, partly due to a decrease in fuel prices. Moving to the export markets, starting with Japan. As Devin mentioned, elevated inventories of European lumber imports And reduced consumption continue to weigh on the Japanese log market.

Speaker 3

That said, we anticipate our Japanese sales volumes will increase compared to the 2nd quarter due to the timing of vessels, and we expect our sales realizations to be comparable. In China, elevated log imports New Zealand and reduced log consumption continue to have an impact on the Chinese log market. We expect these conditions to persist through the Q3. As a result, our sales realizations into China are expected to be lower compared to the Q2, and we anticipate our sales volumes will be significantly lower as we flex logs to domestic customers to capture higher margin opportunities. In the South, we expect sawlog markets To moderate somewhat in the Q3 and fiber markets to soften further.

Speaker 3

This is being driven by a seasonal increase in log supply, Elevated mill inventories and softening demand, particularly for pulp and paper products. That said, takeaway for our logs is expected to remain steady given our delivered Our fee harvest volumes are expected to be comparable to the Q2 and will include a higher mix of fiber logs as increased thinning activity continues. With a higher percentage of fiber logs, we expect our sales realizations to be slightly lower compared to the Q2. Per unit log and haul costs are expected to be comparable and forestry and road costs are expected to be seasonally higher. In the North, our fee harvest volumes are expected to be significantly higher compared to the Q2 as we have fully transitioned from spring breakup conditions and our sales realizations are expected to be moderately lower due to mix.

Speaker 3

Turning to our Real Estate, Energy and Natural Resources segment. Demand for our real estate properties remains steady and we continue to anticipate a consistent flow of HBU transactions with significant premiums to timber value. For the Q3, we expect earnings will be slightly higher and adjusted EBITDA will be approximately $20,000,000 Higher than the Q2 of 2023 due to the timing and mix of real estate sales. For the full year, we continue to anticipate adjusted EBITDA of approximately $300,000,000 for the segment and now expect basis as a percentage of real estate sales to be 35% to 40% for the year. For our Wood Products segment, benchmark prices for lumber and OSB entered the 3rd quarter on an upward trajectory, supported by improving demand, relatively lean inventories and the prospects of supply disruptions following an early start to wildfire season in Canada.

Speaker 3

As shown on Page 21, our current and quarter to date average sales realizations for lumber and OSB are well above the 2nd quarter averages. Assuming this pricing dynamic remains intact for the balance of the 3rd quarter, We expect our Wood Products financial results to be significantly higher compared to the Q2 of 2023. That said, Excluding the effect of changes in average sales realizations for lumber and OSB, we anticipate 3rd quarter earnings and adjusted EBITDA will be slightly lower than last quarter. For our lumber business, we expect moderately higher production and sales volumes in the Q3 and slightly lower unit manufacturing costs. Log costs are expected to be moderately lower compared to the Q2.

Speaker 3

For our oriented strand board business, we expect production Sales volumes to be comparable to the Q2. Unit manufacturing costs are expected to be slightly higher and fiber costs are expected to be comparable. Turning to our Engineered Wood Products business. As Devin mentioned, we continue to see improving demand for EWP products, And this has extended our order activity well into the Q3. As a result, we expect our sales volumes to increase slightly compared to the 2nd quarter.

Speaker 3

Notwithstanding this dynamic, we anticipate slightly lower sales realizations as supply and demand continue to rebalance in certain markets. That said, Q3 EWP prices are expected to remain substantially above pre pandemic levels and will Raw material costs are expected to be higher compared to the Q2, primarily for OSB Webstock. For our distribution business, We expect adjusted EBITDA to be comparable to the Q2. With that, I'll now turn the call back to Devin and look forward to your questions.

Speaker 2

Thanks, Davey. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Our view on the housing market has become incrementally more positive over the last several months, supported by improvements in homebuilder sentiment, An increase in new home sales and an uptick in single family starts. Despite elevated mortgage rates, we continue to see resilient demand from the homebuilding segment, largely driven by the historically low inventory of existing homes, a strong labor market and solid household balance sheets. That being said, there continues to be a degree of uncertainty around the trajectory of mortgage rates in the broader U.

Speaker 2

S. Economy. As a result, we still expect housing starts in 2023 to be lower than the last couple of years. But again, our outlook has become more positive as the year has on housing fundamentals, supported by favorable demographic trends and a significantly underbuilt housing stock. Turning to the repair and remodel market.

Speaker 2

Activity strengthened slightly in the Q2 and has held up well year to date, largely supported by Solid demand from the Professional segment. Demand from the do it yourself segment was steady in the Q2 and is largely normalized to pre pandemic levels. Near term, we expect stable demand from this segment as prospective homebuyers may choose to remodel in lieu of purchasing a new home in a higher mortgage rate environment. In longer term, we continue to believe the repair and remodel market will be an important demand driver for our businesses, supported by strong home equity levels and an aging housing stock. In closing, our teams delivered solid operational and financial results in the 2nd quarter.

Speaker 2

In addition, we continue to make meaningful progress against the multiyear targets we set out in 2021 through strategic Timberlands acquisitions and the advancement of our Forest Carbon business. Looking ahead, we're encouraged by recent improvements in the housing market and maintain a favorable long term outlook for the demand fundamentals that will drive growth for our businesses. We remain focused on operational excellence and innovation, driving industry leading margins and supporting our customers. And with our strong financial position, our unmatched portfolio of assets And disciplined approach to capital allocation, we're well positioned to drive long term value for our shareholders. With that, I think we can go ahead and open it up for questions.

Speaker 2

Thank

Operator

you. We will now be conducting a question and answer Our first question comes from George Staphos with Bank of America. Please proceed with your question.

Speaker 4

Thank you, everyone. Good morning. Thanks for the details. Good

Speaker 2

morning. I want

Speaker 5

to start off

Speaker 4

how are you doing, Devin? I want to start off on SG and A and I guess relatedly all the things you're doing to manage costs at the company. Your cost management, at least from our vantage point, has been Commendable again year to date SG and A really hasn't moved much. Are there any cost pressures though that you're looking out to 2024, That you'll need to manage against that or maybe building and we'll see a little bit more movement to the upside there in future years. What do you think about that?

Speaker 2

Yes. I mean, first of all, I say thanks for the recognition, George. As you know, this is work that we've been doing day in, day out for a number of years to Stay focused on cost, and it's a never ending journey to keep control on costs and particularly over the last few years With all of the inflationary pressures, I think in terms of what we're doing on a day to day basis, it's just incorporated into our planning and our operations To daily focus on keeping our costs down, I think we are seeing from an overall inflationary standpoint, Not specific to SG and A, but just overall. We are seeing some of our cost pressures starting to wane a little bit, Fuel, energy, resin, waxes, things of that nature. But on the SG and A front, labor costs, those are sticky, And those inflationary pressures are something that we continue to have to manage.

Speaker 2

In terms of the primary focus areas over the next several years, I think it's largely more of the same. I think labor costs will continue to be something that we'll have to manage closely. But beyond that, I think it's A lot of the same things that we've been doing over the last several years. I don't know. Davey, would you like to add anything to that?

Speaker 3

Sure, Devin. I would just point Now that this goes back to everything we've been doing for a number of years on OpEx and as we look forward, our focus on OpEx and continuing into innovation And everything we're working on every day, we expect that to be a lever for us over time to continue to manage costs and drive those down into the future.

Speaker 4

Okay. Thank you. 2 follow ons and I'll turn it over very quickly. So given what's been a nice Pickup in demand over the course of year in Wood Products, recognizing it wasn't so strong earlier in the year. Are Timber prices in the south for sawlogs where you would have expected them given that backdrop, why aren't we seeing more lift Recognizing again, it's a market by market, very local market, but are timber prices in the South for sawlogs where you would have expected given the backdrop, Why or why not?

Speaker 4

And then can you give us a bit more color in terms of the normalization, The factors that you're seeing in supply demand in EWP, particularly in Trust Joyce and why we're not seeing more of a lift Higher given the favorable single family outlook. Thank you guys.

Speaker 2

Sure. Well, I'll start with the sawlog question in the South. And I think we've seen over the last several years, some uplift on sawlog pricing. And we've been talking about this for a long time, A lot of new capacity coming into the South and certainly what we've seen in those geographies where we've had new capacity or expanded Capacity, we have seen those markets tension and we've seen upward pressure on pricing. I think this year, there are a few things going on.

Speaker 2

For the first half of the year, I think sawlog prices held up pretty well, at least in the markets that we participate in. I think unlike The fiber logs, which have seen a little bit more pressure just because of what's going on in the pulp and paper industry, the sawlog market has held up pretty well. I think there is a nuance going on there with respect to the availability of transportation. One of the things that we saw over the last couple of years was just a real Shortage of trucking capacity, I think that put a little bit of an uplift on pricing just as mills, particularly strong lumber markets, We're making sure that they had adequate log decks. As that trucking capacity has loosened a little bit, I think some of that pressure has come off.

Speaker 2

As we think about where we are in the year, it's not atypical to see a little downward pressure on log prices just because in the summer months In the drier weather, you have more supply hitting the market. So that's the dynamic at play. I do think over time, and again, just going back to my point earlier, as we see Capacity continuing to come into the region, you are going to see continued pressure and tensioning across the South. So I think the trajectory is still What we had expected and certainly, I think we're optimistic over the next several years as these mills continue to come into the region You'll see continued upward price pressure. You'll have ups and downs seasonally like we always do, but the overall trajectory, I think, still looks positive.

Speaker 2

With respect to your question around EWP, I think if you really want to understand what's going on today, you have to look back a couple of quarters and just think about the trajectory What's happened? As we got into late last year and early 2023, we had a fair bit of destocking going on. So you combine that with the lower residential construction activity, and it really put the EWP market in a softer place earlier in this year. And so that was really the story in Q1. As you remember, we did dial back our production an EWP to address that.

Speaker 2

I think we have a pretty good customer base. We have a strong product. And so as that market started to recover, There was good demand for our product, and we certainly saw that over the course of Q2 moving into Q3. But the reality is in Q1 and Q2, just as those markets rebalanced, we had to take pricing action as everyone else did just to make sure that we were competitive in each individual market. There's generally a time lag in terms of those pricing actions, whether you're raising prices or lowering prices.

Speaker 2

And so Some of what you're seeing in Q3 is just the lag effect of pricing actions that we had to take earlier in the year. I would say on balance, the market is recovering nicely. Our order files are back to the place where they're fairly extended. We're even on allocation for a few products at this point. So The market is stabilizing, but each individual market has its own dynamics and we'll make pricing action where necessary to make sure we're competitive.

Speaker 2

But I think directionally, we feel pretty good about where EWP is and the trends that we've seen lately.

Speaker 4

Thank you, Devin.

Speaker 6

Great.

Operator

Our next question is from Kurt Yinger with D. A. Davidson. Please proceed with your question.

Speaker 7

Great. Thanks and good morning everyone.

Speaker 2

Good morning. Good morning.

Speaker 7

I know it wasn't a huge impact for you guys in the quarter, but could you just talk about some of the derivative impacts from the wildfires up in Canada in terms of Just operating your facilities there, logistics and transportation and the role that is perhaps played in some of the pricing strength that we've seen in the last 2 to 3 months?

Speaker 2

Sure. Well, I'll give you an update on our operations Specifically, and then mention more or less the impact that it had on pricing in the market. So in terms of the impact to us, We had 2 of our 3 mills in Alberta that were impacted. We had a lumber mill and our OSB mill that both had to take about 2 weeks downtime each as the fires caused evacuations in those local communities. And so the net impact to us from a financial standpoint Was relatively minor, sub $4,000,000 for the quarter.

Speaker 2

I think the bigger impact though, as you mentioned, was just with all of the fire activity. It did cause some concern around supply, particularly, I think, on the lumber side, and I suspect that was Part of what drove some of the pricing activity to the upside in lumber as we got into June and early parts of July. So I think The real impact was on the overall lumber market and just kind of the concerns around supply availability with the fires. I would say from a transportation standpoint, it did obviously have some impact, but I would say not material.

Speaker 7

Got it. Okay. That's helpful. And then just two quick ones. First, could you talk about what you're hearing and seeing in terms of European lumber imports into the U.

Speaker 7

S. Kind of for the back half of the year, as well as on the Timberland side, The pipeline of opportunities that you see and just kind of your outlook in terms of potential additional bolt on or larger scale transactions Going forward?

Speaker 2

Sure. Well, with respect to European lumber, we certainly saw a higher than normal amount The volume coming in late last year, early part of this year. Ordinarily, I would say European lumber volumes don't have a meaningful impact on the market. I do believe earlier in the year with the amount of volume that was coming in, particularly on the East Coast, it probably did have some impact on the supply demand dynamic and probably push pricing down just a bit. We've seen the volumes of imports Really starting to wane here over the last several months, which makes sense as the lumber prices have come down, it's less Economically viable for some of that wood to come to the U.

Speaker 2

S. So our expectation is we will see lower volumes. I think you'll still have some degree European volume coming into the market is many of those producers want to maintain that supply chain and give them the ability to depending on what's going on here versus in Europe, but I suspect it will be a lower volume coming in for the back half of the year. As we think about the M and A market on the Timberland side, as you probably have noticed, it's been lighter this year than it has been over the last few years. I think last year, you probably saw in the neighborhood of $5,000,000,000 of transaction activity.

Speaker 2

We're certainly trending much lower than that this year. And that's really, I think, largely a function of, a, probably some pull forward from last year, pretty heavy year. I think there's probably a piece of this too that As the market is trying to figure out how to price carbon and ESG options in this space, perhaps some are holding out with the view that prices are going to continue to go up. So we'll see what the back half looks like, but We're expecting it to be a lighter year this year than it has. We're always in the market.

Speaker 2

That being said, as you saw with the Mississippi transaction, We'll continue to look at every deal that comes to market. We'll continue to have conversations with parties to see if we can I do deals outside of the auction process? It's a competitive market, but I think there will be properties where we're very well suited to make those acquisitions and deliver returns for our shareholders.

Speaker 7

Okay. Thanks for the color, Devin, and good luck here in Q3, guys.

Speaker 6

Thank you.

Operator

Thank you. Our next question comes from Susan Maklari with Goldman Sachs. Please proceed with your question.

Speaker 8

Thank you. Good morning, everyone.

Speaker 2

Good morning. Good morning, Sue.

Speaker 8

My first question is, Devin, can talk just a bit about the production levels and the inventory that you're seeing at the mills just across lumber? As the builders are gearing up and adding that Those starts on the ground, how are you thinking about overall lumber inventory out there? And maybe what could that mean for Your ability to hit that 5% annual growth target that you've set out there.

Speaker 2

Yes. So the first part of the question in terms of inventory, I'd say on balance in the lumber space, inventories are on the lean side, not nearly as lean as OSB, but I'd say leaner than normal. I think what's going on right now is there is adequate supply coming on and so People are feeling more comfortable with those lean inventories. And as you know, typically the August time frame is a period where you see a little bit of Pull back in demand, particularly on the R and R side, just because of the heat of the summer, people are less Inclined to build a deck if it's 110 degrees outside. So I think you have some normal seasonal demand pullback just on the But in terms of what that leaner inventory looks like is, as you get into the fall, if buyers continue to carry lean And certainly, our inventories at the mills are on the lean side as well.

Speaker 2

If you get into the fall when that R and R activity picks up and you have Strong single family homebuilding, we've seen what happens there, particularly if you have some sort of supply shock maybe from fire season or Some other thing happening, that can really push pricing up fairly quickly. And we saw that even just in June with the fire activity in BC, What that can do to pricing? So I think it all depends on if we see repair and remodel activity pick back up In the fall, as we normally do and the builders continue to build, which is what we're expecting, that could be a nice setup for fall pricing in lumber. In terms of our ability to meet the 5%, there are going to be puts and takes every year. What we're doing is we're doing the work With building the capacity, so the CapEx projects, the improvements in reliability, etcetera, that we need to do to hit that target.

Speaker 2

Last year, obviously, we were down a little bit because of the strikes in the Northwest. This year, we did dial back production a little bit just because lumber Demand had slackened a little, particularly in the Northwest and BC. So we'll see what the ultimate production number is for the year. But Ultimately, we're doing the work from a capacity and an operation standpoint to support that 5% per year.

Speaker 8

Yes. Okay. That's very helpful color. And then I guess, as you do think about some of the dynamics that are In the lumber market, from both the supply and demand perspective, how do you think about where pricing can go as we think about The back half of this year and probably even the first half of next year, given what the builders are talking to and looking to add on the ground. And maybe how is that different from what happened in Few years that could either put a floor or ceiling in terms of the upside potential around the pricing.

Speaker 2

Yes. I mean, I'll offer the caveat that lumber pricing is very, very hard to predict as we've seen over the last several years. I would say, if we look back over the pandemic era, I don't know that I would necessarily look at $1,000 lumber prices as being something we're going to see very often. That was a result of just a number of factors coming together at the same time, all of the supply chain disruptions, etcetera. So I'm not sure that's how you should be thinking about things.

Speaker 2

As we think about where lumber prices are going to go in the fall, it's really a function of, A, what's going to happen on the supply side. And I think we're going to continue to see puts and takes there with the additions in the South, the capacity coming out of British Columbia. That dynamic, I think, is going to continue to play out. And then it's just really a function of what happens with homebuilding and repair and remodel. Our view is the homebuilders have done a remarkable job of managing and navigating with higher mortgage rates.

Speaker 2

They seem to be pretty optimistic in the conversations that we're having with them. So my expectation is the back half of the year, even with high 6% mortgage rates or even 7% mortgage rates is that we're still going to see strong single family building, which will be supportive. And then it's the question of R and R. And we've seen pretty strong demand out of that segment. Just as a data point, Year over year, our Q2 into the home improvement warehouse market was actually up.

Speaker 2

So we continue to Expect that to be a strong market. And as the treaters come back in, in the fall, I would expect that we're going to see reasonably strong lumber prices. And then again, it will just depend Are there upside surprises on building or are there supply shocks that can cause that price ceiling to go up?

Speaker 8

Yes. Okay. I appreciate all the thoughts, Devin. Thank you and good luck with everything.

Speaker 6

All right. Thank you.

Operator

Thank you. Our next question comes from Mark Weintraub with Seaport Research Partners. Please proceed with your question.

Speaker 9

Thank you. So thanks for all the details on lumber and walking us through your thought process and how pricing might evolve. If we think about OSB, I guess the first question I have is you give on that slide that I think the current prices were like $70 Higher as of July 1, the way you look at it. But, I think you also referenced that you've got, your order files Are what, 3 or 4 weeks, I believe. And so if we were to kind of, assess real time pricing in OSB, What does that mean?

Speaker 9

Can you give us a sense as to what you'd expect your prices to be given what we already know 3 to 4 weeks out, once the real time prices are what you would be calling your current prices?

Speaker 2

Yes. I mean without specifically giving the number, what I can tell you is directionally, our order files are actually 5 to 6 weeks out. So They're fairly extended. As you noted, Mark, what that means for us is that there is a lag to the current pricing. And so While what you see quarter to date in the earnings package is lower than current, that will catch up over time.

Speaker 2

So There will be a several week lag on the upside. And the flip side of that is there's also a several week lag on the downside. So we ultimately get it. It's It's a timing question. And for us as we think about the quarter, there's a fair amount of leverage there.

Speaker 2

It's $8,000,000 of EBITDA per quarter for every $10 increase. So there's a fairly significant upside. And I think just given the length of the order files, that's going to translate into a pretty strong Order for OSB for us.

Speaker 9

Okay. And recognizing that prices can move from where they are, but, I mean, so if I can I look back 5 weeks or so and look at the increase that we've had and expect that to because that's over $100 plus to expect that to Translate into your prices and then they'll go wherever prices real time go as we go forward? Is that a reasonable way to look at it? Yes, that's generally right. Okay.

Speaker 9

And then you kind of had you'd mentioned that, you felt in lumber that maybe we can See some improvement in the fall, etcetera. But it sounded like you're reasonably cautious over the summer. Correct me if I interpreted that incorrectly. How do you feel on OSB? Did you see the dynamics differently?

Speaker 9

And if so, why?

Speaker 2

Yes, I do different just because there's not a lot of OSB available. And I think what you're seeing right now with the pricing dynamic is Most buyers went into the summer with very little inventory. And as you've seen that building activity pick up, The demand ended up being higher than people expected. And when they're going out and trying to buy open market OSP, there's just none there. And so That's going to take a little while to figure itself out.

Speaker 2

OSB is not as reliant on the R and R market, so it's a little bit more focused On the single family construction, which has continued to be pretty strong. So absent a material pullback on the housing It would seem to me that we're going to see pretty tight market there for OSB, which should mean you should have strong OSB pricing into the fall. Okay, super. And just one last one.

Speaker 9

Okay, super. And just one last one. I know there are lots of concerns on fire season Weeks or a couple months ago, and not hearing as much about it and certainly not in your comments recognizing There's uncertainty. Have things calmed down or are things feeling like it's not going to

Operator

be as dangerous a situation this year? Just a quick update.

Speaker 2

Yes. So in the Northwest, it's been a relatively mild wildfire season to date. I always caution people though, it really starts to become an issue typically in August and the early part of September. So We're not necessarily in the heat of the wildfire season yet in the Northwest. Obviously, in Canada, it's been a really bad year so far.

Speaker 2

There has been some rain in Alberta. So while we still have fire activity going on, I think that's calmed a little bit. In Northern BC, I think the fire activity has started to pick up a little bit. So as you think about some of the key regions for us, Washington, Oregon, British Columbia, I think that story will play out over the course of August. But to your point, At this juncture in the Northwest, fire season hasn't been that bad.

Speaker 9

Okay. Appreciate the color. Thank you.

Speaker 6

Yes. Thank you.

Operator

Thank you. Our next question comes from Anthony Pettinari with Citi. Please proceed with your question.

Speaker 10

Good morning.

Speaker 11

Good morning. Just following up on the Mississippi deal, I think it transacted at Kind of somewhat of a premium to some comps that we've seen in the state. I think you talked about it being well stocked and maybe having some synergies with existing operations. I'm just wondering if you could maybe touch on, I guess, the real estate and E and R opportunities that I think you were mentioned in the press release. And maybe more broadly, I think you're the largest landowner in Mississippi.

Speaker 11

Can you just talk about that sort of Mississippi, Louisiana, Arkansas market in terms of anything that you're particularly excited about or concerned about maybe in the next few years?

Speaker 2

Yes, sure. So it's a really nice acquisition for us. A couple of things I would highlight, as you noted, really good mature age class, High percentage of sawlog mix and importantly, there's 2 pieces of it. There's a northern piece and a southern piece. Each of them are really close, so short haul distances to lumber mills that we have in Mississippi.

Speaker 2

So some really nice synergies there. I think from a comp standpoint, just for frame of reference, one of our large competitors did a deal in Mississippi recently at 2,700 an acre. It's pretty in line with what we've seen for the higher quality acquisitions in that Mississippi region. We are the largest landowner in Mississippi by a fair margin. I think the positive news from a Mississippi standpoint is We're seeing a fair bit of new capacity coming in there.

Speaker 2

From a sawmill standpoint, we've got the pellet mills that are Coming in and building new mills in Mississippi. So it's a market while it's been less tension perhaps than some of the other markets. And this is true For Louisiana and Arkansas, by the way, I do think that's where a lot of the new capacity is coming in. And with the work that Russell and his team are doing, We're working real hard to make sure that we can influence where some of that capacity is coming in so that it's placed in a region where we benefit from a Timberland standpoint can drive synergies for those customers. So I think we feel pretty good about the trajectory of all three of those markets.

Speaker 2

And My instinct here is that over the next several years, you're going to see some of the biggest price growth in those markets as that new capacity Comes into place.

Speaker 11

Okay. That's very helpful. And then just switching to Climate Solutions. I think you mentioned 2 Carbon projects underway in the South. Given the experience you've gained with the main pilot, I mean, is it possible to say How long it might take for those 2 Southern projects to maybe ultimately start issuing credits?

Speaker 11

Is that 1 or 2 years or maybe longer or shorter? And then I kind of thought that the main project was chosen because economics in the northern region are maybe less Compelling than in the Southern region. I don't know if that's the case or if that's changed. But is there any sort of change in view where Carbon projects are getting more feasible or more attractive and you're moving them to the South or maybe these are special regions within the South. I don't know if you can Comment there?

Speaker 2

Sure. Well, I think first of all, with the main project and that's why we call it a pilot project is there were learnings that We acquired through that process, and I think we've been able to take the learnings from that main project and apply that to So my expectation is those projects are going to move dramatically faster than the main project. And we could have those Issued as soon as later this year or early next year. So much faster. And again, I think we've taken a lot of the learnings from that project, which was the whole point in building out that group and the expertise so that we can start to scale this business.

Speaker 2

In terms of the regional decision making for Where carbon projects go, you're absolutely right. We started in Maine because the economics there are more supportive. But as you think about our portfolio of 7,000,000 acres Across the South, there are going to be certain parcels and certain tracks that are less economically beneficial than others. And so There are going to be places where the economics for carbon even in the near term still make sense in the South. And just to be clear, We're only going to do carbon projects where we think the economics in doing carbon will beat the economics of doing timber.

Speaker 2

And Part of that is the quality of the land base, but part of that is where we think carbon prices are trending. And what we've seen here of late is For improved forest management carbon projects that are of high quality, they're generating strong pricing and that's our expectation when we bring these credits to market.

Speaker 11

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

Speaker 6

All right. Thank you.

Operator

Thank you. Our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question. Yes.

Speaker 10

Thanks very much. Good morning, guys. Just wanted to follow-up on this natural climate solutions and the carbon optionality that you've got. If you could and I appreciate the extra color on the 30,000 credits that you expect in year 1. What's the size of the main project The scope of it that you put forward and then what's the size of the 2 projects that you've got in the U.

Speaker 10

S. South?

Speaker 2

Yes. So we're not providing the specific acreage really for a couple of reasons, Paul. First is, as we think about How we're managing these carbon projects? We're not just taking those acres out of production. We're going to continue to generate timber Revenues from those acres in addition to carbon.

Speaker 2

So it's a little we feel like it's a little Hard to put that in context just by throwing acres out there. So we're not going to be providing acreages for these products. We'll ultimately provide the number of And the revenues that we're generating from the credits. And that's how we'll dimension that going forward.

Speaker 10

Okay. Well, just trying to scale it from my side then, the 30,000 credits, is that equating to somewhere in the $500,000 to $600,000 range?

Speaker 2

Well, it depends on what you think pricing is going to be. 30,000 Mid-20s. Yes, mid-20s is kind of a good way to think about it in terms of what we've I think the quality of the credits we're bringing to market are really going to be at the top of the range. So that's how we're thinking about it.

Speaker 10

Okay. And then just lastly, just is this 100% addition To your cash flow, is there an impact when you put these projects, the carbon projects forward, I. E, is there an impact on harvest in the area?

Speaker 2

Yes, there will be some. Now obviously, we're picking areas which have economics where that's supported by The carbon, but ultimately, if you're going to get carbon credits, you are giving up some degree of volume. And so We're going to pick regions where that margin is the lowest and where that offset makes the most sense. But yes, there will be some offsetting Impact to timber revenues where we do carbon

Speaker 10

projects. All right. Makes sense to me. Best of luck. Thanks.

Speaker 6

All right. Thank you.

Operator

Thank you. Our next question comes from Ketan Mathura with BMO Capital Markets. Please proceed with your question.

Speaker 12

Thank you and good morning. First question, Devin, you talked about the order files in OSP, which are quite Standard right now. Can you give us some sense of what the order files are like in engineered wood and in lumber and how they compare For this time of the year versus historical average?

Speaker 2

Yes. Lumber order files are pretty normal. I mean that's in a couple of week time 1 to 2 weeks, which is pretty typical, particularly for this time of year. The EWP order files are extended Depending on the product, out even beyond OSB. So they're back to a place where they're fairly lengthy, the order files.

Speaker 12

Understood. Got you. And then, coming back to Wi Fi, are your mills in Alberta back up to I I heard you say that you all took some downtime at 2 of your 3 mills. Are they back up running kind of Fully or are there some restrictions whether related to the log decks or anything else there?

Speaker 2

No, those mills are both back up running full. No ongoing issues there. The downtime was really just When the fire got close to the community, there were evacuation orders, so everybody had to leave town. But as soon as those evacuation orders We're lifted. We were back at the mills and they're both back up running full.

Speaker 12

Got it. Okay. That's all from my side. Good luck. Thank you.

Speaker 5

All right.

Speaker 6

Thank you. Thanks, Ketan.

Operator

Our next question is from Mike Roxlin with Truist Securities. Please proceed with your question.

Speaker 5

Thank you, Devin, Davey, Andy and Cara for taking my questions. Very good quarter.

Speaker 6

Thank you.

Speaker 5

Just on EWP, can you talk about any regional differences that you've seen on EWP demand? I recall the West being more impacted months ago from slower market conditions and inclement weather. So have you seen a ramp in on the West more than this out? But just help us figure out how that demand improvement has been I'll broken up by

Speaker 2

region. Yes. I mean California, in particular, earlier in the year and late last year was struggling and that was, if You recall just a result of wave after wave of storms hitting that market. So you really saw building activity slow quite a bit. As we got deeper into spring and early summer, the California market picked up quite a bit.

Speaker 2

And you can see that Mostly in the Douglas fir lumber sales that we've got going into that California market that really saw an uptick as that building activity Increased. I'd say there are always regional differences. California, I think, has been picking up. Texas is always a strong market. The South has generally been pretty strong, and I think all of those trends are holding.

Speaker 2

When you think about what's going on with EWP, There's obviously two pieces of that though. There's the demand and how much building is going on and then there's also the supply That's going into each individual region and our experience is every local market has its own competitive dynamic and so it's always balancing, Making sure that you're serving your customers, trying to make sure your margins feel good, but also making sure that you're holding market share against competitors who all want the same business. So that dynamic plays out in Every region, every day. But I'd say on balance again, the EWP market certainly has stabilized. And as you can see with our order files We feel pretty good about that trajectory.

Speaker 2

I mean, there will always be some ups and downs on pricing, but directionally, we feel pretty good about where EWP is going.

Speaker 5

Thanks for that. Just following up, I mean, it's kind of interesting when you look at your sequential improvement in lumber versus EWP. Lumber About 5% sequentially in terms of volumes, but EWP about 63% quarter over quarter. Can you help us frame like what's really driving difference? I Is it all due just the fact that EWP is more single family related, maybe lumber has got that R and R component?

Speaker 5

Or is there anything else driving the difference Between lumber demand and EWP demand? Yes.

Speaker 2

I mean, when you look at our sales volumes, it's really more of a function that We had scaled down our EWP production earlier in the year because of what was going on and just the dynamic with so many buyers destocking. So The big volume increase in EWP, I mean, obviously, it's related to the fact that there's been a pickup in homebuilding Activity, but the delta between the improvements in volume in EWP and the improvements in volume in lumber is just that EWP was operating at 60% capacity for the Q1, whereas lumber wasn't down nearly as much. But that was an intentional decision on our part Just to match supply with demand.

Speaker 5

Got you. And one final question before turning it over. Just the operating rate in EWP in 2Q?

Speaker 2

Yes. It was in the mid-70s, mid to or low to mid-70s. And so we think it will be up just a little bit in Q3.

Speaker 5

Thanks very much and good luck in the second half.

Speaker 6

All right. Thank you.

Operator

There are no further questions at this time. I'd like to turn the floor back over to Devin Stockfish for closing comments.

Speaker 2

All right, terrific. Well, thanks everyone for joining us this morning and thank you for your continued interest in Weyerhaeuser. Have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And we thank you for

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Earnings Conference Call
Weyerhaeuser Q2 2023
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