Weyerhaeuser Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Weyerhaeuser Second Quarter 20 24 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 As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Taylor, Vice President of Investor Relations. Thank you, Mr.

Operator

Taylor. You may begin.

Speaker 1

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's Q2 2024 earnings. This call is being webcast at atwww.warehauser.com. Our earnings release and presentation materials can also be found on our website.

Speaker 1

Please review the warning statements in our earnings 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 Web site. On the call this morning are Devin Stockfish, Chief Executive Officer and Davey Wold, Chief Financial Officer.

Speaker 2

I will now turn the call over to Devin Stockfish. Thanks, Annie. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported 2nd quarter GAAP earnings of $173,000,000 or $0.24 per diluted share on net sales of $1,900,000,000 Excluding a special item, we earned $154,000,000 or $0.21 per diluted share. Adjusted EBITDA totaled 410,000,000 a 16% increase over the Q1.

Speaker 2

These are solid results and I'd like to thank our teams for their continued focus and operational performance. Through their efforts, adjusted EBITDA improved across each of our business segments compared to the prior quarter, a notable achievement in light of numerous market related challenges, particularly in the lumber market. Before getting into the businesses, I'd like to comment briefly on an exciting growth opportunity within our Southern Timberlands portfolio. As we announced yesterday, we are acquiring approximately 84,000 acres of high quality timberlands in Alabama for $244,000,000 The collective acreage was sourced through multiple transactions, one of which closed in the 2nd quarter for $48,000,000 The remaining transactions are under contract and expected to close later this year subject to customary closing conditions. These acquisitions represent an attractive opportunity to expand our strategically positioned to demonstrate immediate synergies, strategically positioned to demonstrate immediate synergies with existing Weyerhaeuser operations.

Speaker 2

In addition, they're As highlighted on Page 18 of our earnings slides, we've demonstrated meaningful progress toward our multiyear Timberlands growth target. Including these transactions, we will have completed approximately $775,000,000 against our target and are on track to reach $1,000,000,000 of strategic Timberlands acquisitions by the end of 2025. Turning now to our Q2 business results. I'll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $81,000,000 to 2nd quarter earnings.

Speaker 2

Adjusted EBITDA was $147,000,000 a slight improvement compared to the Q1, largely driven by increased sales volumes out of the West. Starting with the Western domestic market, log prices faced downward pressure in the 2nd quarter as mills carried elevated log inventories and continue to navigate a softening lumber market. In addition, log supply was ample given the seasonal improvement in weather conditions and recent milk curtailments reduced log takeaway in the region. As a result of these dynamics, our average domestic sales realizations decreased slightly compared to the quarter. Given favorable operating conditions, our fee harvest volumes were moderately higher and domestic sales volumes improved as demand for our logs remained stable despite softer end markets.

Speaker 2

Per unit log and haul costs increased and forestry and road costs were slightly higher. Moving to our Western export business. Log markets in Japan were stable in the 2nd quarter and demand for our logs was steady. Suppliers of European lumber into Japan continue to face shipping and cost headwinds, which has provided our customers an opportunity to pick up market share. For the Q2, our average sales realizations for export volumes to Japan increased slightly.

Speaker 2

Sales volumes increased significantly, partially due to the timing of vessels. In China, log consumption increased modestly following the Lunar New Year holiday and log inventories at the ports declined steadily in the Q2. That said, log takeaway waned as the quarter progressed. On balance, log demand was solid from our strategic customers in the region and we significantly increased our sales volumes into China during the Q2. Our average sales realizations were slightly lower compared to the Q1.

Speaker 2

Turning to the South, adjusted EBITDA for Southern Timberlands was comparable to the 1st quarter. Southern sawlog markets moderated in the 2nd quarter largely in response to elevated mill inventories, a seasonal increase in log supply and reduced consumption as mills adjusted to lower pricing and takeaway of lumber. In contrast, Southern Fiber markets were generally stable as supply and demand returned to a more normalized state. On balance, takeaway for our logs remained steady given our delivered programs across the region. As a result, our average sales realizations were comparable to the Q1.

Speaker 2

Our fee harvest volumes and forestry and road costs were seasonally higher and per unit log in haul costs were comparable. In the North, adjusted EBITDA decreased slightly 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 contributed $59,000,000 to 2nd quarter earnings. Adjusted EBITDA was $102,000,000 an $8,000,000 increase compared to the Q1, partially driven by higher royalty income from construction materials within our Energy and Natural Resources business.

Speaker 2

In our Real Estate business, we continue to benefit from solid demand for HBU properties resulting in high value transactions with significant premiums to timber value. That said, our average price per acre declined sequentially due to the mix of acres sold in the quarter. I'll now make a few brief comments on our Natural Climate Solutions business. We continue to see strong demand for large scale solar development and signed additional agreements in the Q2. In total, we now have over 70 agreements for potential solar projects covering more than 130,000 acres across the U.

Speaker 2

S. South. Turning to forest carbon. We are advancing several projects through the development pipeline and expect to have 2 new projects in the U. S.

Speaker 2

South approved later this year. These projects in combination with our main pilot project are expected to generate over 100,000 credits in 2024. Looking forward, we're encouraged by the growing support for the voluntary carbon markets and are uniquely positioned to capitalize on increasing demand for high quality credits. Moving to Wood Products on Pages 12 through 14. Excluding a special item, Wood Products contributed $171,000,000 2nd quarter earnings.

Speaker 2

Adjusted EBITDA was $225,000,000 a 22% improvement over the 1st quarter, largely driven by an increase in OSB pricing as well as higher sales volumes and lower costs in lumber and EWP. Starting with lumber, 2nd quarter adjusted EBITDA was an $8,000,000 loss with soft pricing as the primary headwind. Average benchmark pricing for lumber decreased by 5% compared to the Q1. Despite solid single family housing starts thus far in 2024, other end markets for lumber, particularly the repair and remodel and multifamily housing segments have been more muted recently. As a result, lumber supply continued to outpace demand and buyer sentiment remained cautious in the second quarter.

Speaker 2

Although this dynamic is being felt across the North American lumber market, it's been more acute in Southern Yellow Pine, given softness in treater and multifamily demand, which are proportionately larger markets in the South compared to other regions. For the lumber business, our average sales realizations decreased by 2% in the Q2. Our sales volumes were moderately higher, partially due to increased production following winter weather disruptions in the Q1. Unit manufacturing cost and log costs were both lower in the Q2. Before moving to OSB, I'll make a few comments on our recent decision to indefinitely curtail operations at our sawmill in New Bern, North Carolina.

Speaker 2

These are always difficult decisions given the impact on employees, their families and the local community. So we did not take this decision lightly. Newbern is the smallest mill in our portfolio at 100,000,000 board feet of capacity. Unlike other facilities across our mill set, for a variety of reasons, we haven't invested meaningful capital in Newbern. So its cost structure was relatively challenged, making it very difficult in the current pricing environment.

Speaker 2

Given these variables along with Newbern's limited integration with our fee timberlands, we didn't see a clear path to achieving sufficient financial results to keep the mill running. As a result, we've commenced an orderly wind down of operations and expect the mill to be fully curtailed in the Q3. I do want to thank our New Bern team for their contributions to the company as well as the local community for their support over the years.

Speaker 3

We're

Speaker 2

working to minimize the impact of the curtailment by providing employment opportunities in other parts of our operations or transition services to affected employees. As for the remainder of our mill set, we are very focused on running efficiently and controlling costs. Given our deeply ingrained OpEx culture and relative position on the cost curve, we firmly believe that we're better positioned to operate through the commodity cycle than most of the 3rd quarter. This will take place across our mill set and is inclusive of the Newburn curtailment. And looking forward, we will continue to assess our performance, customer commitments and broader portfolio integration as we evaluate the need to further optimize our lumber operations.

Speaker 2

So now turning to OSB. Adjusted EBITDA largely in response to the softer than expected demand during the spring building season and elevated channel inventories. Pricing stabilized by quarter end and has remained steady into July. Notwithstanding this volatility, average OSB composite pricing was 6 percent higher compared to the Q1, while our average realizations were 13% higher. This relative difference was largely due to the length of our order files, which results in a lag effect for OSB realizations.

Speaker 2

Our production and sales volumes and unit manufacturing costs were comparable to the Q1 and fiber costs improved slightly. Engineered Wood Products adjusted EBITDA increased by 6 $1,000,000 compared to the Q1. Given solid single family construction activity, BWP market experienced a slight seasonal improvement in demand at the outset of the quarter before stabilizing into the summer months. As a result, our sales volumes were higher across all products in the second quarter and sales realizations were comparable for most. Unit manufacturing costs improved sequentially and raw material costs moved lower for solid section products, but higher for I joists primarily related to OSB Web stock.

Speaker 2

In distribution, adjusted EBITDA decreased by $2,000,000 compared to the Q1 as lower commodity margins offset higher sales volumes. With that, I'll turn the call over to Davey to discuss some financial items and our Q3 outlook. Thank you, Devin,

Speaker 3

and good morning, everyone. I'll 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 ended the quarter with $1,000,000,000 of cash with approximately $200,000,000 earmarked for the remainder of the Timberland acquisitions we announced yesterday. Our balance sheet, liquidity position and financial flexibility remain exceptionally strong and we are well positioned to navigate a range of market conditions.

Speaker 3

In the Q2, we generated $432,000,000 of cash from operations and capital expenditures were $91,000,000 We returned $146,000,000 to shareholders through the payment of our quarterly base dividend, which was increased in the Q1 by 5.3% to $0.20 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 $29.96 and as of quarter end, we had completed approximately $850,000,000 of repurchase under our $1,000,000,000 authorization. Looking forward, we'll continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. 2nd quarter results for our unallocated items are summarized on Page 15.

Speaker 3

Adjusted EBITDA for this segment increased by $6,000,000 compared to the Q1, primarily attributable to changes in inter segment profit elimination and LIFO. The outlook items for the 3rd quarter are presented on Page 19. In our Timberlands business, we expect 3rd quarter earnings and adjusted EBITDA will be approximately $20,000,000 to $30,000,000 lower than the Q2 of 2024, largely driven by lower sales volumes and realizations in the West. For context, results for our Timberlands business are generally at their lowest level in the Q3 given seasonal dynamics. Turning to our Western Timberland operations, we expect domestic log demand and pricing to face downward pressure in the 3rd quarter as mills continue to carry elevated log inventories and navigate a challenging lumber market.

Speaker 3

As a result, our domestic sales realizations are expected to be moderately lower compared to the Q2. Our fee harvest volumes will be slightly lower as we have made the seasonal transition into higher elevation operations, which generally have lower productivity. Forestry and road costs are expected to be seasonally higher in the 3rd quarter and per unit log and haul costs are expected to be lower. Moving to the export markets. In Japan, we anticipate continued steady demand from our customers in the Q3.

Speaker 3

As a result, our sales volumes are expected to be comparable to the 2nd quarter. That said, we anticipate a moderate decrease in our average sales realizations given ongoing consumption headwinds in the Japanese log market and the effects of a strengthening yen against the dollar. In China, log demand is expected to moderate in the 3rd quarter in response to lower consumption levels and an increase of log inventories at the ports. As a result, our sales volumes to China are expected to be lower compared to the Q2 and our average sales realizations are expected to decrease slightly. In the South, we expect sawlog markets to moderate somewhat in the Q3 as log supply remains ample and mills further adjust to lower pricing and takeaway of lumber.

Speaker 3

In contrast, Southern fiber markets are expected to remain stable with slight upside as the quarter progresses. On balance, takeaway for our logs is expected to remain steady given our delivered programs across the region. As a result, we expect our sales realizations will be comparable to the Q2. Given favorable weather conditions in the Q3, we anticipate our fee harvest volumes will be moderately higher. Per unit log in haul costs are expected to be comparable and forestry and road costs are expected to be seasonally higher.

Speaker 3

In the North, our fee harvest volumes are expected to be significantly higher compared to the 2nd quarter as we have fully transitioned from spring breakup conditions and our sales realizations are expected to be moderately lower due to mix. Turning to our Real Estate, Energy and Natural Resources segment. Real Estate markets have remained solid year to date and we have capitalized on steady demand and pricing for HBU properties. As a result, we are increasing our guidance for full year 2024 adjusted EBITDA to approximately $330,000,000 $10,000,000 higher than prior guidance. We continue to expect basis as a percentage of real estate sales to be 35% to 45% for the year.

Speaker 3

And we remain on track for a year over year increase in contributions from our Natural Climate Solutions business as we continue to advance toward our 2025 target. For the Q3, we expect earnings will be approximately $10,000,000 lower and adjusted EBITDA will be approximately $30,000,000 lower than 2nd quarter due to the timing and mix of real estate sales. For our Wood Products segment, we expect 3rd quarter earnings before special items and adjusted EBITDA will be lower compared to the Q2, excluding the effects of changes in average sales realizations for lumber and OSB. Benchmark prices for lumber and OSB have been fairly stable in July after decreasing for most of the second quarter. For lumber, buyers remain reluctant to build inventories and supply continues to outpace demand.

Speaker 3

For OSB, supply and demand are currently more balanced, yet buyer sentiment has turned more cautious as we transition beyond the spring building season. As shown on Page 20, our current and quarter to date average sales realizations for lumber are moderately lower than the 2nd quarter average. For OSB, our current and quarter to date average sales realizations are significantly lower than the 2nd quarter average. For our lumber business, as Devin mentioned, we expect to reduce lumber production by 5% to 10% in the Q3, inclusive of the Newburn curtailment. As a result, we anticipate lower sales volumes and higher unit manufacturing costs compared to the Q2.

Speaker 3

Our log costs are expected to be slightly lower. For our OSB business, we expect lower production volumes and moderately higher unit manufacturing costs due to planned annual maintenance outages that are typical in the Q3. However, we anticipate our sales volumes to be comparable. Our fiber costs are expected to be slightly higher in the Q3, primarily in Canada. In our Engineered Wood Products business, we can continue to see steady demand for our products given solid single family construction activity.

Speaker 3

As a result, we expect our sales volumes to be comparable to the 2nd quarter. We anticipate moderately lower sales realizations, primarily for plywood and MDF products. Raw material costs are expected to be lower in the 3rd quarter, primarily for OSB Webstock. For our distribution business, we expect adjusted EBITDA to be slightly lower compared to the 2nd quarter due to a decrease in commodity realizations. With that, I'll now turn the call back to Devin and look forward to your questions.

Speaker 3

Thanks, Davey. Before wrapping up this morning, I'll make

Speaker 2

a few comments on the housing and repair and remodel markets. Starting with housing, despite a softer than expected spring building season, our macro view on the housing market is largely unchanged from the last quarter. The single family segment is holding up reasonably well, hovering around 1,000,000 units year to date and notwithstanding elevated mortgage interest rates, single family construction activity continues to be supported by healthy underlying demand for housing, a limited inventory of existing homes on the market and actions taken by the larger public homebuilders to offset affordability challenges. In contrast, the multifamily segment has been more challenged given the significant amount of new supply entering the market this year on top of elevated supply in 2023 and the impact of higher rates on new projects. Moving into the second half of twenty twenty four, we're still expecting solid single family building activity with potential upside if mortgage rates come down as the year progresses.

Speaker 2

And that's consistent with what we're hearing from our homebuilding customers. In contrast, we expect multifamily to remain soft through year end and into 2025. Longer term, our view on housing fundamentals continues to be favorable, supported by strong demographic trends and a vastly under built housing stock. Turning to the repair and remodel market, activity has been softer year to date, particularly in the do it yourself segment. However, the professional segment is still holding up relatively well.

Speaker 2

To a certain extent, persistent inflationary pressures are weighing on consumer sentiment and spending. We're also seeing some near term headwinds from fewer people buying and selling homes in the current environment. But as we think about the back half of twenty twenty four, we are expecting fairly steady repair and remodel activity, albeit at levels below the last several years and would expect demand to increase when interest rates move lower and consumer sentiment improves. And longer term, many of the key drivers supporting solid repair and remodel activity remain intact, including favorable home equity levels and an aging housing stock. So in closing, our teams delivered solid operating performance in the Q2 and we continue to make meaningful progress on multi year growth targets to enhance our Timberlands portfolio and advance our Natural Climate Solutions business.

Speaker 2

Although near term market conditions have moderated, we maintain a constructive longer term outlook for the demand fundamentals that support growth in housing, repair and remodel and natural climate solutions. And with our unmatched portfolio of assets, our strong balance sheet and disciplined approach to capital allocation, we're well positioned to execute against our strategy and navigate a range of market conditions. We remain relentlessly focused on operational excellence and innovation and are committed to serving our customers and delivering superior long term value for our shareholders. So with that, I think we can open it up for questions.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from Susan Maklari with Goldman Sachs. Please proceed with your question.

Speaker 4

Thank you. Good morning, everybody.

Speaker 2

Good morning. Good morning, Sue.

Speaker 4

Good morning. My first question is on Wood Products. You mentioned that you're taking that reduction in capacity in the Q3. Can you talk a bit more about how you arrived at that 5% to 10% range? What would take us to the lower end of that versus the higher end of that range?

Speaker 4

And how do you think about positioning the operations just given the changes in the competitive landscape more broadly? We've been hearing smaller players have more staying power this cycle. And does that require you to take different actions today than perhaps you would in the past? How do you think about positioning the business for the near term as well as the longer term? And I guess maybe what would you need to see to take more actions there?

Speaker 2

Yes. Well, maybe I'll answer your second question first and then get back to how we got to the 5% to 10%. As we look at the lumber business and this is frankly true for all of our businesses, one of the things that we've really been focused on over the last several years is really aligning our businesses for the cyclical nature of our industry. And so what does that mean? Well, it means strengthening the balance sheet, which we've done a tremendous amount of work on that, very strong balance sheet.

Speaker 2

But it's really focused on making sure that your operations are low cost and can weather these dips that you see from time to time in these markets. And we've been really focused on that with all of the OpEx work that we've done. I think you can see that in our relative operating performance, industry leading margins across all of our businesses. And we're very focused on that in good and in more challenging times. And that way, you don't have to take as dramatic action when you see some of these more challenging markets like we're seeing in lumber.

Speaker 2

So that's what we're focused on all the time, whether lumber prices are high or low because I think that's the way that you win in commodity markets. And as we see the market today, obviously, and particularly lumber, it's a little bit more challenged. With the pullback that we've seen on multifamily and repair and remodel, that's created an imbalance in supply and demand in the market. So you're seeing that in the pricing environment. The 5% to 10%, that's really us looking out at the market.

Speaker 2

We're always looking to balance our supply with our customer demand. We look at the integrated nature of our model to see where do we have opportunities to create value and where do we need to dial back a little bit. And so as we looked into the Q3, obviously, the Newburn mill had some unique situation there because of the cost structure at that mill and the size. But outside of that, it's really just trying to balance the demand from customers, maintaining the right inventory levels and really seeking to drive the most earnings that we can in this current environment. I will say it's important to remember, we're at a price right now that is essentially making most of the market under water, that's not going to last forever.

Speaker 2

At some point, you are going to see more action taken. Prices will come up and then we'll be back in a more sustainable place for lumber.

Speaker 4

Okay. That's very helpful, Devin. And then maybe turning to Timberland, obviously, you've got this nice deal that's coming together as part of it in the second quarter, the remaining piece in the back half of this year. As you continue to make those investments and you get closer to that $1,000,000,000 target by the end of next year in Timberlands, How do you think about helping investors appreciate the inherent value in these deals? And the potential for the upside in returns as you can realize over time as some of these alternative opportunities come together and perhaps even relative to alternative uses of your cash, whether it's investing in organic growth or shareholder returns, any thoughts around that?

Speaker 2

Yes, maybe I'll take a crack and Davey, you can come in if I miss anything here. First of all, I would just say we're really excited about these Alabama transactions. This is an opportunity to pick up some very high quality timberlands as we mentioned in the release. Really, when we look across the entirety of our Southern portfolio from a cash flow per acre standpoint, really, it's going to be really at the top of our ownership. So really pleased to get that.

Speaker 2

As we think about demonstrating and highlighting the value of our underlying Timberlands, I think you're going to look at a couple of different things. Number 1, we're going to continue to get investors out into the timberlands. We did that last year. I think that was a good opportunity for people to see on the ground just the quality of the asset. I do think as we continue to get deeper into this natural climate solutions journey and you start to see some of the work that we've really been putting effort in over the last few years, this is going to start coming to fruition in the years to come.

Speaker 2

And I think that will be a great way to highlight some of this alternative value. And I'll just use solar as an example. That's been an area that's been particularly attractive. That's a nice healthy uplift over Timberland values and we've already got agreements signed up on over 130,000 acres. So we need that solar capacity to be installed and come to fruition and you're going to start seeing that cash flow hitting the P and L over time.

Speaker 2

And that will be a way that we can really demonstrate the up lift from all of this work on alternative values. But it's an important part of what we need to do to really educate our investment community on the value opportunity within this portfolio.

Speaker 3

Yes. And I would just add, Sue, I think this really just demonstrates the beauty of our flexible cash return framework as we think about all the options that are available to us. We're continuing to, of course, provide our base dividend to investors, but we're also able to invest in our business, complete attractive share repurchase activity through the cycle when others may not be in to do so. So when markets inevitably improve, we'll be well positioned to take advantage of that position. So we can continue to evaluate all the options that are available to us and we'll ultimately allocate our capital in the way that creates the most value for shareholders.

Speaker 4

Yes. Okay. Thank you both for the color and good luck.

Speaker 2

Thank you.

Operator

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

Speaker 5

Hi, thanks everyone. Good morning. Hi, David and David.

Speaker 6

Hi, George. Can you guys hear me okay?

Speaker 3

Hi, George.

Speaker 2

Yes. Okay.

Speaker 5

Thanks so much. So I guess, first of all, with Timberlands and the outlook, it sounded like the larger amount of downward pressures coming from the West. If we think about the key export markets, China, Japan and domestic markets and then think about shipments and realizations or costs for that matter. Within that grid, where would you have us think about where you're seeing the most cost for that sequential downtick in timber EBITDA? Are you talking on the cost side

Speaker 2

or the realization side, George?

Speaker 5

Well, I'm talking about EBITDA. We're expecting EBITDA to decline. So if I think about your markets and realizations and costs or shipments, where is most of that pressure coming from, if you get my question?

Speaker 2

Yes, I get you. It's mostly on the price side. And the dynamic that we have at play right now in the West, I mean, it continues to be a very tension market. And under most circumstances, you're going to see pretty strong log pricing in the West. And we've seen that over the years.

Speaker 2

The challenge that we have at the moment is with lumber prices where they are, we're just kind of bumping up against the ceiling where mills can still make money. And frankly, I think a lot of them are not currently. And so what that's doing is it's causing the mills to run at reduced postures across the West. And so that is really reducing the amount of takeaway. Now we're still moving the volume because we have a strong customer base, but our ability to raise prices in this environment is pretty challenged.

Speaker 2

And when you look at the Japan pricing, which is kind of second most important here, that typically tracks what's going on in the domestic market. You always get a premium to domestic prices, but those 2 are correlated. And so the ability to really raise prices in Japan is somewhat limited both by the domestic dynamic, but also as Davey mentioned in his script, the challenges with the yen right now are making that a little bit tougher as well. So it's really on the price side as much as anything. That's what's going on with EBITDA in the West.

Speaker 5

Thanks, Devin. Next question. If we think about lumber markets and we move to the South and I forget the precise amount of board feet that was added in the industry over the last 5 years. If you had a figure that was top of mind, it would be helpful. What do you think right now industry operating rates are within the South in lumber are recognizing tough to call, not a monolithic market, we're running 5 days, 7 days.

Speaker 5

But there's a lot of capacity that was added in converting. That was the hope that would ultimately drive higher timber pricing over time. Right now, it doesn't look like lumber is being demanded at the rate that capacity came in. What do you think that imbalance is in the South right now in terms of lumber?

Speaker 2

Yes. I mean, there have been several 1,000,000,000 board feet that have been added over the last several years. I would just note, when you look at capacity across North America as a whole, it's been pretty stable over the last several years. But to your specific question around production, I think what we are seeing and again, it's hard to say for sure, but certainly from our log customer standpoint, we're definitely seeing reduced production across the U. S.

Speaker 2

South. And by the way, that's true in the Northwest and it's true in British Columbia, I believe as well. Hard to dimension it just because we don't have that level of insight into our competitors operating rates. But it's certainly down relative to where it would be in a normalized condition. I would say the 2 things from an overall supply demand dynamic, I think that are important to remember 2 in the South are, number 1, treated lumber is a pretty big market in the South for Southern Yellow Pine.

Speaker 2

That's probably been down mid to high single digits this year from best we can tell. And then multifamily, just because there is a lot of multifamily activity that's been going on that uses Southern Yellow Pine. That obviously has been down quite a bit this year. So I think the combination of that incremental capacity coming in to the south as well as those two components being down has really put some pressure on Southern Yellow Pine. Now I will say just again over time what's going to happen is you're going to continue to see SPF coming out of the market and you've seen a lot of rationalization over the last few years.

Speaker 2

And what's going on in the market today is Southern Yellow Pine is just kind of pushing into some of those markets that have historically been SPF, but that's going to take a little time to fully play out.

Speaker 5

Right. No, that's helpful. Last question for me, I'll turn it over. Recognizing you're not going to make changes on capital allocation based on a quarter or 2, you shouldn't. Where you sit here today, do you still feel comfortable about the dividend growth outlook that you've talked about over the years, the 5%?

Speaker 5

And how does the acquired Timberland now help you keep up that dividend growth or in total allow more optionality in your capital allocation? Thanks guys. Good luck in the quarter.

Speaker 3

Yes. Thanks, George. I mean, obviously, the dividends are a Board decision, but the ability to increase that base dividend is supported by ongoing increases to our sustainable cash flow generation. So to your point, those Timberland acquisitions we announced yesterday, the growth in the Natural Climate Solutions business, all of those things help support our ongoing cash flow generation. And so that's ultimately what's going to support that growth in the dividend over time.

Speaker 3

But I'd also point out, it's not just those things, we also have improvements we've made over time in our capital structure, debt pay down, refinancing, share repurchase, of course, helps contribute towards that, as does OpEx and innovation, the things that we're doing every single day to help make sure we have the right cost structure across our business. I'd say we've modeled a number of different scenarios and feel very confident in our ability to increase our base dividend even in challenging market conditions.

Speaker 5

Okay. Thanks, Dave. I'll turn it over.

Speaker 3

Thanks, Devin. Thanks, George.

Operator

Our next question comes from Amir Patel with CIBC Capital Markets. Please proceed with your question.

Speaker 7

Hi, good morning. Devin, in your recent response, you highlighted the treated market down, I think you said mid to high single digits. So in that R and R channel, do you have a sense as to how much maybe the DIY component is down? Because I

Speaker 3

think you've mentioned that's faring worse than the broader market.

Speaker 2

Yes. I mean, it's probably down in a similar range. As you know, it's hard to get really tight numbers in the repair and remodel market. So you kind of have to piece it together from our different customers and some other anecdotal. But that's kind of where we're thinking mid to high single on the DIY side.

Speaker 7

Fair enough. Then Devin, are you able to share your operating rates in the quarter for the various wood products businesses?

Speaker 2

Yes. So Q2 for lumber, we were kind of in the low 80% range for OSB, call it mid-90s and for EWP low 80s. That was for Q2. Thanks.

Speaker 7

That's helpful. And just the last question I had was for the latest Timberland acquisitions in Alabama, appreciate the disclosures there on the EBITDA you expect from timber sales, but would you see additional Natural Climate Solutions revenues of acreage you acquired?

Speaker 3

Yes, of course, Sameer. We it's pretty limited in terms of what we're underwriting today in terms of that upside over time. But as we've seen in the transactions that we've acquired in the Carolinas and Mississippi and other spots over the last few years, we continue to see a lot more opportunities than we had originally anticipated as we bring those into our portfolio. So certainly that's true on the Natural Climate Solutions business, but it's also true as we think about the synergies that we identify in terms of putting them into our operating footprint and really just running those timberlands over time.

Speaker 7

Fair enough. That's all I had. I'll turn it over. Thanks, Doug.

Speaker 2

Thank you.

Operator

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

Speaker 8

Great. Thanks and good morning everyone. I just wanted to start off on Timberland. I guess given kind of the capital that you've deployed there and hopefully the fact that we're at kind of a bottom in terms of the lumber pricing cycle, how much confidence do you have that harvest contributions and cash flow can start to show some sustainable improvements over the next 2 to 3 years? And I guess excluding price, what other levers do you think are going to be most important in driving that for Weyerhaeuser?

Speaker 2

Yes, I'd say a couple of things and I'm going to differentiate here between the West and the South. In the West right now, obviously realizations are down relative to where they've been over the last several years. In a normalized lumber environment, I would expect higher log realizations in the West. So we still feel good about the overall dynamic for pricing in the West outside of these unique circumstances that we're in right now in the lumber market. So you should see a nice pickup in log realizations out of the West when things normalize.

Speaker 2

In the South, we have been adding Timberlands here over the last several years as part of our $1,000,000,000 program and you're going to start seeing that reflected in harvest volumes in the years to come. And so that's a component. We do think, again, outside of the situation that we're in today where lumber markets are challenged, In those geographies where we've seen new capacity come in, we do expect to see log prices go up over time. We're also very focused, as we've talked about before, on growing our export business out of the U. S.

Speaker 2

South. And it's still a small component right now, but I'm pretty excited about some of the opportunities in India and Vietnam. And I think we're really looking to grow that over time, which is a component. And then again, just the natural climate solutions piece, I think as you look out over the next 5, 10, 15 years, one of the things you're really going to see is the alternative values that are inherent in a timber portfolio are going to start materializing in a much greater way. And whether that's solar, wind, carbon, carbon capture and storage, real estate development, mitigation banking, conservation, there are a lot of different things that you can do on a land base like ours.

Speaker 2

We've got a whole team that's really focused on identifying and capturing that value. We're still in the early stages, but you're going to really see that materialize in a more meaningful way in the years to come. And so that's when we look out into the future, obviously, we're going to continue to focus on having the lowest log and haul costs we do today and we will, I think, in the future because we're super focused on it. I think we'll see some upside on log prices, but we're also very focused on creating alternative values off the land base. So that's what gives us confidence that this program to acquire Timberlands is going to develop nicely and create a lot of value for our stakeholders over time.

Speaker 8

Got it. Okay. Thanks for that. And then in terms of EWP, I mean, it was pretty encouraging to see I joist and solid section pricing hold firm. How would you kind of describe the competitive environment out there?

Speaker 8

And how would you sort of characterize pricing risk if we were to see single family starts kind of sequentially soften a bit further just given what we've seen in the last couple of months?

Speaker 2

Yes. I mean, as you say, this is a product line that's primarily focused on single family. And so that's held up reasonably well and that's given us the ability to continue to move product and keep prices relatively steady. And that's our expectation by and large for Q3 as well. Look, if single family fell off dramatically, would we see some additional price pressure for EWP?

Speaker 2

Of course. But that's not our base case. We think that single family is going to hold up reasonably well. It's competitive marketplace. We've got some solid competitors.

Speaker 2

They make a nice product as well. But I think the TrustJoyce brand does carry a premium in the market. We do a lot in terms of customer support to make sure that we are taking care of our customers, we think, in a unique way that provides us with a a competitive advantage. And so I think we'll fare well regardless of what's going on in the market. But as long as single family housing holds up, I think we should be just fine from an EWP standpoint.

Speaker 6

Got it.

Speaker 8

Okay. Well, appreciate all the details. I'll turn it over.

Speaker 2

All right. Thank you. Thanks, Kurt.

Operator

Our next question comes from Mike Rotchmann with Truist Securities. Please proceed with your question.

Speaker 9

Thank you, Devin, Davey, Andy and Cara for taking my questions and congrats on a good quarter despite the backdrop.

Speaker 3

Thank you. Thank you.

Speaker 9

Dustin, just one question on the weakness in housing. How much of the weakness that we're seeing in housing starts do you think relates to regional and smaller builders who don't have the wherewithal of the larger builders to buy down rates or offer other incentives?

Speaker 2

Yes. I mean, I think that's certainly a component and there's no question we have seen a bifurcated market with rates being where they are. The ability for the bigger builders to buy down rates is a meaningful competitive advantage in this market. So yes, I think that certainly impacted overall new home construction activity. However, I don't think it's one for 1 in terms of for every house that a small builder doesn't build.

Speaker 2

It just doesn't get built because the big builders are just taking market share. You can certainly see that over the last few years. Now the good news, I think, is as rates come down and as those smaller builders are again able to compete on a little bit more equal footing, I think that is another increment that can come back into the market.

Speaker 9

Got you. Got it. Okay. That makes sense. And then just on EWP, you mentioned the operating rate in the low 80s for 2Q.

Speaker 9

I think it was in the high 70s for 1Q. I think you had some mill reliability issues last quarter. Were those addressed in 2Q? And where do you think the operating rate will be in EWP for 3Q? And just lastly, it's EWP.

Speaker 9

If trends continue the way they are in terms of single family holding its own, when do you think an inflection point can be reached in EWP pricing? Could that be 3Q, late 3Q, 4Q? What do you think needs to get us over the hurdle to actually see prices reflect higher? Thanks very much.

Speaker 2

Yes. Well, in terms of operating rates, in Q1, it was there was a little bit of a reliability issue. Some of that was weather related. It was pretty minor in the grand scheme of things. Right now, we are operating at kind of that low 80%.

Speaker 2

That's more or less what we're expecting for Q3 as well. We can dial that up a little bit if markets improve, but we're really just trying to kind of keep that production in line with what we see as customer demand. So this is the rate we're going to be running at here until we see a meaningful pickup in activity. In terms of what's the up to up to 1.1 or north of that on the single family side, I think it doesn't take a whole lot to see the EWP market tension up. So you don't need all that much more.

Speaker 2

But again, even in this current environment, we can, I think, do pretty well on the CWP business? It's important to remember, obviously, we've seen prices come down a little bit from the pandemic highs, but when you look at where EWP pricing is relative to history, it's still very strong.

Speaker 9

Yes. Would agree with that. Thanks very much and good luck in the second half.

Speaker 2

All right. Thank you.

Operator

Our next question is from Ketan Mamtora with BMO Capital Markets. Please proceed with your question.

Speaker 6

Thank you and good morning, Devin, Davey. Good morning. I want to start with lumber and look, I mean, clearly, warehouse has made a lot of progress towards its black at the bottom efforts. But EBITDA in the last three quarters has been kind of negative. So I'm just curious, as we look at sort of back half and to your comments around demand being on the softer side, especially for R and R, I'm just curious, why do you think a more decisive kind of action towards production curtailments is not warranted given the market backdrop?

Speaker 2

Yes. Well, a couple of things, good question. So a couple of things I'd note. First of all, when we talk about black at the bottom, it is important to note that our Wood Products segment as a whole certainly has been black at the bottom. But with respect to lumber specifically, no question, this has been a very challenging pricing environment Recently, we've seen lumber prices at multiyear lows, and this has been a challenge for the lumber industry as a whole.

Speaker 2

I would say that's particularly true for our Northwest and British Columbia operations where even though we do have low cost mills, the log costs have remained elevated relative to the lower lumber prices. But just a few things for context when we think about what's going on. So first, our mill set overall is positioned very well on the cost curve. And you can see that I think in our relative performance even obviously we're not pleased with where EBITDA has been in lumber, but relatively rest of the industry, I think we've demonstrated where we sit on the cost curve. 2nd, I think we can and should be black at the bottom even at these prices in our southern operations and in Alberta.

Speaker 2

And I think, look, it's important to remember that pricing is not going to stay at levels where much of the underwater forever. And so we're ultimately going to see a pickup in pricing for lumber, at which point certainly will be black in the bottom back in the black as a system. But in the interim, we're going to keep focusing on costs and OpEx and running our operations efficiencies to navigate efficiently to navigate the market dip and overcome some of That's where we think just with That's where we think just with our cost structure, our customer base, where we think that makes sense. And look, others will make decisions based on their operation and their cost structure. But ultimately, you're not going to sit in a place where prices are below cash breakeven for most of the industry.

Speaker 6

Got it. No, that's very helpful perspective. Thanks, Evan. I'll jump back in the queue.

Speaker 2

All right. Thank you.

Operator

Our next question is from Matthew McKellor with RBC Capital Markets. Please proceed with your question.

Speaker 10

Hi, good morning. Thanks for taking my questions. Just a couple on Wood Products. Maybe first, can you talk about your expectations for the OSB market for the rest of the year with some new capacity coming on from a couple of your peers and ramping up, the cautious buyer sentiment you noted. I think you also highlighted somewhat elevated inventory levels there?

Speaker 2

Yes. So couple of things on that. As we think about Q3 for us, we're expecting essentially comparable to Q2 from a volume standpoint sales volume standpoint, from a realization standpoint. We'll see kind of how the quarter progresses, but things feel reasonably steady right now. When you look into Q4, as you mentioned, there is going to be some new capacity coming on.

Speaker 2

And so we'll see what that does to the market. It is important to remember when new capacity really comes on, it does take a while for them to get really fully into production. So the ramp up period will take some time. I would also note, historically Q3 and Q4 are times where much of the industry takes some of their annual maintenance downtime. So that may mitigate some of that new volume coming to market just from a Q4 standpoint.

Speaker 2

But overall, if we have more volume hitting the market unless demand picks up, that is going to put some downward pressure on pricing. Now the good news, at least from my standpoint, is our base case is that rates are going to come down at some point. And when you look pretty much everywhere in the U. S. And North America, there are housing shortages everywhere.

Speaker 2

And so it's really just and I can't tell you exactly what the mortgage rate needs to be to kind of unleash that level of building activity, but it's going to come at some point, at which point I think the OSB market is going to need that extra supply. So we'll see there may be a moment in time where it gets a little out of balance, but over the longer term, I think OSB should be a pretty strong business.

Speaker 10

Thanks. That's helpful. And then just switching over to the lumber business, can you talk about your expectations around the impact of software lumber duty cash deposit rates moving higher in August for the Canadian industry? Do you expect that pricing can move higher to offset some of that? Or do you have any expectations around capacity that could come out?

Speaker 2

Yes. I mean, obviously, we don't have visibility into our competitors' cost structure, but if you raise the duty from 8 percent to 14%, that's just yet another headwind for producers that are moving lumber into the U. S. Market. So we'll see what happens in terms of whether that triggers additional capacity decisions or not.

Speaker 2

But directionally, that could ultimately be helpful. But we'll see.

Speaker 10

Okay. Thanks so much. I'll turn it back.

Speaker 2

Thanks.

Operator

Our next question is from Mark Weintraub with Seaport Research Partners. Please proceed with your question.

Speaker 11

Thank you. Just maybe a little bit more on Natural Climate Solutions. So you mentioned 70 solar projects, 100 and 3,000 acres. When do those can you give a sense when those options expire? When you might expect you to start seeing more cash coming in related to

Operator

those deals?

Speaker 2

Yes. I mean, the nice thing about solar is there's a tremendous amount of demand. The flip side is it takes these solar projects a while to work through the system. So we're going to have solar development start coming online this year. First one is back half of this year and then you add, call it several a year and they just continue to build.

Speaker 2

And so the pipeline will grow over time and you're going to start seeing that cash flow hit our income statement. But it's unfortunately, it's slow going just the process to move these things through the pipeline.

Speaker 11

Okay. And so now we're kind of a couple of years into after you're having provided that $100,000,000 EBITDA target for Natural Climate Solutions. How things played out differently, better, worse than you expected? And maybe start there.

Speaker 2

Yes, that's a good question. I think when we look at the overall market, I think the opportunity that we see in the future is probably larger than back when we first set out that target, which is natural to some extent as these things continue to mature. I think the timeline on several of these different businesses has probably been a little longer than we expected. And that's particularly true around carbon capture and that's just taken a little bit longer than we would have expected. I that's just taken a little bit longer than we would have expected.

Speaker 2

I still have a lot of confidence that ultimately those are going to be a nice revenue generator. Solar, probably there's been more demand than we had expected. I think the timeline unfortunately hasn't dramatically shortened relative to when we kicked this off. And I do think just from an overall public policy standpoint, we do need to figure out a way to get these solar projects through the pipeline quicker. But the demand level is extremely high, so we feel good about that.

Speaker 2

I think mitigation banking is another area where we've seen probably a little bit more demand than we had originally anticipated. So that might be a bigger component of that initial $100,000,000 than we originally anticipated. And I think forest carbon is we're seeing growing levels of support. We had the Biden administration that came out and support of voluntary carbon markets. SBTI came out talking about voluntary credits for Scope 3 emissions.

Speaker 2

You've seen a variety of commentary from the environmental community in support. So I feel like that's growing in momentum. And when we talk to customers for forest carbon, there's a significant amount of demand as long as you can get over that credibility hurdle. And I feel like we're making good progress there. So I think that's another market that we're pretty excited about.

Speaker 2

And you're going to really start to see that hit in a more material way next year in terms of the income stream coming off of Forest Carbon. So overall, some there are always puts and takes, some things are going a little slower, but sitting here today in 20 24, I'm pretty optimistic about the Natural Climate Solutions.

Speaker 11

Thanks, Devin. Super helpful. Maybe just shifting gears real quick on OSB, it's kind of interesting. Even if I take a look at you're talking about current prices, knock off $100 from where they were on average, it still comes out quite a bit higher than where the random length is posting the price. And that's not unusual, your price has frequently been higher, not always, but frequently.

Speaker 11

Can you maybe explain why your prices I don't know if it's just an accounting thing or whether or not it's a mix or why does your price tend to be higher than what we see in random length?

Speaker 2

Yes, I think it's a few things. 1, oftentimes is going to be the length of the order files. So you're going to have a delay in terms of when those price moves hit our realizations. Number 2, we do sell a decent amount of our OSB internally as web stock as part of our Ijoy. So that flows through typically at a little bit higher price than just kind of commodity OSB.

Speaker 2

And then lastly, we typically have a higher mix of high value product relative to sheathing, which helps our overall realizations relative to random links. I think it's really those three things typically.

Speaker 11

That's helpful. Maybe just relatedly, so when we think about the EWP business, we've got OSB prices coming down, at least the commodity price is coming down very substantially. Does that flow through into higher margins for your EWP business or not necessarily as much as you would think?

Speaker 2

Yes, absolutely. I mean that OSB web stock, I mean it typically because it is all supplied internally, it's on a 13 week rolling average. 13 week rolling average. So it does roll through, but absolutely that is a tailwind for margins as you see OSB prices come down for the EWP business.

Operator

Okay, super. Thanks so much.

Speaker 2

Thank you.

Operator

Our last question is from Anthony Pettinari with Citi. Please proceed with your question.

Speaker 12

Good morning. Thanks for taking my question.

Speaker 9

Good morning.

Speaker 8

Hey, I just wonder, is

Speaker 12

there any way to quantify the fixed cost reduction you might see from Newbern? And then with the outlook for lumber for 3Q, I guess there's a few moving pieces with lower volumes, little lower log costs, higher unit manufacturing costs. I mean, if prices kind of stay where they are now through 3Q, would your lumber EBITDA maybe be kind of directionally similar to 2Q? Or do you think that you could breakeven with some of the actions you've taken or just any color you can give there?

Speaker 3

Yes, Anthony, just starting on the Newburn, again, I'd remind you that that's a relatively small mill, 100,000,000 board feet in capacity. Say

Operator

there.

Speaker 3

In regard to lumber as a whole, I think that's what I would say there. In regard to lumber as a whole, I think that's probably a fair statement in terms of if pricing holds where it's at today, probably relatively comparable. But of course, I do think there's some reason to think that prices could come up as the quarter progresses.

Speaker 12

Okay. That's helpful. I'll turn it over. 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. Well, thanks everyone for joining us this morning and thank you for your continued interest in Weyerhaeuser. Have a great day.

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Earnings Conference Call
Weyerhaeuser Q2 2024
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