Weyerhaeuser Q3 2021 Earnings Call Transcript

Presentation

[Operator]

Greetings, and welcome to the Weyerhaeuser Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host for today's call, Andy Taylor, Director of Investor Relations. Thank you, Mr. Taylor, you may begin.

[Andy Taylor, Director of Investor Relations at Weyerhaeuser]

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's third quarter 2021 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer; and Nancy Loewe, Chief Financial Officer.

I will now turn the call over to Devin Stockfish.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Great. Thanks, Andy. Good morning, everyone, and thank you for joining us today. This morning, Weyerhaeuser reported third quarter GAAP earnings of $482 million, or $0.64 per diluted share on net sales of $2.3 billion. Excluding a special item with a net after-tax benefit of $32 million, we earned $450 million or $0.60 per diluted share. In the third quarter, we delivered strong results across each of our businesses despite weather-related disruptions, the ongoing COVID-19 pandemic and continued supply chain challenges. Our teams did an exceptional job navigating these headwinds, and I'm incredibly proud of their collective efforts and focus on safely operating our businesses and continuing to serve our customers. Truly, great execution across the entire supply chain in a difficult environment, which has resulted in record earnings and cash flow in 2021. Year-to-date, we've generated more than $3.4 billion of adjusted EBITDA and $2.4 billion of adjusted funds available for distribution.

Turning now to our third quarter business results. I'll begin the discussion with Timberlands, on pages six through nine of our earnings slides. Timberlands earnings increased by $20 million in the quarter, which included a $32 million gain on the previously announced sale of our North Cascades Timberlands. Adjusted EBITDA decreased by $15 million compared to the second quarter. In the West, adjusted EBITDA decreased by $13 million compared to the second quarter. Western domestic log markets started the quarter in a favorable position despite weakening lumber prices and ample log supply. Demand remains elevated as mills continue to bolster log inventories during the peak of wildfire season, but weakened somewhat in September as a number of producers experienced COVID-related disruptions and finished lumber inventories increased above normal levels. Despite these headwinds, our third quarter domestic sales realizations were comparable to the second quarter, driven by strong domestic log prices in July and August. Salvage operations resulting from the 2020 Oregon wildfires continued in the third quarter.

The teams have done an outstanding job in managing these salvage efforts over the last year. To date, we've completed approximately 80% of our planned salvage harvest and expect to conclude most of this work by year-end. As expected, during the warmer and drier months in the summer, we transitioned to higher elevation and higher cost operations. Additionally, although we experienced very minimal wildfire damage to our timberlands, active fires and dry conditions across the region resulted in restrictions on our harvest activity in the quarter, particularly in Oregon. As a result, our fee harvest and domestic sales volumes were modestly lower in the third quarter, and per unit log and haul costs were higher. Turning to our export markets. In Japan, demand for our logs remained strong in the third quarter. Lumber imports from Europe into Japan continue to be restricted by the ongoing shortage of global shipping containers. This dynamic is driving increased market share for our customers and robust demand for our logs. As a result, our Japanese log sales realizations increased moderately compared to the second quarter, and sales volumes were comparable. In China, demand for our logs remained favorable in the quarter despite seasonally lower consumption, COVID impacts to construction activity and other supply chain disruptions.

Imports of lumber and logs into China continue to be constrained by global shipping container availability as well as the ban on Australian logs. As a result, sales realizations for our China export logs increased moderately compared to the second quarter, but were more than offset by higher ocean freight rates. Sales volumes to China were comparable to the second quarter. Moving to the South. Southern timberlands adjusted EBITDA was comparable to the second quarter. Southern sawlog and fiber markets continued to strengthen as log supply was constrained and mill inventories remain lean, resulting from ongoing wet conditions and significant weather events. As a result, our sales realizations were slightly higher than the second quarter. Fee harvest and sales volumes increased slightly in the third quarter, but fell below our planned activity level as a result of persistent wet weather and operational disruptions from Hurricane Ida. Per unit log and haul costs increased slightly in the quarter as did forestry and road costs. On the export side, we continue to see growing demand for our Southern logs. Our export log pricing increased substantially in the third quarter, but volumes were lower than second quarter as we continue to face challenges associated with container availability and increased freight rates.

In the North, adjusted EBITDA decreased slightly compared to the second quarter. Sales volumes were significantly higher coming out of spring breakup conditions, though sales realizations were lower due to mix. Turning to Real Estate, Energy and Natural Resources on pages 10 and 11. Real estate and ENR contributed $45 million to third quarter earnings and $60 million to adjusted EBITDA. Third quarter adjusted EBITDA was $31 million lower than the second quarter due to timing of transactions, but comparable to the year ago quarter. Similar to last year, our 2021 real estate sales activity has been heavily weighted toward the first half of the year. Third quarter earnings more than doubled compared to the third quarter of 2020 due to the mix of properties sold. We continue to capitalize on strong demand for HBU properties, resulting in high-value transactions with significant premiums to timber value. Moving to Wood Products, pages 12 through 14. Wood Products earnings and adjusted EBITDA decreased by approximately 60% compared to the prior quarter as lumber and OSB pricing declined substantially from record levels earlier in the year before stabilizing later in the quarter.

Additionally, weather events in the U.S. South, including Hurricane Ida, resulted in temporary downtime and lost production in our lumber business. And together with COVID-related staffing disruptions, further exacerbated transportation challenges in the region. Despite these headwinds, our teams performed well and delivered strong results. Our EWP business established a new quarterly EBITDA record in the third quarter and the overall Wood Products segment has achieved year-to-date adjusted EBITDA of more than $2.8 billion. Lumber markets began the third quarter with elevated home center and treater inventory levels due to softening do-it-yourself repair and remodel activity. As a result, pricing continued its downward trajectory in July and for much of August. The market began to strengthen later in the quarter as home centers and treaters work through excess inventories and consumer spending shifted back to do-it-yourself repair and remodel activity after Labor Day. When combined with solid demand from new home construction and professional repair and remodel activity, each of which remain healthy throughout the third quarter. These dynamics caused pricing to stabilize in late August and increased gradually through September

Adjusted EBITDA for our lumber business decreased $686 million compared to the second quarter. Our sales realizations decreased by 52% in the third quarter while the framing lumber composite pricing decreased by 61%. Our sales volumes increased moderately in the third quarter and log costs increased slightly, primarily for Canadian logs. The OSB market weakened significantly at the outset of the third quarter with the softening of do-it-yourself repair and remodel activity. This dynamic drove lower sales activity and higher inventories at the home centers. As a result, we experienced a rapid decline in pricing from the peak record prices that we reached in July. Pricing then stabilized above the historical average in August, as demand from strong new home construction activity continued and the market faced supply constraints resulting from ongoing resin availability and transportation challenges. This dynamic, along with late quarter improvement in do-it-yourself repair and remodel demand, drove prices gradually higher through September. Adjusted EBITDA for our OSB business decreased by $128 million compared to the second quarter. Our sales realizations decreased by 24% in the third quarter while the OSB composite pricing decreased by 43%.

This relative outperformance was largely a result of our higher percentage of premium OSB products. Our sales and production volumes improved modestly in the third quarter due to less downtime for planned maintenance. Unit manufacturing costs increased slightly, primarily for resin costs. Engineered Wood Products adjusted EBITDA increased $23 million compared to the second quarter, a 43% improvement. Sales realizations improved significantly across most products, and we continue to benefit from previously announced price increases for solid section and I-joist products. This was partially offset by higher raw material costs for OSB webstock, resin and veneer. Sales and production volumes were moderately lower for most products as a result of planned annual maintenance during the quarter. In Distribution, adjusted EBITDA decreased by $53 million compared to the second quarter. Despite lower sales volumes for most products and significantly lower margins resulting from the commodity price correction, our teams did a great job navigating these challenges and delivered $22 million of adjusted EBITDA in the third quarter.

With that, I will turn the call over to Nancy to discuss some financial items and our fourth quarter outlook.

[Nancy S. Loewe, Senior Vice President and Chief Financial Officer at Weyerhaeuser]

Thank you, Devin, and good morning, everyone. I'll begin with our key financial items, which are summarized on page 16. We generated $659 million of cash from operations in the third quarter, bringing our year-to-date total to nearly $2.7 billion, our highest year-to-date operating cash flows on record. Adjusted funds available for distribution or adjusted FAD, for year-to-date, third quarter 2021 totaled over $2.4 billion, as highlighted on page 17. Year-to-date, we have returned $382 million to our shareholders through the payment of our quarterly base dividend, and we will supplement the base dividend each year with an additional return of cash to achieve the targeted 75% to 80% of adjusted FAD. For this year, we intend to achieve this entirely through a variable supplemental cash dividend. Though in future years, we may also utilize opportunistic share repurchase for a portion of this cash return. The supplemental dividend will normally be paid in the first quarter of each year based on prior year cash flow.

However, as a result of the record year-to-date performance, we accelerated a portion of the supplemental dividend by returning $375 million to our shareholders through our previously announced $0.50 per share interim supplemental dividend earlier this month. We look forward to returning the remaining portion of the supplemental dividend with a significant payment in first quarter 2022. During the third quarter, we also returned $26 million to shareholders through share repurchases. Further, as previously announced, we authorized a new $1 billion share repurchase program. And as always, we'll look to repurchase shares opportunistically under circumstances when we believe it will create shareholder value. Turning to the balance sheet. We ended the quarter with approximately $2.3 billion of cash and just under $5.3 billion of debt. Subsequent to quarter end, we repaid our $150 million or 9% note at maturity, which brings our debt balance to $5.1 billion. After this repayment, we have no additional maturities until 2023. Looking forward, key outlook items for the fourth quarter are presented on page 18.

In our Timberlands business, we expect fourth quarter earnings and adjusted EBITDA will be comparable to the third quarter. Turning to our Western Timberland operations, although domestic log inventories ended the third quarter higher than normal, takeaway of finished lumber and log demand have improved following a brief pullback in September. We anticipate this dynamic continuing for most of the fourth quarter. As a result, we expect our domestic sales realizations to improve from the lower levels experienced in September. For the fourth quarter, we anticipate our average domestic sales realizations to be moderately lower than the elevated third quarter levels. As Devin discussed, we have made great progress within our salvage operations in Oregon and expect our salvage volumes to decrease in the fourth quarter. As a result, we expect fourth quarter fee harvest volumes to be moderately higher with lower per unit log and haul costs. Moving to the export markets. In Japan, log demand remains favorable. We anticipate our fourth quarter sales realizations to be comparable to the elevated third quarter levels, partially offset by moderately lower sales volumes due to the timing of vessels.

In China, despite elevated log inventories at the ports, demand for our logs is expected to remain favorable as construction activity increases seasonally and imports of lumber and logs continue to be constrained from other countries. We expect our fourth quarter sales volumes to be higher than the third quarter, partially offset by slightly lower sales realizations. Elevated freight costs and labor to load ships continue to be headwinds. In the South, weather conditions improved at the outset of the fourth quarter. As a result, we anticipate slightly higher fee harvest volumes compared to the third quarter. Log demand continues to be favorable as mills work to bolster lean inventories, resulting from persistent wet conditions and reduced log supply. As a result, we anticipate slightly higher sales realizations during the fourth quarter. We expect this will be offset by slightly higher per unit log and haul costs as well as a moderately higher forestry and road costs as a portion of our planned activities in the third quarter were deferred due to weather disruptions. As a result of persistent wet conditions in 2021 and significant weather events in the third quarter, we now expect full year Southern fee harvest volumes to be comparable to 2020.

In the North, sales realizations are expected to be slightly lower due to mix and fee harvest volumes are also expected to be slightly lower compared to the third quarter. Turning to our Real Estate, Energy and Natural Resources segment. Fourth quarter earnings and adjusted EBITDA will be significantly lower than third quarter due to timing of transactions. We continue to predict full year 2021 adjusted EBITDA will be approximately $290 million, and we now expect basis as a percentage of real estate sales to be approximately 25% to 30% for the full year. For our Wood Products segment, new residential construction activity remains strong and demand from the repair and remodel segment continues to strengthen following the improvement in do-it-yourself activity in September. This dynamic should continue for most of the quarter before weakening seasonally into winter. Excluding the effect of changes in average sales realizations for lumber and oriented strand board, we expect fourth quarter earnings and adjusted EBITDA will be higher than the third quarter. For lumber, production volumes are expected to be comparable to the third quarter.

However, our sales volumes are expected to be modestly lower, resulting from the inventory drawdown we experienced in the third quarter. We anticipate this will be offset by slightly lower log costs and improved unit manufacturing costs. As shown on page 19, our current and quarter-to-date realizations for lumber are slightly higher than the third quarter average. For oriented strand board, we anticipate moderately higher sales volumes and improved unit manufacturing costs, primarily due to less downtime for planned maintenance during the fourth quarter. We expect this will be partially offset by moderately higher fiber costs. As shown on page 19, our current and quarter-to-date realizations for oriented strand board are significantly lower than the third quarter average, but still elevated compared to historical standards. For engineered wood products, we expect sales realizations for solid section and I-joist products will be comparable, while realizations for plywood will be lower. We anticipate this will be more than offset by significantly lower raw material costs, primarily for OSB webstock.

For our distribution business, we're expecting higher adjusted EBITDA in the fourth quarter, primarily due to improved commodity margins, partially offset by seasonally lower sales volumes. I'll wrap up with a couple of additional items or comments on our total company financial items. We now anticipate our full year outlook for capital expenditures to be slightly below our previous guidance of $460 million as a result of supply chain and contract labor constraints with $15 million to $25 million potentially at risk. Turning to taxes. The $90 million tax refund associated with our 2018 pension contribution was approved during the second quarter. However, we are still awaiting the refund. We expect to receive it by the end of fourth quarter 2021. Excluding this refund, we now anticipate our full year cash taxes will be slightly lower than tax expense.

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

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Thanks, Nancy. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Notwithstanding a slight decrease from the prior quarter, U.S. housing activity remained strong in the third quarter, with total housing starts and permits averaging around 1.6 million units on a seasonally adjusted basis. Although housing starts in 2021 continue at a strong pace, the cycle time between starts and completions has extended as homebuilders continue to experience supply chain and labor availability challenges. Despite these headwinds, our customers tell us they continue to expect strong demand for new home construction for the balance of 2021. The latest new home sales number released earlier this week further reinforces our positive view on the current state of the housing market. With favorable long-term demand fundamentals, including a decade of underbuilding, favorable demographics, we continue to have a bullish outlook on U.S. housing activity well into the future.

Turning to repair and remodel. We've continued to see strength in large professional projects over the course of 2021 and expect that to continue for the balance of the year and into 2022. And while we did see some softening in the smaller do-it-yourself segment during the summer, demand has improved significantly coming out of Labor Day, and we've continued to see strong demand from the repair and remodel segment through October. Overall, we continue to have a favorable long-term outlook for repair and remodel activity, supported by numerous demand drivers, including an aging housing stock, rising home equity and low interest rates. Finally, we hope you have the opportunity to participate in our virtual Investor Day on September 22, where we outlined a series of multiyear strategic growth targets, including growing our Timberlands portfolio, growing our new Natural Climate Solutions business and organically growing our lumber business. We also announced several capital allocation actions and enhanced our ESG leadership by releasing our carbon record and announcing new greenhouse gas emission reduction targets. Our strategy, as we outlined at Investor Day, is simple. We intend to grow the value of our portfolio, improve our cash flows, build on our competitive advantage in the marketplace and solidify Weyerhaeuser as a premier ESG investment opportunity.

These actions will ensure that we drive superior returns for our investors, including returning meaningful amounts of cash to shareholders through a growing base dividend, a variable supplemental dividend and opportunistic share repurchases, all while continuing to invest in our businesses and maintain an appropriate capital structure. We're excited about the future of Weyerhaeuser, and we're well positioned to capitalize on strong macro trends driving continued growth and demand for our products and new opportunities for our businesses. Before turning to questions, I would like to take this opportunity to recognize and thank Beth Baum for her leadership of our Investor Relations team over the last several years. We're greatly appreciative of Beth's contributions to our IR function and look forward to our next opportunity at the company. With Beth's transition, Andy Taylor has assumed the lead role of our Investor Relations program. Andy joined Weyerhaeuser in October of last year after an 18-year career in the energy industry, where he served in numerous leadership roles, including Investor Relations. He's been a great addition to the Weyerhaeuser team, and we're really excited to have him taking on this new role.

So now I'd like to open up the floor for questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Susan Maklari with Goldman Sachs. Please proceed with your question.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Morning, everyone.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Morning.

[Susan Maklari, Analyst at The Goldman Sachs Group]

My first question is around any color you can give us on inventories in the channel. Given all the moves that we saw during the quarter in terms of pricing as well as the demand environment, how much do you think the industry worked through? And where are your inventory sitting? And how does maybe that compare to the broader industry?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. And Susan, I assume you're talking about Wood Products inventory?

[Susan Maklari, Analyst at The Goldman Sachs Group]

Yes, yes.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Sure. Yes. So I think at present, as we think about inventories across the channel, I would categorize them, generally speaking, for lumber and OSB as anywhere from normal to perhaps a bit lean in certain areas. I think with respect to the treaters and to some extent, the home improvement warehouses, they're more or less a normal inventory levels for this time of year. I think in some of the dealers, perhaps a little lean in spots. On EWP, really, that's pretty tight across the system. So I don't think there's a whole lot of inventory there. And that's generally the case for us as well. We're sort of normal to perhaps a little light in certain spots in terms of wood products.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. That's helpful. And then as a follow-up, obviously, there's been a lot of puts and takes as it relates to the supply chain, especially in the quarter. Can you just give us maybe a bit more color on any highlights areas where you're really sort of seeing some headwinds there. And then also the implications as we think about resins and some of the inputs to things like OSB or some of your other products like EWP and what -- any kind of read-throughs from there?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, I'd say at a high level, there have been a lot of challenges from a supply chain standpoint. And that really cuts across really all aspects of the supply chain. The big one that I think has been a challenge for everyone has been on the transportation side. And that's trucking, particularly in the U.S. South, it's been a real challenge. That bleeds over into rail in many instances, all the way to the export side and finding shipping containers. So really, anything having to do with transportation is a real challenge right now. As you think about other aspects of the supply chain, labor is a challenge, I think, in many spots. You read a lot about that. I think it's impacting pretty much every industry.

Ours is no different. So labor challenges. And really, to us, that's made us a little bit maybe more challenged in terms of running extra hours than we might otherwise have done so. So I think labor issues across the industry continue to be an issue. In terms of some of the inputs, resin, it hasn't really impacted our operations to date. But certainly, there is a tightness in terms of resin availability, and I think that's impacted the industry as a whole. The other one I would call out really is veneer, and that's been a challenge as well. So really, there are impacts across the entirety of the supply chain, and I think that's really why we're so pleased with the work our team has done in navigating some of those challenges and delivering the results that we were able to deliver in Q3.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Got you. Okay. Thank you. That's very helpful coloring, good luck.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Thank you.

[Operator]

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

[George Staphos, Analyst at Bank of America]

Thanks very much. Hi, everyone. Good morning.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Good morning, George.

[George Staphos, Analyst at Bank of America]

And congratulations to Beth and Andy. Andy, looking forward to working with you in the future. So I guess the first question I had, when I look at wood, obviously, and lumber EBITDA in particular, obviously, you took it on the chin from a pricing standpoint, although you did a little bit better than the composites. But when I apply that to your volumes, actually, EBITDA held up a little bit better than I would have expected. So what were you doing from a process and operations a cost standpoint? Obviously, you've been working on this for the last number of years that helped the performance in the quarter? And then I had a couple of follow-ons.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, I think -- well, you really touched on it, George. And the reality is the opex work that we've been doing for a long time has been a core part of our strategy. That's really true in any environment, but I think particularly in an environment where we are seeing inflationary pressures, that work is just absolutely critical. And so kudos to the teams for all the work they're doing to, again, manage through some of those supply chain challenges, really try to battle some of the inflationary pressures. And we're going to continue to do that. We didn't mention that on the script. But certainly, we do plan to meet our $50 million to $75 million opex target for the year, which I'll just say that's a really high hurdle given the inflationary environment that we're seeing. So it really just goes back to operational excellence, George, and really what we're doing on that front to make sure that we're driving costs out wherever we can and delivering for our customers.

[George Staphos, Analyst at Bank of America]

Devin, does that suggest you'll be at the upper end of that range or you don't really want to be that precise at this juncture on opex?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, I wouldn't want to be any more precise and just to say that we're confident that we'll be within that range.

[George Staphos, Analyst at Bank of America]

Okay. Understood. Second question for you and for Nancy. Obviously, we'll see what the fourth quarter brings. But so far, it looks like your guidance is for performance that's at least as good as was the case in the third quarter. You gave us guidance on capex for the year and not make any adjustments for the tax refund. Is it unfair to think of the potential special dividend in the first quarter, again, a lot has to happen as being in the $1.70 range or perhaps higher when we do the math? Or how would you have us sort of guardrail it, if you will.

[Nancy S. Loewe, Senior Vice President and Chief Financial Officer at Weyerhaeuser]

Yes. George, this is Nancy. Adjusted FAD is cash from operations, less capex and significant nonrecurring items. So we will actually adjust the tax credit for that. And we don't provide guidance on adjusted FAD or the supplemental dividend, and that's because our cash flow fluctuates with working capital changes and we can't predict the lumber and OSB prices. So we do provide the adjusted FAD each quarter, as you saw. And you'll know the payout is targeted at 75% to 80% of adjusted FAD. And you'll see that each quarter as we go here. And I think what we shared today is that the remainder of the supplemental dividend that we've seen will be significant. That's about what we can say.

[George Staphos, Analyst at Bank of America]

Nancy, and I appreciate that. But if we hold pricing constant and we'll leave other stuff to the side, would it be fair to say that your operating cash flow should be at least as good in 4Q versus 3Q? Are there some other things that we should be remembering in terms of, I don't know, working capital, cash taxes, etc.

[Nancy S. Loewe, Senior Vice President and Chief Financial Officer at Weyerhaeuser]

Yes. Well, just remember, the capex is a significant amount of our fourth quarter and that's because our capex is close to...

[George Staphos, Analyst at Bank of America]

So I was excluding capex there. So on operating cash flow?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, George. I mean when you build it up, right, so we're talking about comparable EBITDA from a Timberland standpoint It is going to be lower for the real estate, but again, up to the $290 million that we guided to. And then on the Wood Products side, as we said, we're thinking absent lumber and OSB prices, which obviously we're not going to try to predict, it is going to be higher for the quarter. So when you build those up, I think you're not wrong about the operating cash flow. Although like Nancy said, you have to build in a capex when you're trying to calculate the FAD.

[George Staphos, Analyst at Bank of America]

Yes, of course, of course. My last question, I'll turn it over. I assume it's just the supply chain and the lack of other markets being able to hit Asia, but if you could give us a bit more color in terms of why the southern log exports were strong in the quarter?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, sure. And that's primarily going into the China and India markets, George, in terms of our Southern export. And it's really a combination of a few things. Number one, particularly in China, there are some overall global supply chain issues. As you mentioned, shipping containers for European wood going into that market have been strained. There's also a ban on Australian logs. And so that's really opened up some opportunities for North American wood and we've really seen that demand spike up. And so that's true for China, but we've also seen the demand going into India coming up. We've started shipping into Pakistan. Turkey as well. And so we're just seeing good strong global demand for logs. And from the Southern yellow pine standpoint, we think there's a really good strong market for us going out into the future, particularly when we can start resolving some of these logistical challenges with shipping availability and container availability.

[George Staphos, Analyst at Bank of America]

Thank you, Devin.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yup. Thank you.

[Operator]

Our next question is from Mark Wilde with Bank of Montreal. Please proceed with your question.

[Mark Wilde, Analyst at Bank of Montreal]

Devin, to start out, I wondered if you could just help me with that engineered wood pricing. The quarter-to-quarter gains in both the solid section and the I-joist were much, much, much larger than I had expected than -- and much larger than I would have expected given what people have always told me about sort of how these price increases cadence in. I know you've got a lot of increases over the last year, but my understanding was that those fixes over the last year. But my understanding was that those typically phase in over a three year for quarter period.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, Mark. Well, you're absolutely right in terms of the time line for how those pricing increases typically take place. It is over a multi-quarter period. I think the way to think about that though is that just given the dynamics of what's been going on in the market, both with respect to OSB pricing and some of the other input costs like resin, veneer, etc, we've had a number of price increases over the last year. And so they just sort of have layered on top of each other. And generally speaking, that's the answer is we're just in this quarter, we saw several of those price increases really start to take hold. We still have more coming in terms of the previously announced price increases. So Q4 and Q1, we'll see a little bit more. The only thing I would say on that front is it's always dependent on particular regions and customers. And so we did see perhaps a little bit more in Q3 than you might otherwise think. But generally speaking, the answer is it's just a number of price increases over the last year that have kind of layered on top of each other.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. And the second question I had was just around southern log and timber pricing because you're up a little bit, but not much. But in talking with kind of people around the trade, it seems like there's a little more of a pickup going on than you're showing or the timber mark data is showing. And I'm just curious, do you sell forward such that if we had a pickup in the markets. It was starting to occur. It would take a while to be fully reflected in your numbers because maybe you're selling forward three or four quarters?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. So certainly, that's correct with respect to some of our volume that we sell in South. So we sell through a variety of methods, including spot prices, which obviously those are reflected real time. But we also do a lot of quarterly pricing, which will reflect the prior quarter indexes. And so to the extent you see a run-up. There will be a lag in log pricing in the South.

[Mark Wilde, Analyst at Bank of Montreal]

Okay. And then finally on this Southern log export business, is there any case over the next, I don't know, two years, three years? You should actually put some dedicated freight in place, in the Pacific Northwest. You've got dedicated bulk ships for log export business. Whereas I think in the South, we're basically stuffing logs in the shipping containers right now, which has to be higher cost.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, Mark. Well, that's the goal. Ultimately, we'd like to build that program to the size where we can transfer that over from the container shipping up to break bulk. So that's the goal. I think we're making some good progress. We were heading in that direction pre tariffs a few years ago when we had the trade dispute with China. That set us back a little bit. That was a bit of a headwind there with the size of the tariffs on Southern Yellow Pine. But as those have come off, we've really been building that program back up. We do see the demand in China for Southern Yellow Pine growing. I think we'll see some interesting dynamics here over the next few years, one, with the export ban of logs from Russia. I think that will be an interesting dynamic to follow. And then two, we have seen elevated levels of European logs going into that market after the beetle infestation that we've seen there. Our view is that volume is peaking, maybe over the next year or so and then should start to diminish over time. And again, I think that just opens up another opportunity for Southern Yellow Pine.

[Mark Wilde, Analyst at Bank of Montreal]

And if you go to break bulk, Devin, can you give us an order of magnitude on what that does to kind of shipping costs?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, I think it would be hard for me to give that to you right off the top of my head, Mark. We can certainly follow up. But there's no question it's better economics if you can go to break bulk versus shipping container. And that's true in any market conditions. But particularly right now, when you think of the inflationary pressures we've seen on containers it would be even more so in today's environment. But no question about it, the economics are much better with break bulk versus container.

[Mark Wilde, Analyst at Bank of Montreal]

Great. I will turn it over. Thanks, Devin.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Thanks, Mark.

[Operator]

Our next question comes from Mark Weintraub with Seaport Global. Please proceed with your question.

[Mark Weintraub, Analyst at Seaport Global Securities]

Thank you. Good morning. First --

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Morning.

[Mark Weintraub, Analyst at Seaport Global Securities]

First, just could you clarify a little bit the answer to George's question, were you -- I thought I heard you saying it sort of doesn't really make total sense to me. The cash from operations in the fourth quarter look like they're going to be higher than the third quarter. And I just wanted to clarify if that is what you were saying, because I guess if lumber and OSB prices stayed where they are today, would that be the case? Or would they probably be somewhat lower? I'm a little confused by that exchange.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. So we were really just speaking to EBITDA absent the impact of lumber and OSB sales, which -- or pricing, which we don't -- as you know, which we don't try to forecast.

[Mark Weintraub, Analyst at Seaport Global Securities]

Right. But you have provided an indication of where they are quarter-to-date and where they are currently. So if we were to just assume those types -- that type of pricing level. Can you give us a sense or do you want to hold off from that?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Well, but I think keep in mind, right, so if we think about quarter-to-date lumber pricing, they're up just a little bit, but OSB pricing still down quite a bit relative to Q3. So if you took today's pricing, then obviously, it would be lower quarter-over-quarter.

[Mark Weintraub, Analyst at Seaport Global Securities]

Okay. Good. That's what I thought. I just wanted to clarify, was a misunderstanding. I guess another thing though on the OSB, we do -- you pointed out in the slide that there is a lag on the way that the pricing does show up. And so when you give that current number, is that reflective of what's in Random Length today? Or is that really reflective of what was in Random Length several weeks back so that we've already sort of got this built in ramp of some amount in the coming few weeks?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, there's always going to be a lag when we talk about our realizations relative to Random Length because the order files that we have in OSB, that creates a lag effect. And particularly today, where we're talking as three to five week order file, you're going to see a comparable lag in terms of pricing relative to what's going on with Random Lengths when we talk about our realizations.

[Mark Weintraub, Analyst at Seaport Global Securities]

Okay. And then lastly, we've seen -- certainly noted your bullish comments that make a lot of sense to me on housing, etc, for next year and implications for the Wood Products business as well as your other businesses. What are you expecting for the balance of this quarter? Are we most likely going to see more normal seasonal patterns? Or do you think that there's enough of that underlying strength that it could play out counter seasonally? Do you have a strong view or it sort of is grayish at this point?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. So I'll tell you what we hear from our homebuilder customers, which is they're going to try to build as many homes as they can. So I think from the standpoint of the demand signal and what they're going to try to do, it's pedal to the metal. Now the caveats to that are really twofold. One, that largely depends on whether they can manage through the supply chain issues that they've had. So whether they can get windows and doors and paint, etc. I can tell you, from our conversations, that continues to be a struggle and there's no doubt that that's held back what we otherwise might have seen from a housing standpoint. So that issue is still out there, and I think we'll be, to some extent, a governor. And the other big wild card is just what goes on with weather.

To the extent that you have mild weather, I think you're going to see probably as much homebuilding as you can possibly squeeze into Q4. If we start getting an early winter in the northern regions or you have a lot of rain or other weather events, obviously, that could impact it. But on balance, we're expecting a strong fourth quarter, just given the level of demand that our customers are seeing in the market right now. And I think you can look at just the permitted not yet started number. You can look at the new home sales number that we just saw. There's just a lot of demand out there, and the homebuilders are trying to meet that to the extent that they can get the products to do it and manage through the weather issues as we get deeper into the year.

[Mark Weintraub, Analyst at Seaport Global Securities]

That's helpful. And last one quick, just a clarification. I think you mentioned in the EWP business, that you had higher OSB web costs in the third quarter, which I guess puzzled me a little bit given that OSB prices were lower in the third quarter than the second quarter. So I just wanted to understand that a bit more. Or maybe I missed that.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. Again, that just goes back to the lag. And when we talk about OSB sales to webstock, when we talk about OSB cost per webstock, remember, that is almost exclusively coming from our own OSB business. And so that rolls on, I think, a 12-week kind of rolling average pricing dynamic. So you see that lag a little bit, but that will show up in Q4.

[Mark Weintraub, Analyst at Seaport Global Securities]

Got it. Thanks very much.

[Operator]

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

[Paul Quinn, Analyst at RBC Capital Markets]

Yes. Thanks very much. Morning guys. Just to make sure on Wood Products, lumber shipments to date are up only 1.5%, which is quite a bit lower than to what you suggested that 5% on Investor Day. So I'm just wondering how confident you are in getting that 5% over the next number of years per year?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. I would say we are highly confident we would -- frankly, we wouldn't have said it at Investor Day if we didn't have a high level of confidence. And as we think about how that's going to play out over the next several years, all of that is built up from individual mill-level five year capital road maps. And so we have the projects identified, the vast majority of projects that are going to make up that incremental production have already been completed at one mill or another. So it's -- we view it as relatively low risk to continue to execute across these projects that we've, by and large, are already done somewhere else. So that's the long answer. The short answer is we're highly confident in that number.

[Paul Quinn, Analyst at RBC Capital Markets]

Okay. And then if I flip it over to OSB, you're down 8.7% year-to-date on shipments. Just wondering why that is?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. It's really just a reflection of some planned maintenance that happens during the year. And so when you look year-over-year, mills will have different quarters, different parts of the year where they'll have planned annual maintenance. And so that's just a reflection of that.

[Paul Quinn, Analyst at RBC Capital Markets]

Okay. And then just lastly, just -- I hate to harp on it, but I can't understand it. I mean you've got record wood products pricing this year, but your share performance to date is less than half your biggest REIT peer. So the question is, why and how can you make up the difference?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. So I guess what I would say to that, Paul, is first and foremost, we're always focused on driving value for our shareholders. And we do that in a number of ways, managing our portfolio. We've done some transactions on the timberland side that we think have increased value. We have a focus on opex, and I think that showed up in how we've driven industry-leading performance across our businesses. We've taken a number of actions of late to continue to work on the portfolio and improve our performance. We've strengthened the balance sheet by paying down over $1 billion of debt.

I think our new base plus variable supplemental dividend structure is going to return significant amounts of cash over time, and we've seen how that's played out this year with the interim supplemental we paid out in October, the sizable supplemental dividend we're going to pay out in Q1 2022. And so from my standpoint, as we continue to execute on the long-term growth opportunities that we laid out in Investor Day and achieved those targets, there's no doubt in my mind that's going to make us a better and more valuable company. And I think as we continue to grow the company, improve our margins, return cash to shareholders, that value will ultimately be reflected in the stock price over time.

[Paul Quinn, Analyst at RBC Capital Markets]

Alright. That's all I had. Best of luck.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Alright, thank you.

[Operator]

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

[Kurt Yinger, Analyst at D.A. Davidson]

Great. Thanks and good morning, everyone.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Morning.

[Kurt Yinger, Analyst at D.A. Davidson]

I just wanted to start off on the harvest side. In '18 and '19, you were in the ballpark of 38 million tons. Last year, kind of down to $33 million with some of the restrictions? And it looks like you'll kind of be around that same level this year. Can you just help us think about what a good baseline for the different regions is as we look ahead to 2022? And is there anything from a labor or supply chain perspective that you foresee being particularly challenging as you maybe look to ramp that up?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes, sure. So without giving specific guidance on 2020 harvest levels, which we'll do when we report Q4 earnings. I will make a few comments by region and starting in the West. So as you think about the Western harvest levels relative to history, a few things to keep in mind. Number one, when you think about the harvest levels in kind of 2015 through 2018 time frame, to some extent, that was impacted by the Longview Timber acquisition that we did back in 2013. And as we said, that had some very mature timber that came along with that acquisition. So our harvest levels were a bit elevated for several years after that acquisition as we work that age class down to a more normalized level.

So we always expected that to come down a bit over time. We had expected that to start going back up. But obviously, in 2020, we had a pretty significant fire season in Oregon. And so that impacted the harvest levels both in 2020, but also in 2021 as we work through some of that salvage volume. But we would expect that to start going back up next year. In the South, we've had a few things going on in the last couple of years. Obviously, last year, we did defer some harvest volume in the South due to some market conditions and COVID, etc. We had planned to have that going back up by 10% this year, year-over-year.

This has just been a really wet year in the south, a lot of weather events that has really reduced our ability to get out and move wood in some of those weather events. And so we're able to catch some of that up. But I do think, to the point you just made, one of the challenges that we have in fully catching that up is just some of the availability of contracting loggers and trucking availability. So I would say on the margins, that's probably hindered a little bit our ability to ramp up to make up for some of that lost production in kind of the winter months here. But again, we do expect that to start going back up next year and we'll give more fulsome and clear guidance on harvest levels when we report for Q4.

[Kurt Yinger, Analyst at D.A. Davidson]

Got it. Okay. That's helpful. And then just on the lumber and OSB market. As you look out over the next 12 to 18 months outside of new residential construction activity and repair and remodel demand levels. What are you thinking about in terms of key factors kind of determining the direction of the markets?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. I mean, so you mentioned two of the big ones. What's going to happen with residential construction? What's going to happen from a repair and remodel standpoint? We're pretty bullish on both of those fronts. I think some other things that come into play, obviously, to the extent that we continue to see supply chain disruptions that can impact the availability of wood into the market, which obviously can have an impact on pricing. Labor availability, I would put in that mix to the extent that the industry can't find enough labor to run the mill school that can have an impact on overall supply, and that can impact the market.

I do think there are a few things that are also coming into play to some extent, one of which is depending on what happens with the infrastructure bill that I think could drive some incremental demand for wood, both from a lumber standpoint, plywood, OSB, etc, to the extent that, that ultimately gets passed. And then just -- we do continue to see more and more momentum around wood-based building, tall buildings, mass timber, CLT, etc. So that could be another tailwind as well. So overall, I think we have a pretty optimistic view of what things are going to look like in the Wood Products market over the next couple of years.

[Kurt Yinger, Analyst at D.A. Davidson]

Got it. Okay. Makes sense. And then just my last one on the Southern log export business. With freight costs and pricing where they are, how do kind of the economics compare, I guess, to keeping those logs in the domestic market?

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Yes. Well, we've seen a pretty dramatic run-up in pricing on the export side. And even when you take into consideration the increased transportation costs to get those logs to market. It still represents a pretty decent premium over what we would get in the domestic market. So it's advantageous for us to move as much as we can into the export market.

[Kurt Yinger, Analyst at D.A. Davidson]

Got it. Okay. Well, I appreciate all the color and good luck here in Q4.

[Devin W. Stockfish, President and Chief Executive Officer at Weyerhaeuser]

Terrific. Thanks. Well, I believe that was our final question. So thank you to everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser. Have a great day.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Andy Taylor, Director of Investor Relations
• Devin W. Stockfish, President and Chief Executive Officer
• Nancy S. Loewe, Senior Vice President and Chief Financial Officer

Analysts

• Susan Maklari, The Goldman Sachs Group, Inc.
• George Staphos, Bank of America Co.
• Mark Wilde, Bank of Montreal
• Mark Weintraub, Seaport Global Securities
• Paul Quinn, RBC Capital Markets
• Kurt Yinger, D.A. Davidson