Weyerhaeuser Q1 2003 Earnings Call Transcript

Presentation

[Operator]

Greetings, and welcome to Weyerhaeuser First Quarter 2023 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Andy Taylor, Vice President of Investor Relations. Thank you, Mr. Taylor. You may now begin.

[Andy Taylor, Vice President of Investor Relations at Weyerhaeuser]

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's First Quarter 2023 Earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer; and David Wold, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported first quarter GAAP earnings of $151 million or $0.21 per diluted share on net sales of $1.9 million. Adjusted EBITDA was $395 million, a 7% increase over the fourth quarter of 2022. These are solid results, and I'm pleased with the operational and financial performance delivered by our team despite various market and weather-related challenges throughout the quarter. Turning now to our first quarter business results. I'll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $120 million to first quarter earnings. Adjusted EBITDA was $188 million, a 25% increase compared to the fourth quarter.

In the West, adjusted EBITDA increased $33 million compared to the fourth quarter, largely driven by increased sales volumes in domestic and Chinese markets and lower per unit log and haul costs. These favorable results were partially offset by lower sales realizations. Turning to the Western domestic market. Demand and pricing for domestic logs faced downward pressure at the start of the first quarter. Mills reduced consumption in response to lower pricing and takeaway of finished products, and we're carrying elevated log inventories. As the quarter progressed, log consumption increased as end market demand improved, but log supply was constrained by consistent winter weather conditions. This dynamic drove log inventories to lower levels and cause log pricing to stabilize. For the quarter, our average domestic sales realizations were significantly lower than the fourth quarter. Our fee harvest and domestic sales volume as well as per unit log and haul costs improved in the first quarter as we return to full run rate operations following the work stoppage in the fourth quarter.

First quarter harvest activity included a portion of the deferred volume resulting from the work stoppage, and we remain on track to capture the majority of the deferred harvest volume in 2023. Forest and road costs were also seasonally lower. Moving to our Western export business. Log markets in Japan continued to soften in the first quarter in response to elevated inventories of European lumber imports as well as lower consumption driven by reduced post-and-beam housing activity. As a result, our average sales realizations for export volumes to Japan were moderately lower compared to the fourth quarter, and our sales volumes were comparable. In China, log inventories at the ports declined during the quarter and daily takeaway increased as construction activity improved following the Lunar New Year and in response to the recent lifting of pandemic-related restrictions. As a result, log demand from our customers remained solid in the first quarter. Our sales volumes increased significantly compared to the fourth quarter and we intentionally flexed additional volumes to China to take advantage of improving market conditions in the first quarter.

Our average sales realizations were slightly higher compared to the fourth quarter aided by improved ocean freight rates and a favorable exchange rate. Turning to the South. Adjusted EBITDA for Southern Timberlands increased $4 million compared to the fourth quarter. Despite reduced log consumption in response to lower finished product pricing and demand, southern sawlog and fiber markets remain fairly balanced during the first quarter as log supply was constrained by wet weather conditions. As a result, our average sales realizations were comparable to the fourth quarter. Our fee harvest volumes increased slightly despite the adverse weather conditions. Per unit log and haul costs were slightly lower in the first quarter, and forestry and road costs were slightly higher. Adjusted EBITDA in the North was comparable to the fourth quarter.

Turning to Real Estate, Energy and Natural Resources on Pages 10 and 11. And Real estate and ENR contributed $53 million to first quarter earnings and $89 million to adjusted EBITDA. First quarter EBITDA was $43 million higher than the fourth quarter primarily due to a significant increase in real estate acres sold, partially offset by a decrease in royalty income from our Energy and Natural Resources business. Similar to prior years, our real estate activities in 2023 and are more heavily weighted towards the first half of the year. Average price per acre decreased compared to the fourth quarter due to the mix of properties sold but remained elevated compared to historical levels, as we continue to benefit from steady demand for HBU properties. Despite broader macroeconomic headwinds, buyers continue to seek the safety of hard assets, resulting in high-value transactions with significant premiums to timber value.

Moving to Wood Products on Pages 12 through 14. Wood Products generated $95 million of earnings in the first quarter and $148 million of adjusted EBITDA. First quarter adjusted EBITDA was a 25% reduction from the fourth quarter, largely driven by continued softening in wood products pricing. Regarding the lumber and OSB markets, benchmark prices for both products entered the first quarter showing signs of stabilization after receding in the back half of 2022. Pricing for both products increased slightly through early February in response to stronger-than-expected demand for housing and buyers replenishing lean inventories. The increase was more pronounced for lumber as supply concerns weighed on the market following a series of mill curtailment announcements, particularly in British Columbia. As the quarter progressed, overall buyer sentiment remains cautious. As adverse weather impacted homebuilding in several regions and in response to ongoing concerns about inflation and the economy. Despite lean inventories, orders were limited to necessity purchases through quarter end, and benchmark prices for both products were generally range bound. I would note, however, that prices for both products have trended higher as we've moved into the second quarter.

Adjusted EBITDA for our lumber business was comparable to the fourth quarter. Both the framing lumber composite pricing and our average sales realizations decreased 9% in the first quarter. Our sales and production volumes increased significantly versus the fourth quarter which was impacted by the work stoppage at our Northwest mills. Reliability also improved across the system. With increased production in the quarter, unit manufacturing costs improved significantly. Log costs were comparable to the fourth quarter. OSB adjusted EBITDA decreased by $32 million compared to the fourth quarter, primarily due to the decrease in commodity pricing. Our average sales realizations decreased by 20% in the first quarter, largely in line with OSB composite pricing. Sales volumes were significantly higher as production volumes increased from less planned downtime for annual maintenance and transportation networks improved following adverse weather conditions late in the fourth quarter. Unit manufacturing costs and fiber costs improved moderately during the quarter.

Adjusted EBITDA for Engineered Wood Products decreased by $28 million compared to the fourth quarter due to softening demand for EWP products. As a result, our sales and production volumes and average sales realizations were lower for most products in the first quarter. That said, we have seen a recent uptick in our order activity and our current realizations remain above pre-pandemic levels. Unit manufacturing costs were comparable to the fourth quarter and raw material costs decreased primarily for OSB web stock. Adjusted EBITDA for distribution was comparable to the fourth quarter as higher volumes and lower operating costs were offset by a decrease in realizations for EWP and commodity products. With that, I'll turn the call over to David to discuss some financial items and our second quarter outlook.

[David Wold, Chief Financial Officer at Weyerhaeuser]

Thank you, Devin, and good morning, everyone. I'll be covering key financial items and first quarter financial performance before moving into our second quarter outlook. I'll begin with key financial items, which are summarized on Page 16. We ended the quarter with approximately $800 million of cash and cash equivalents and total debt of approximately $5 billion. Our balance sheet, liquidity position and financial flexibility remain exceptionally strong. And we reinforced our flexibility in the first quarter by extending the maturity of our existing $1.5 billion revolving credit facility to 2028. In the first quarter, we generated $126 million of cash from operations. It's worth noting that the first quarter is usually our lowest operating cash flow quarter due to seasonal inventory and other working capital build. Capital expenditures for the quarter were $71 million, which is a typical level for the first quarter.

We returned $139 million to shareholders through the payment of our quarterly base dividend which was increased by 5.6% to $0.19 per share during the quarter. This is in line with our commitment to grow our sustainable base dividend by 5% annually through 2025. During the quarter, we also returned $660 million to shareholders through the payment of our supplemental dividend, which was associated with our 2022 financial results. We returned $35 million to shareholders through share repurchase activity in the first quarter. These shares were repurchased at an average price of $31.25 and as of quarter end, we have completed nearly $660 million of repurchase under our $1 billion authorization. Looking forward, we will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value.

First quarter results for our unallocated items are summarized on Page 15. Adjusted EBITDA for this segment decreased by $6 million compared to the fourth quarter. This decrease was primarily attributable to changes in intersegment profit elimination in LIFO and as well as the absence of nonrecurring health care and workers' compensation items that were benefits in the fourth quarter. Looking forward, key outlook items for the second quarter are presented on Page 18. In our Timberlands business, we expect second quarter earnings and adjusted EBITDA will be approximately $20 million lower than the first quarter of 2023. Beginning with our Western Timberlands operations, domestic log markets were fairly tensioned at the outset of the second quarter, driven by improved pricing and takeaway of finished products, leaner than normal log inventories and log supply constraints due to persistent winter weather conditions. As the quarter progresses, we expect further improvement in log demand and an increase in log supply as the weather improved seasonally. As a result, our domestic sales realizations are expected to remain fairly stable throughout the second quarter. That said, we anticipate the quarterly average will be lower compared to the first quarter as log prices have fallen since the beginning of the year. We anticipate our fee harvest volumes will be moderately higher given seasonally favorable operating conditions in the second quarter. Forestry and road costs are expected to be significantly higher as we enter the spring and summer months, and per unit log and haul costs are expected to be significantly lower, partly due to lower fuel prices.

Moving to the export markets, starting with Japan. As Devin mentioned, elevated inventories of European lumber imports and reduced consumption continue to weigh on log demand and pricing. We expect these conditions to persist through the second quarter. As a result, our Japanese sales volumes and realizations are expected to be lower compared to the first quarter. That said, we expect European lumber inventories to normalize as the year progresses, which should increase demand for our logs in the Japanese market. In the meantime, we are shifting a certain amount of logs to our internal mills to capitalize on domestic market conditions. In China, construction activity and log consumption continued to improve following the Lunar New Year and the lifting of pandemic-related restrictions. That said, log imports from New Zealand have increased significantly following the disruption in the first quarter due to Cyclone activity. This dynamic is likely to put downward pressure on log pricing until excess inventories are cleared. As a result, our sales realizations into China are expected to be slightly lower compared to the first quarter. We anticipate our sales volumes will be significantly lower as we direct logs to domestic customers to capture higher-margin opportunities. In the South, we expect sawlog markets to remain fairly balanced in the second quarter as log supply improves with drier weather conditions and mills bolster inventories in response to weather-related challenges in the first quarter. Southern fiber markets are expected to soften as a result of end market demand and pricing. Despite improving weather conditions, our fee harvest volumes are expected to be comparable to the first quarter largely driven by a higher mix of fiber logs as thinning activity increases following wet weather conditions earlier in the year. With a higher percentage of fiber logs we expect our sales realizations to be slightly lower compared to the first quarter.

Per unit log and haul costs are expected to decrease slightly as a result of lower fuel prices, and forestry and road costs are expected to increase seasonally. In the north, our sales realizations are expected to be slightly lower than the first quarter and fee harvest volumes are expected to be significantly lower as we enter the spring breakup season. Turning to our Real Estate, Energy and Natural Resources segment. As Devin mentioned, we are still seeing steady demand for our real estate properties, and we continue to expect a consistent flow of HBU transactions with significant premiums to timber value. For the second quarter, we expect earnings will be comparable to and adjusted EBITDA will be approximately $20 million lower than the first quarter of 2023 due to the timing and mix of real estate sales. For the full year, we continue to anticipate adjusted EBITDA of approximately $300 million for the segment. For our Wood Products segment, we expect second quarter earnings and adjusted EBITDA will be slightly higher than the first quarter of 2023, excluding the effect of changes in average sales realizations for lumber and OSB. Benchmark prices for both lumber and OSB have been fairly stable quarter-to-date, but we are seeing signs of increased demand for wood products as we get further into the spring building season, while channel inventories remain lean. As shown on Page 19, our current and quarter-to-date average sales realizations for lumber are moderately higher than the first quarter average. For OSB, our current and quarter-to-date average sales realizations are slightly higher than the first quarter average. For our lumber business, we expect higher production and sales volumes in the second quarter and moderately lower unit manufacturing costs as operating rates at our Northwest mills return to a more normalized level, reliability improves across the system and inflationary pressures continue to ease.

Log costs are expected to be moderately lower compared to the first quarter, primarily for Western and Southern logs. For our oriented strand board business, sales volumes are expected to be comparable to the first quarter. We expect slightly lower production volumes and moderately higher unit manufacturing costs due to more planned downtime for annual maintenance in the second quarter. Fiber costs are expected to be slightly lower. Turning to our Engineered Wood Products business. As Devin mentioned, we have seen an uptick in order activity quarter-to-date, and we expect steady demand as the quarter progresses. As a result, we anticipate significantly higher sales volumes for most products compared to the first quarter. That said, sales realizations are expected to be moderately lower as supply and demand continue to rebalance across the broader EWP market. We anticipate moderately lower raw material costs for most products, including for OSB web stock. For our distribution business, we expect adjusted EBITDA to be slightly higher compared to the first quarter due to improved sales volumes. With that, I'll now turn the call back to Devin and look forward to your questions.

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Thanks, David. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Our view on the housing market is largely unchanged, and we still anticipate a somewhat more challenging backdrop in 2023 and compared to the last couple of years. We've clearly seen some softening from the peak levels of 2022 as home buyer sentiment remains cautious. That being said, there have been some positive signs lately that the housing market is holding up better than we anticipated at the beginning of the year. Specifically, we've seen improvements in homebuilder sentiment and increase in new home sales and an uptick in single-family starts over the last couple of months.

Additionally, the labor market and household balance sheets are generally in good shape and inventory of existing homes for sale remains well below historical levels. Putting this all together, we continue to believe that underlying housing demand is solid. As we saw in the first quarter, there are buyers willing to step back into the market in response to lower mortgage rates and homebuilder incentives. Ultimately, we'll need to see further rate reductions, combined with a stable to improving U.S. economy before the housing market fully returns to the levels of the past few years. However, notwithstanding any near-term headwinds, we continue to maintain a positive and constructive longer-term view on housing fundamentals, supported by strong demand, favorable demographic trends and a significantly underbuilt housing stock.

Turning to repair and remodel, where activity remained fairly stable in the first quarter and continued to be supported by steady demand from the professional segment. Demand from the do-it-yourself segment has largely normalized to pre-pandemic levels. Looking forward, we expect customer demand to be bolstered to some degree by prospective homebuyers choosing to remodel in lieu of purchasing a new home in a higher mortgage rate environment. Lower commodity building product prices may also support repair and remodel activity in the near term. And in any event, we continue to have a bullish longer-term outlook for repair and remodel demand, supported by strong home equity levels and an aging housing stock. In closing, we delivered solid operational and financial performance in the first quarter. We remain as focused as ever on operational excellence and supporting our customers to drive industry-leading margins.

In addition, we remain committed to returning cash to shareholders. During the quarter, we increased our base dividend by 5.6% and returned more than $830 million to shareholders through base and supplemental dividend payments as well as share repurchase activity. Looking forward, we remain constructive on the longer-term demand fundamentals that will drive growth for our business, notwithstanding the current macroeconomic headwinds. Our financial position is exceptionally strong and we are focused on delivering superior operating performance across our unmatched portfolio of assets as well as enhancing shareholder value through disciplined capital allocation. So with that, I think we can go ahead and open it up for questions.

Questions and Answers

[Operator]

[Operator Instructions]

Our first question comes from Anthony Pettinari with Citi.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Devin, as you look at Southern log prices, are you seeing any regional trends worth calling out? And I guess, specifically, over the past few years, the Southern log prices have seen some strength. I think we saw maybe stronger price appreciation in some of these coastal regions versus inland regions. Now that log prices appear to be kind of moderating a bit, I'm wondering, are you seeing those coastal regions holding price better? Or alternately, are they may be giving up kind of more of the gains that they've had and maybe acting with a little bit more volatility. I don't know if there's any trend that you would call out. I'm just kind of curious what you're seeing and maybe how your portfolio is positioned there.

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes, Anthony, good question. As we think about the Southern sawlog pricing dynamic, as you say, there are certainly regional differences. And we've seen that play out over a number of years. As you mentioned, the Atlantic Coast, and we think about that from North Carolina really all the way down through Florida and Georgia, certainly have been a stronger market. I think there are a couple of things at play there. To some extent, the sawlog market is also impacted by the pulpwood markets on the coastal region. As you think about a lot of these mills and where they source logs, if you're if you're next to the ocean, your sourcing radius is only about 180 degrees versus 360. And so that tightens up some of those markets, and I think that bleeds into sawlogs. And certainly, I think that's been one of the drivers of late for why you've seen those prices tick up.

We'll see if with a little softening in the fiber markets, if that wanes a little bit more. But I think more broadly, as you mentioned, we have seen some capacity coming into the south and certainly, that's benefited us in some of the markets where we have large fee holdings, you think Mississippi, Southern Arkansas, some spots in Louisiana. What we have seen is as new capacity comes into a particular wood basket, we see an uplift on sawlog prices, and we expect that to just continue to be the case as more capacity comes into that region. I think the other thing at play of late has been -- and this is particularly true, I'd say, over the last 18 or so months, there's just been a bit of a constraint on log and haul capacity and I think that's another driver for why you've seen a little bit of an uptick in sawlog prices just as mills wanted to maintain inventory so they didn't lose out on the high lumber price opportunity.

I would say that the haul capacity has probably gotten a little bit better here as we've gotten into 2023. But over the long term, I continue to think you're going to have constraints on both log and haul capacity across the South, just as labor will continue to be an issue. So the net-net is we are seeing regional differences, will we see the Atlantic Coast come down? A little bit more perhaps. But on balance, we still feel pretty optimistic about the trajectory of southern sawlog prices in the years to come.

[Anthony Pettinari, Analyst at Smith Barney Citigroup]

Okay. That's super helpful. And then just on Natural Climate Solutions, I don't know if there's any kind of update you can give us in terms of level of interest and engagement and maybe how you're tracking towards that $100 million EBITDA target for '25? Or if there's any kind of specific projects or work streams that you feel like are moving faster or slower than expected?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes. I think the good news is there just continues to be an increasing level of interest across really all parts of that natural climate solutions business. That's true with renewables, solar, wind, a lot of interest and activity there. It's true with mitigation banking. We've seen certainly a lot of interest in carbon capture and storage in the forest carbon market. So I think we're as optimistic as ever about the trajectory of growth over time with that business. And that's really, like I say, true across every component of that Natural Climate Solutions business. I think the trick continues to be managing the time line to get these projects to fruition. And that's unfortunately the case across each of those different businesses, whether it's the permitting and getting tied into the grid across the renewable section sector or just the time line to get forest carbon projects through the process of a third-party audit and I think that's going to continue to get better over time as more resources go into the system. But it's really a question of timing more than magnitude, but we're really optimistic about the long-term opportunities across really each of those businesses within natural climate solutions.

[Operator]

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

[Ketan Mamtora, Analyst at BMO Capital Markets]

Good morning, Devin and David. First question, just related to Anthony's earlier question. Dave any update on the main carbon offset project, how that's coming along? And when do you anticipate kind of sort of incremental information around that?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes. So I feel like we're right at the goal line. We've had all of our materials and responses into the third-party auditor for quite some time. I think one of the things that we've come to appreciate in this space is that there are not enough third-party auditors really to manage the magnitude of carbon credits that are coming to market. I do think that's something that will be resolved over time. But that's really been the bottleneck for us as we've tried to move that through to the end game. I think we should have something here shortly, and we would anticipate in the very near future, getting those credits issued and then hopefully start selling those forest carbon credits. But I would say also, we've also learned some things through the process that I think should help us scale this program going forward. So more to come on that hopefully in the very near future.

[Ketan Mamtora, Analyst at BMO Capital Markets]

Got it. And Devin, when you say very near future, I would still assume that to be kind of 2023. Is that fair?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Absolutely.

[Ketan Mamtora, Analyst at BMO Capital Markets]

Got it. And then just switching to capital allocation. I'm curious kind of your approach towards share repurchases, especially in the context of broader capital allocation. In a year like 23, where cash generation will be kind of hit by lower product [Phonetic] prices. Obviously, you guys have laid out the base and the supplemental portion. I'm just curious kind of how do you approach share repurchase this year?

[David Wold, Chief Financial Officer at Weyerhaeuser]

Yes, sure. Thanks. I mean we have -- as we've said for a while now, we believe share repurchase is a useful tool in the right circumstances. And certainly, we're fortunate to have a number of capital allocation levers, including M&A, investing in our business and adjustments to our capital structure. So the current share price, share repurchase is an attractive lever. But we're constantly weighing that in light of all the alternatives and the overall backdrop. And we've been quite active repurchasing shares since we announced our increase to our authority in fall 2021, making our way through about 2/3 of that $1 billion authorization, including about $550 million last year. So as we moved into 2023, the process really remains the same. But to your point, with the cash return framework, the amount of cash committed to be returned to shareholders is going to flex up or down year-to-year based on the amount of adjusted FAD generated.

So in light of the economic environment, we saw to start the year with the relative choppiness in housing. It's important to be disciplined and balanced as we deploy our cash over time, weighing all the market conditions and those available levers and ultimately allocating the cash in the way that creates the most value for shareholders. So in summary, I'd say the evaluation process remains consistent. We'll continue to assess share repurchases along with all the other capital allocation options and report out our activity quarterly.

[Operator]

Our next question is from Susan Maklari with Goldman Sachs.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Thank you. Good morning, everyone. Our first question is on the DIY segment of the R&R market. Devin, I know you gave some comments there on the activity that you're seeing. But as we get into the spring, what's the tone from your customers there? And how are you thinking about the spring playing out?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes. On balance, we've seen pretty solid demand. I would say just for context, Q1 is always a little bit softer from the DIY segment just because people aren't doing R&R projects in the Northern regions this time of year. I would say in the South, we've actually seen the activity up a little bit year-over-year as we feed into the big box retailers. It's been a little lagging in the West, I would say, year-to-date, but that's starting to pick up. So on balance, we're still expecting a very solid year from the DIY segment. I don't think it's going to be at the same levels that we saw during the peak of the pandemic, but certainly very strong relative to pre-pandemic levels.

[Susan Maklari, Analyst at The Goldman Sachs Group]

Okay. That's helpful. And then looking at the EBITDA margin in lumber and OSB, it was really impressive, given what you're seeing from a pricing perspective. And it does seem like it reflects some of the benefits of the productivity initiatives that you have put in place in the last couple of years. How are you thinking about the production costs going forward, just given the various puts and takes there. And with that, is there any update generally on opex 2.0. Any thoughts on how you're progressing against the $175 million, $200 million target for '25?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Sure. Well, at a high level, I think the benefits of this opex program that we've been undertaking for a number of years are really reflected in the Q1 numbers, as you said, in a very challenging market we were still able to deliver positive margins across all of our businesses. And I think just from a relative operating performance standpoint, that's really, really served us well and has been a core part of our operating strategy for quite some time. we are progressing, I think, quite well to that $175 million to $250 million target. And I would say I'm particularly pleased with the progress we made last year. We generated $40 million of opex in an environment where we saw historically high levels of inflation. And so that was quite a headwind to navigate through. I think this year, as we see some of the turnover starting to go back to maybe a more normal level and inflation comes down, I feel very good about the tailwinds that we'll have from an opex standpoint. And I think it's just a real testament to the teams that we have all across the organization that are staying focused on improving how we operate every day, trying to innovate everywhere we can and serving our customers to make sure that we're not just maintaining industry level -- industry-leading margins, but we're growing that over time. So really pleased with the efforts there.

[Susan Maklari, Analyst at The Goldman Sachs Group]

And any thoughts just on those production costs for lumber and OSB as we get into the spring?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Well, I think as we look across the key cost elements of each of those businesses. The labor piece has remained elevated. I don't think it's increasing at the clip that we've seen over the last several years, but it still remains at an elevated level. But besides labor, I would say, on balance, we are seeing some progress in having that inflationary pressure kind of back off a bit, whether it's fuel, energy, resins, really across the board, we've seen some of the fiber costs come down. So we are seeing some of those inflationary pressures start to wane. And I think that will be a tailwind for us as we get through the year as well.

[Operator]

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

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

Good morning, everyone. Wanted to start out on the EWP business. I mean, it's been a really nice source of stability kind of in spite of volatility in commodity markets. Realizations there held in better than we expected. It looks like you're expecting some additional pressure in Q2. But could you talk about how you're thinking about profitability there over the next couple of quarters? And maybe give a little bit more color on what you're seeing on the volume side after maybe some destocking issues the last couple of quarters?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Well, I think not surprisingly, given that EWP's primary market is single-family construction. We did see softening in EWP demand as we got into Q4 last year, and that really flowed through into Q1. As you say, I think to a large extent, as the housing market softened last fall, the inventory levels across the channel probably built up a little bit more than expected, and we certainly saw in Q1, many of our customers had to work through some existing inventory. And so we adjusted our operating posture down to more -- to be more reflective of the demand environment. And that, I think, together with just a little bit of softening on the price side is really what you saw reflected in the Q1 EBITDA numbers for EWP. But again, as we step back and look at this business from a high level, we're still at pricing that's well above historical levels, prepandemic levels. And I think as we get deeper into the spring, we've seen our order files start to build. Certainly, I think what we've seen going on recently with single-family construction in particular, starting to get a little bit more optimistic about how that's going to be playing out in the months to come. So we're going to be increasing our production in Q2, as David mentioned, not -- still not up to the levels that we're running full out, but certainly above where we were in Q4 and Q1. And I think that will continue to trend in the right direction as we get deeper into the year, assuming that housing continues with this momentum. So we feel really good about the business. It's a quality product. We have great service, and I think really a lot of customer loyalty. And so we'll continue to serve our customers and as single-family housing continues to recover, that business will be in really good shape for us going forward.

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

Makes sense. And then just second, on southern log pricing. I guess as you look over the next year, do you think we're kind of in a situation where maybe you see kind of a slow bleed in realizations absent a real inflection in demand? Or from where you sit today, any kind of confidence in the idea that things could really level out in the near term at all?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

I think our view is that it's going to stay fairly stable for most of this year, absent a material change in market dynamics. That's certainly our view from a sawlog perspective I think there's probably a little risk with respect to fiber logs just given end markets in the pulp and paper space has softened a bit. And so there may be a little softening here until that stabilizes and firms up. But for the sawlog prices, our view is it's going to stay pretty consistent over the course of this year. And then as the market improves overall going forward, a lot of the same drivers for that log price appreciation we've seen over the last couple of years should kick back into gear and we still feel pretty optimistic long term that we'll see that gradual price increase across the sawlog portfolio.

[Operator]

Our next question is from Paul Quinn with RBC Capital Markets.

[Paul Quinn, Analyst at RBC Capital Markets]

Yes. Just following up on this real estate energy networks or is it especially the natural climate solutions, looking for the extra color on the carbon project. But where are we at with the -- you signed 2 deals of the carbon storage. Just wondering how that permitting is going for those companies that you're involved with?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes. I think it's progressing as expected. We -- as we said before, there's a fair amount of work to do between signing the deal on actual first injection. You've got to prove out the data, which has been underway and that's progressing well. The permitting and ultimately building out the infrastructure. But I think from a time line standpoint, things are progressing as expected, and we continue to believe we'll see first injection in late 2025 or into 2026. But I think a big part of why we chose those 2 partners is they're both very well equipped to manage through the process and the time line. So we think it's progressing on plan.

[Paul Quinn, Analyst at RBC Capital Markets]

Okay. And then just switching over to Wood Products. If I look at 2023, whole year. What are we tracking for lumber volumes? Is this -- last year was down. Are we going to go back to 21 levels and especially on the OSB side as well, it looks like you're tracking at record lows for '23.

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes. For lumber, we'll definitely be up year-over-year. Sitting here today, it's probably kind of a mid-single digit, high single-digit percentage-wise improvement year-over-year. And remember, last year, there were some things going on around, the strike in the Pacific Northwest. And frankly, with some of the labor issues, probably the production was down as a result of that to some degree as well. So we should see that improve in 2023? And then from an OSB standpoint, that should be up slightly as well.

[Operator]

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

[Mark Weintraub, Analyst at Seaport Research Partners]

Real quick on the OSB pricing. You show current up $5 versus the 1Q average. And by my math, when I look at the random length pricing, it's something like $450 million. And is that just because what you're showing is really where prices were 3 or 4 weeks ago given your order files? Or is there something else that might be going on that would depress the type of uptick you would expect to see in OSB pricing?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

No, you hit on it exactly, Mark. It's just a function of when you have a 3- to 5-week order file, it takes time for the current prices that are reflected in random lengths to flow through to realization. So there's a lag on the way up. But then there's also a lag on the way down. So it nets out to be the same. It's just a timing issue.

[Mark Weintraub, Analyst at Seaport Research Partners]

Got it. Okay. And then on the question on the U.S. South, a couple of questions on the timber markets. and where they may be going. Of course, you don't just grow trees, you also consume logs and making lumber. So I was hoping to get a sense as to what your net position on sawlogs might be? And if there's a difference regionally if you're more long in the Carolinas or the Atlantic Coast versus in some of the Mississippi Arkansas, Louisiana basket, that would be super helpful.

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes. That's a really good question, Mark. I think from our standpoint, we have 7 million acres across really all of the major markets across the South unparalleled diversification. I think generally speaking, we have peer-leading scale in every market. So I think as we move forward in a world where we think sawlogs are going up, I think we're really well position going forward. And as you know, there's just been a lot of new capacity coming into the south. And I think -- and we've seen this in markets where new capacities come in, that's pushed up sawlog prices. So as we think about how does that impact our business as a whole going forward. I think it's positive. First, on the timberland side, we are a net seller of logs. So on balance, we generally sell between 40% to 50% of our grade fee logs in the south to our internal mills. So that means the remainder of those logs go to third-party customers. So higher sawlog prices in the South will have a net benefit to Weyerhaeuser on those third-party logs.

Now obviously, higher log prices also have an impact on wood products manufacturing as that's a key input cost. But I think, again, the integrated model that we have is going to help us in that respect. So the manufacturing side is those sawlog price increase over time. Those logistics and efficiency benefits that our manufacturing operations enjoy today on the fee timber that we supply is going to become even more important in maintaining industry-leading margins. And you can just look to the Pacific Northwest for an example of that. So I think on balance, we feel very good about that. Obviously, there are regional differences, but I would say outside of the Southeast, we have manufacturing operations in every other wood basket. So most of those dynamics will play out very similarly. And I think all in, if you want to look at log prices and where they're going, I think with our business to scale the integrated nature, we're going to be the premier investment vehicle to leverage increasing Southern sawlog prices into the future.

[Mark Weintraub, Analyst at Seaport Research Partners]

Okay. That's super helpful. Just one follow-up. You mentioned that you use about 40%, 50% of your logs go to your own mills. Do you buy much from the outside for your sawmills?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

We do. So generally speaking, our internal mills are going to get 50% of their logs from our fee timber and then they will buy the remaining 50% from third parties.

[Mark Weintraub, Analyst at Seaport Research Partners]

Okay. So you're kind of moderately net long. Is that a fair if I just do that -- if I do the math in my head, it would suggest you're moderately net long sawtimber in the U.S. South. Is that fair?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Correct.

[Operator]

Our next question is from Buck Horne with Raymond James.

[Buck Horne, Analyst at Raymond James]

Quick question on the lumber markets and just kind of one of the wildcards that's kind of probably affected prices this year. I'm just wondering if you could help us characterize, what's happening with the European wood imports that either hit domestically and/or impacting international markets? Do you see a peak of some of that European wood out there? Or how long will it take to work through some of that inventory that's hitting the domestic market?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

We certainly have seen an uptick in particularly the European lumber hitting the U.S. market, and I'll speak to Japan here in just a moment as well. I think that's a function really of a couple of different things. First, if you look back over the last couple of years, clearly, the lumber pricing dynamic in the U.S. made it a very attractive place to send wood. And so even overcoming the logistics and transportation costs, it was a margin positive move to get lumber from Europe into the U.S. market. Even as lumber prices have come down in the U.S., I think, to some extent, it's still probably the best margin opportunity for some lumber because the European demand has really come down with all of the dynamics that are going on there. And so I think you're going to see European imports come down a little bit in 2023, probably not dramatically, however, until you start to see the European economy and European demand pick up.

We did see in Japan, a pretty significant slug of lumber hitting that market at the end of 2022. And as David mentioned, that has put a little bit of pressure on the Japanese market for our customers and our log deliveries. We have started to see the European volume coming into Japan, Wayne. And so we expect that excess inventory of European lumber to work down here in the second quarter, and we should be back into a more normalized position as we get into the third quarter. I think over the long term, though, but the reality is with the beetle infestation issue that they've had in Central Europe, that volume is rapidly becoming less viable. I think as the Russian imports of lumber into Europe assuming that those don't come back in a material way in the near future. The overall dynamic is going to be the Europeans will have to keep more lumber in Europe in a normalized circumstance. And so I think this is a short-term issue that will resolve itself in the not-too-distant future.

[Buck Horne, Analyst at Raymond James]

Very helpful color. I appreciate that. And then shifting to -- you mentioned capacity that's come into the U.S. South in terms of mill production. Can you help us maybe characterize in terms of like how quickly some of that capacity is coming online in the U.S. South. Is that -- is the growth rate that you're seeing faster? And are we bringing in more lumber capacity in the U.S. South than where I guess, replacing that's being curtailed in Canada? Or how do you see that dynamic in terms of what's being added domestically versus what's coming out of Canada?

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes, there's certainly been a lot of new capacity coming into the South, but we've also seen a lot of capacity coming out of BC. I suspect there will be more to come. If you just step back and look at the overall amount of new lumber capacity into the U.S., it's really not a significant amount over the last several years. And we're continuing to see new mills come in and new announcements, although that's probably slowed just a little bit over the last 6 to 9 months because of what's going on in the broader economy. But I think a good way to think about it is you're going to see 1 billion, 1.5 billion board feet coming into the South, more or less every year for the next little bit. But I think you're going to see a comparable amount come out of British Columbia, just given what's going on and the dynamic there. So net North American lumber additions, I'm not sure it's going to be all that much really.

[Operator]

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

[George Staphos, Analyst at Bank of America]

Just a couple of quick questions here. Number one, Devin, David, can you remind us or call out what the headwind factors, the strikes to whether, what that might have taken away from fourth quarter and perhaps aided operations, specifically in Wood Products during the first quarter. And similarly, were there any things that specifically or particularly went well for you on operations within the Wood segment during the first quarter because performance there was well ahead of our forecast even with the decline in realization.

Second question I had, all my other ones have pretty much been asked. Can you remind us what you're seeing in terms of log inventories in China at the ports? I seem to remember that inventories remain pretty elevated. But the outlook seems to be relatively stable to constructive from your vantage point. So I just want to see what the interplay is between inventories at the ports and what you're seeing.

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Yes, George. So maybe I'll take China first and then comment briefly on the lumber piece. From a China standpoint, the latest published numbers from an inventory standpoint in China were down. However, what we saw on the ground in April is a number of ships that were coming over from New Zealand with wood that had been delayed post cyclone. And so I think the inventories in the next published number are going to be up a bit. And I think we've also seen some very low-quality European logs in that market that they're trying to get rid of more or less at fire sale prices. And so I think here, in the very near term, it's just going to be a little bit softer environment as they work through some of that inventory. That being said, the takeaway has really started to pick up here as we've come out of the Lunar New Year. I think as we get out past this period of working through some of this inventory that support at the moment, we're feeling pretty good about the back half of the year in China, and I think that will be a nice flex opportunity for us out of the Pacific Northwest.

On the lumber side, and David may have the specific numbers in terms of the Q4 impact. But I would say beyond the strike impact, the one thing I would point out is just as we get into an environment where, as I mentioned earlier, turnover is starting to lessen a little bit more stability. We've got the transportation networks that are starting to get a little bit more, I would say, healthy. And so, on balance, the business just ran better overall in Q1. And I think that's really, again, a testament to the work that our teams are doing and what's still a relatively challenging environment.

[David Wold, Chief Financial Officer at Weyerhaeuser]

Yes, George, I'd just call out the impact in Q4 would have been pretty negligible based on where margins were at that point in time of the work stoppage. I mean we had a marginal amount of costs associated that may have offset those marginal piece of additional income there. So not really much there. I'd just call out just another great example of the work we've done over time on our cost structure and the opex performance of the team to deliver a great quarter in challenging market conditions.

[George Staphos, Analyst at Bank of America]

So Dave, on a going-forward basis, obviously, there's going to be seasonality. But if we hold pricing constant, this is pretty much a good baseline for operations and for our own margin forecast on a going-forward basis. Would that be fair?

[David Wold, Chief Financial Officer at Weyerhaeuser]

Yes, I'd say so. As Devin referenced earlier, we've seen some easing on the inflationary side with the labor piece still kind of being persistently strong, but across the board in terms of the other costs, we're seeing some nice signs of easing there. So I think this would be a reasonable baseline moving forward.

[Operator]

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

[Devin Stockfish, Chief Executive Officer at Weyerhaeuser]

Okay. Well, thanks 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, Vice President of Investor Relations
• Devin Stockfish, Chief Executive Officer
• David Wold, Chief Financial Officer

Analysts

• Anthony Pettinari, Smith Barney Citigroup
• Ketan Mamtora, BMO Capital Markets
• Susan Maklari, The Goldman Sachs Group, Inc.
• Kurt Yinger, D.A. Davidson
• Paul Quinn, RBC Capital Markets
• Mark Weintraub, Seaport Research Partners
• Buck Horne, Raymond James
• George Staphos, Bank of America Co.