Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing bar and welcome to the Weyerhaeuser first quarter 2020, <unk> earnings Conference call.
At this time, all participants earnings from only long.
After the speaker's remarks, there will be a question and answer session.
Yes. Good question during the session you want me to press Star one on your telephone.
Please be advised to the today's conference is being recorded if you're acquiring systems. Please press star Zero I would know what given the conference over to bomb Vice President of Investor Relations and enterprise.
Thank you. Please go ahead.
Thank you Jay.
Good morning, everyone.
Thank you for joining us today to discuss weyerhaeuser's first quarter Twentytwenty earnings.
This call is being webcast at www Dot Weyerhaeuser dotcom.
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.
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 Devon stocks ish, Chief Executive Officer, and Russell Hagen Chief Financial Officer.
I will now turn the call over two dozen stocks ish.
Thanks, Beth good morning, everyone and thank you for joining us today I.
I hope everyone is well in staying safe.
Want to begin this morning by sending my heartfelt thanks to our Weyerhaeuser employees, we have remarkable people working for this company and I'm extremely proud of their unwavering commitment to safety operational excellence and serving our customers as we manage through this uncertain and challenging environment.
This morning, Weyerhaeuser reported first quarter results and announced further actions to preserve liquidity and financial flexibility in light of the global Cobot 19 pandemic.
Because our markets evolve rapidly since the end of the first quarter I will highlight our first quarter results and then turned my focus to current business conditions and our actions in response to covert 19.
Weyerhaeuser reported first quarter GAAP earnings of $150 million or 20 cents per diluted share on net sales of $1.7 billion.
Excluding a 12 million dollar benefit from special items, we generated earnings of $138 million or 18 cents per diluted share.
Adjusted EBITDA totaled $413 million in the first quarter, an improvement of nearly 60% compared with the fourth quarter and 13% higher than a year ago.
I'll begin the discussion of our results with some high level comments on our first quarter business conditions.
U.S. housing activity started the year very strong total starts averaged 1.6 million in January and February supported by low unemployment favorable mortgage rates increase build are focused on bringing affordable product to market.
By mid March However, our customers began to expressed some concern about the effects of social distancing mandates and state homeowners and housing activity started to weaken in certain markets.
Although housing starts declined to 1.2 million for the month, our sales volumes remain steady through late March.
Against this backdrop each of our businesses delivered strong first quarter operating results. Despite the rapidly changing upstream market conditions.
Turning to timberlands on pages six through eight of our earnings slides.
Timberlands contributed $105 million to first quarter earnings and $173 million to adjusted EBITDA even.
EBITDA increased $15 million compared with the fourth quarter.
In Western Timberlands, EBITDA increased $20 million compared with the fourth quarter.
Average sales realizations and volumes for Japan export logs increased an average domestic sales realizations improved modestly.
In the western domestic market, improving demand and pricing for Douglas for lumber drove solid demand for logs through late March and I think for domestic log strengthened.
Logging conditions were favorable windmill inventories were adequate.
Our fee harvest volumes increased slightly and cost improve seasonally due to reduced road and forestry cost as well as lower per unit logging in hauling costs.
Turning to our export markets.
Log sales volumes to Japan increase substantially in the first quarter and average sales realizations improved modestly.
Well Japanese housing starts were down approximately 10% year to date following the implementation of the consumption tax in the fourth quarter demand from our customers who served the post and B market increased due to limited availability of Canadian export logs and reduced imports of competing European laminated beans.
As expected our China export sales volumes declined significantly in the first quarter as we flagstar volumes to the domestic market to capture higher margin opportunities.
Softwood log inventories at Chinese ports nearly doubled in the first quarter to 7.1 million cubic meters take away was weak is saw mills and construction sites close for the lunar new year holiday and did not begin to reopen until kobin related restrictions eased in mid March.
Log supply from New Zealand in Europe remained abundant for most of the first quarter and our sales realizations decreased slightly compared with the fourth quarter.
Relative to the year ago quarter, our total western log export revenue decline due to significantly lower sales volumes to China, partially offset by higher volumes to Japan.
Moving to the south.
Southern Timberlands, EBITDA decreased $7 million compared with the fourth quarter.
Demand remained steady through late March as season, unseasonably wet weather reduced grade log availability across many southern markets.
Our fee harvest volume declined 7% compared with the fourth quarter, primarily due to seasonally lower stumpage sales.
Average sales realizations declined slightly due to mix.
Comparing our overall southern timberlands first quarter results with a year ago period, EBITDA declined by $12 million due to lower fee harvest volumes and modestly lower average sales realizations.
In northern Timberlands, EBITDA was comparable with the fourth quarter and $4 million lower than the first quarter a year ago.
Fee harvest volumes declined due to the sale of our Michigan Timberlands and average sales realizations improved primarily due to mix.
Real estate energy and natural resources pages, nine and 10.
Real estate and DNR contributed $36 million to first quarter earnings and $101 million to adjusted EBITDA.
First quarter, EBITDA was $64 million higher than the fourth quarter and $5 million lower than a year ago period.
Compared to the fourth quarter real estate sales were significantly higher due to an increase in the number of acres sold.
We experienced strong interest in real estate across our markets throughout much of the first quarter.
In energy and natural resources construction materials volumes were seasonally lower.
Average price per acre declined an average land basis as a percentage of real estate sales was higher due to the mix of property sold.
First quarter real estate sales included some low productivity acreage in southern Oregon that we acquired with the Plum Creek merger.
Wood products pages, 11 and 12.
Wood products contributed $134 million to first quarter earnings and $184 million to adjusted EBITDA.
EBITDA increased $74 million are almost 70% compared with the fourth quarter and was 60% higher than the first quarter, a year ago unimproved commodity realizations and higher sales volumes across all product lines.
Our first quarter Wood products performance was outstanding our relentless focus on safety and efforts to drive reliability and cost structure improvement continues to yield positive results and has never been more important than it is today I.
Im extremely proud of the progress that our teams continue to make on the operational excellence front.
EBITDA for lumber increased $36 million compared with the fourth quarter strong housing activity drove improved demand and benchmark pricing trended higher through much of the first quarter.
Our sales volumes improved modestly and average lumber realizations improved 7% over the fourth quarter.
In the first quarter, our lumber operations delivered the lowest quarterly controllable manufacturing cost on record and also set a new monthly record in March.
Compared with the first quarter, a year ago lumber EBITDA improved by $32 million due to improved realizations higher sales volumes and lower per unit manufacturing cost.
You know SB, EBITDA improved $26 million compared with the fourth quarter.
Realizations improved significantly and sales volumes were moderately higher.
Our always be business delivered the lowest quarterly controllable unit manufacturing cost in our history.
On average the benchmark Oh, let's be composite price increased 22% compared with the fourth quarter.
Our average realizations increased 14% as the length of our order files creates a lag between published in realized pricing.
Compared with the year ago quarter, LSB EBITDA increased $26 million average sales realizations increased 10% fiber costs declined and sales volumes were higher.
Engineered wood products EBITDA improved by $10 million compared with the fourth quarter.
Sales volumes for solid section and I joists were moderately higher due to strong construction activity.
Per unit manufacturing cost improved relative to the fourth quarter with seasonally higher operating rates.
Average sales realizations for both solid section products and I joists decreased by 1% due to mix.
Compared with the first quarter, a year ago, EBITDA improved $4 million due to higher sales volumes and lower fiber and unit manufacturing costs.
Distribution EBITDA increased by $4 million due to higher sales volumes and improved product margins compared with the fourth quarter.
Compared with the year ago quarter, EBITDA increased by $8 million due to higher sales volumes, partially offset by higher delivery in warehouse cost.
Turning now to operational excellence.
In the first quarter each of our businesses made good progress against our $50 million to $70 million Opex target for 2020, and we remain focused on delivering industry, leading performance across a wide range of market conditions.
This commitment to operational excellence and having the right cost structure has never been more essential and our focus is unwavering.
Let me turn now to the recent deterioration of industry wide business conditions in the second quarter and the actions that we've taken to preserve liquidity and financial flexibility and maintain our capital structure in light of the covert 19 pandemic.
And then I'll turn it over to wrestle to discuss our financial position and second quarter outlook.
At the end of March the rapid deterioration in macroeconomic conditions began to translate into weaker demand across our value chain.
In April as stayed home orders were enacted across the nation and unemployment began to rise our homebuilder customers started to report steep declines and buyer traffic and increasing cancellation rates. Likewise, many of our building products dealer customers communicated that they were experiencing sharply lower order files.
Well residential construction was designated in essential industry and most jurisdictions, allowing for continued construction activity the impacts of stay at home orders in general economic uncertainty on potential homebuyers translated into significant slowing of housing activity in late March and throughout April.
And obviously the impacts in regions, where state and local restrictions prohibited construction, we're even more pronounced.
Although take away from our home improvement warehouse customers has remained solid the pandemic related reductions in construction activity have resulted in a significant drop off an overall demand for wood products.
Across our timberland segment demand for fiber logs has held up well the many domestic sawlog customers have curtailed production in response to weaker wood products demand.
In total we have noted curtailments and over 100 customer destinations, reducing solid demand by approximately 25% in April versus March.
For our real estate any in our segment social distancing and other managers have curtailed real estate brokerage activity and increase the time required to finance close and record transactions.
So in summary, we have seen a steady decline across all of our markets over the last month.
Importantly, however, our businesses were well prepared to rapidly respond to the changing market dynamics.
In wood products, we've reduced operating capacity by 15% to 35% across our manufacturing businesses to align our production with customer demand and we quickly pulled back on discretionary capital expenditures and other operating costs.
We have continued to safely deliver on our value proposition of quality reliability and logistics expertise, despite the broad social and economic disruptions.
This is further enhanced our position as a preferred supplier for our customers.
In timberlands, we opportunistically flexed volume into the China market in April to capitalize on improved demand and pricing.
We also leveraged our vertical integration re optimizing log procurement across starwood products segment to facilitate increased fee harvest consumption by our internal mills.
These actions offset all of our demand reduction in the U.S. west for the month of April.
However, they mitigated only a portion of the reduction we're seeing in southern demand.
In light of these market conditions, we are reducing our planned 2020, southern harvest volume by approximately 10% to match our supply with the lower demand.
We will continue to closely monitor market conditions and take the necessary steps to align our operations in production levels to evolving customer demand.
In general current economic data and forecast lead us to believe that our near term business conditions will remain challenged for some period of time.
Key indicators that we are monitoring include unprecedented levels of weekly unemployment claims rapidly rising mortgage forbearance requests record declines in consumer sentiment and builder confidence mortgage purchase applications substantially below year ago levels.
Tighter mortgage credit availability and estimates for a continued near term contraction in U.S. GDP.
Further there continues to be a high level of uncertainty regarding the duration and magnitude of the societal and economic impacts of this cobot 19 pandemic.
The timeline for effective medical treatments in vaccines is unclear.
Recent steps toward economic reopening ER positive, but we expect to trajectory of the economic recovery will be bumpy and gradual.
This drives significant uncertainty regarding the medium term outlook for U.S. housing activity.
We anticipate that pricing and demand will remain choppy across our markets for much of 2020.
When stayed home orders are lifted our customers tell us they anticipate near term pickup in activity as builders complete in process homes and work through pre pandemic order backlogs.
However, following that immediate surge moster, anticipating lower sales and construction activity until employment and consumer confidence materially improve.
In light of these expectations, we're taking actions to preserve liquidity and financial flexibility and maintain our capital structure. During this unprecedented time.
First we're cutting 2020 capital expenditures by $90 million.
Second we are reducing non essential expenses by $55 million. This includes gionee and operating expense reductions across our businesses in corporate functions.
Third we will differ $25 million, a federal payroll tax payments until 2021.
Fourth our senior management team and board of directors have elected to reduce their compensation for the remainder of 2020.
I will reduce my base salary by 30% our board will reduce its fees by 20% and the remainder of our senior management team will reduce their base salaries by 10%.
And finally, our board of directors is temporarily suspending the quarterly dividend.
The dividends suspension is an extremely difficult decision, but one that we believe is prudent given deteriorating into market conditions and the highly uncertain economic environment.
I want to be clear that returning cash to shareholders through a sustainable dividend is a core part of our balanced capital allocation philosophy.
The board will regularly evaluate opportunities to re initiate an appropriate quarterly cash dividend as soon as practicable.
This evaluation will take into account a number of variables, including the broader macroeconomic environment, our market conditions and customer demand as well as the company's cash flow liquidity and leverage.
Ill now turn it over to wrestle to discuss financial items in our second quarter outlook.
Thanks, Devin and good morning.
Well, we're expecting challenging market conditions until the impacts of the cobot 19 pandemic receipt. We are confident the actions we have taken will enable us to maintain a strong financial position through this unprecedented time.
We have a solid balance sheet competitive cost structure, and our 11 million acres of timberlands provide strong asset coverage, we hold investment grade credit ratings remain well in compliance with our debt covenants. Moreover, our trees will continue to grow and generate value now and into the future regardless of the economic conditions.
The first quarter, we took several steps to enhance our financial flexibility first we finance, we refinanced our 1.5 billion dollar revolving credit facility to capture more favorable pricing and extend its maturity to 2025 second we increased our cash on hand through a precautionary 550 million.
In dollar draw on our revolver today. This facility is still has $950 million available capacity remaining.
Third we issued $750 million, a 4% notes through a public bond offering with a net proceeds to be used to repay our 2021 debt maturities and Ford we completed the sale of our Montana timberlands for $145 million in cash we originally anticipated this transaction will close.
In the second quarter.
These activities are reflected on page 14, which summarizes our key financial items for the quarter.
We ended the first quarter, but the cash balance of $1.4 billion, excluding the cash earmarked for repayment of the 2021 maturities and the $550 million drawn our revolver, which will be which we will repay when appropriate we.
We had approximately $170 million of cash on hand at the end of the first quarter. This is in line with our typical cash balance.
Our gross debt outstanding increased during the quarter due to the bond offering and the revolver draw subsequent to the ended the first quarter. We submitted notice that this month, we will be redeeming. Our 569 dollar notes due in March 2021.
Following this repayment we have a total debt of approximately $6.8 billion.
We intend to repay a 150 million dollar debt note in 2021 at maturity.
After these repayments we have no additional debt maturities until 2023.
These actions are consistent with our strategy to preserve liquidity and financial flexibility in this uncertain environment.
Turning to cash flow cash from operations. During the first quarter was $86 million first quarter cash flows typically lower due to seasonal working capital increases and higher quarterly interest payments.
Cash from investing totaled $441 million.
This includes $362 million of cash from the maturity of our last variable interest entity and $145 million from our Montana Timberland sale.
Our capital expenditures for the first quarter totaled $68 million.
As David mentioned, we are reducing our 2020 capex by $90 million to help preserve liquidity.
$75 million of reductions will come from wood products, where we are eliminating discretionary capital projects and cutting back to the low end of the maintenance capital range.
$10 million will come from timberlands and 5 million from corporate.
Our revised guidance for total 2020, Capex is approximately $270 million.
This includes $110 million for timberlands inclusive of reforestation costs.
Okay.
We.
Okay.
Okay.
Okay.
Okay.
Hi.
Okay.
Okay.
Operator East online.
Can you still hear us.
So I assume we can be heard we'll keep going yeah, let's continue right.
Looking forward key outlook items for the second quarter and the full year are presented on pages 15 and 16.
And our timberlands business, we expect second quarter earnings and adjusted EBITDA will be significantly lower than first quarter.
And our western Timberlands operations domestic mill log inventories were above target in early April as lumber mills reduced production in response to the uncertain market environment.
A month in log inventories came into balance as customers limited log purchases to align with planned production.
As David mentioned, our western Timberlands team because of it was able to leverage our scale customer diversity in collaboration with our mills to offset all of the demand reductions we experienced in April.
As a result, even with current market conditions, we expect our second quarter domestic log sales volumes will be comparable with the first quarter.
Average log sales realizations are expected to be lower than first quarter levels and forestry and road spending will increase as we entered the spring and summer months.
Moving to the export markets in Japan, a significant amount of residential construction activity has been curtailed due to cobot 19 outbreak.
Demand for large remained steady in April but is expected to soften as the quarter progresses, we expect our second quarter Japanese export log sales volumes and realizations will be lower than the first quarter.
We expect our Chinese export log sales volumes and realizations to increase in the second quarter.
In early March Chinese log importers began to apply for and were granted exemptions from tariffs imposed on us softwood logs as coated 19 related restrictions eased in China construction activity has resumed log takeaways returned to more normal levels.
Disruptions to the supply of competing logs that in New Zealand in Europe, coupled with additional takeaway is driven improved demand and pricing for our western export logs.
We anticipate minimal effect on second quarter market conditions from the recent easing of restrictions of the New Zealand Forestry operations.
In the south manufacturing shift reductions in curtailments reduced demand for our grade logs by over 30% in the month of April.
Demand for fiber large remain stable as increased production of hygiene products offsets weaker demand for printing and writing papers.
We expect our second quarter fee harvest volumes will decline approximately 5% to 10% compared with the first quarter.
Average log sales realizations will be slightly lower than first quarter, primarily due to mix as we expect a greater proportion of fiber log sales as we continue to shift to more assuming activities.
You are seeing increased interest in exports of our southern yellow pine logs to China as waivers are granted for the ongoing 25% tariff.
In the North second quarter fee harvest volumes will be lower than the first quarter due to the spring breakup season.
As David indicated, we expect to reduce or southern fee harvest by approximately 10% this year to align with our production with reduced saw log demand.
As a result, we're updating our total fee harvest guidance to between 33 and 34 million tons for the full year 2020, we do not anticipate material changes to our western fee harvest volumes.
Clearly second quarter activity is highly uncertain, assuming current market conditions persist, we anticipate earnings and adjusted EBITDA for timberlands business will be approximately $50 million to $60 million lower than the first quarter.
Turning to our real estate energy and natural resources segment.
We anticipate second quarter earnings and adjusted EBITDA multiple segment will be approximately $20 million lower than the second quarter of 2019 due to fewer real estate acres sold we expect second quarter land basis as a percentage of real estate sales will be moderately higher than the first quarter 2020.
In real estate, we continue to experience demand in interest in our properties social distancing and other measures have curtailed broker activity and lengthen the time required to finance closer to core transactions.
Demand for smaller is few transactions remain steady volume of Barker larger transactions, requiring financing is slowing through the change challenging credit availability.
In energy and natural resources second quarter activity has been stable, we anticipate adjusted EBITDA will decrease as the year progresses due to lower demand for construction materials and reduced interest in new oil and gas leasing activity.
As a result, we're lowering our full year adjusted EBITDA guidance for real estate energy natural resources to $200 million. This is a $55 million reduction from our prior guidance. We continue to anticipate land basis as a percentage of real estate sales will be between 55 and 65% for the year.
For our wood products segment, we expect second quarter earnings and adjusted EBITDA will be significantly lower than the first quarter pointing in the second quarter of 29 team.
We anticipate significantly low for sales volumes across all product lines in the second quarter market demand has deteriorated across our wood products businesses due to the economic impacts a cobot 19, and the related reduction in residential construction and large repair and remodel activity.
To align our production with the market demand in April we reduced our operating capacity by 20% for lumber and 15% for oriented Strand Board and we expect to extend these reductions at similar levels in may across our various engineered wood products, we reduced capacity by 15% to 25% in April and plan to reduce engineered wood.
Products capacity by an additional 10% for the month of May.
We will continue to dynamically adjust our production to align with profitable demand.
Benchmark pricing framing lumber composite and Oh, a speed composite have declined approximately $75 and $100 respectively. Since early March for lumber our quarter to date average sales realizations are $25 lower and current realizations are $20 lower than the first quarter average respectively for.
Oriented strand board our quarter to date average sales realizations are five higher and our current sales realizations are $20 lower than the first quarter average respectively. It is important to note the due to the length of our order files, there's a lag between the cash benchmark price in our realizations.
As a reminder, at typical operating rates for lumber every 10 dollar change and realizations as approximately $11 million EBITDA on a quarterly basis.
Oh, just be a typical operating rates every $10 a change in realizations as approximately $8 million EBITDA on a quarterly basis.
For engineered wood products, we expect second quarter average sales realizations will be generally comparable to the first quarter.
Page 13 outlines the major components of our first quarter unallocated items adjusted EBITDA for this segment was comparable to the fourth quarter 2019.
Special items for the first quarter consist of a $12 million benefited from a legal settlement of a legacy insurance coverage matter.
Our non cash non operating pension and post retirement expense was $9 million in the first quarter and we continue to expect approximately $40 million of expense for the full year 2020.
We also continue to expect approximately $30 million if required cash payments related to our pension and post retirement plans, we do not expect to make any contributions to our us qualified pension plan.
As a reminder, we've reduced our future pension obligations of over $2 billion. Since 2018, we've significantly reduced the plans exposure to market interest rate volatility by transitioning to a liability driven investment strategy.
First quarter interest expense was $85 million, we now expect interest expense would be approximately $360 million for the full year 2020 before special items.
This incorporates the previously discussed debt transactions and assumes a higher revolver balance as part of the actions to increase cash on hand.
In the second quarter, we expect to record net pre tax charge of $11 million, which will be reported as a special item as part of the early redemption over 569 million dollar note.
Most of my comments with taxes.
For the second quarter and the full year 2020, we now expect a modest tax benefit due to our current outlook for the remainder of the year the tax rate will be sensitive to the level and the mix of earnings between our read and taxable REIT subsidiary for the year.
As previously discussed the $90 million refund associated with our 2018 pension contribution remains in process.
We anticipate receiving this refund in early 2021, now I'll turn the call back to Devon and look forward to your questions.
Thank you Russell.
Although we expect near term market conditions will be very challenging I'm highly confident that weyerhaeuser is well positioned to successfully navigate these unprecedented times.
Our strong safety culture and high level of employee engagement enabled us to rapidly implement rigorous safety measures to protect the health and wellbeing of employees for the duration of this covert 19 outbreak.
Our businesses have industry, leading scale cost structures and supply chain expertise and an unmatched diversity of customers products and geographic locations.
Our teams are agile innovative and committed to effectively serving our customers.
We have an unrivaled portfolio of valuable timberland assets and wood products business with a proven ability to generate cash through adverse market conditions, and we have acted prudently and decisively to preserve weyerhaeuser's financial flexibility maintain our capital structure and ensure we have sufficient liquidity to mid two.
Whether this period.
Looking forward our confidence in the underlying thesis for the US housing remains strong.
In contrast to the period following the great recession, you as housing is now severely under bill and evolving societal preferences. We emerge from this pandemic are likely to support strong demand for single family homes.
We are confident that us housing growth will resume as economic fundamentals stabilize and consumer confidence rebounds, and we are well positioned to capitalize on that trend.
We remain focused on driving long term value for our shareholders through industry, leading operating performance and disciplined prudent capital allocation.
Now I'd like to open up the floor for questions.
Hi, This time, if you would like to ask your question, we would like to remind you. Please press star then the number one on your telephone keypad.
We'll pause for just a moment from Paul Acumera roster.
Okay.
Your first question comes from the line of Mark Weintraub from Seaport Global Your line is open.
Thank you I hope everybody in the extended Weyerhaeuser family stay safe and well.
Thanks Mark.
Two questions. The first if you could just walk us through the thought process on.
Moving to suspend the dividend as opposed to resetting it to a lower level and maybe.
As we think about as it gets to reinstate it is not likely to be a gradual increasing process or do you wait until you are at a point to restore it to what you think an appropriate ongoing level for it for the cycle and then.
Real quickly to if theres any help you can give us.
In modeling or thinking through absorption of fixed cost issues.
As you are taking significant volume out.
Particularly in the wood products business.
Yeah, sure Mark well I'll take the first two questions and then ill pass it over to wrestle on the fixed cost question.
Really we look at this through the context of the macro environment and our market conditions and really as I mentioned, just an unprecedented situation in terms of what's going on with the pandemic.
Broad swath of the economy being locked down we're seeing historic levels of unemployment GDP contraction in Q1 expectations that it's going to be much more dramatic in Q2 consumer confidence dropping it really no clear path on their trajectory of recovery and so.
Really we're expecting a significant erosion in housing and residential construction as well as to some extent larger remodel activity here in the near term I think we're in the early stages of understanding what thats going to look like it may get worse for awhile and so we're expecting that that's going to result in a very challenged and choppy pricing in demand.
Environment for our products for much of 2020.
And our view is that the full impacts from the housing slowdown wont be seen for a while longer just given.
The builders and contractors are working through existing backlogs their finishing up projects that are under construction. So there is likely to be a bit of a lag before we see the full impacts of the reduced wood products demand. So just a lot of uncertainty around how this is going to play out over the next few quarters.
Again, we're expecting a challenging environment for most of 2020 in so.
In light of that you know, we elected to suspend the dividend as as a temporary measure.
Help preserve our liquidity and financial flexibility.
It was a obviously an extremely difficult decision returning cash to shareholders through a sustainable dividend remains a core part of our balanced capital allocation philosophy. However, under the circumstances. We believe this is the right action a prudent action to take at this time, just given current business conditions our expectations.
Regarding a very challenged environment over the next several quarters in the high degree of uncertainty.
And so we're taking what we believed to be an appropriate and proactive set of actions to preserve liquidity and financial flexibility in and also to ensure that we maintain an appropriate level of leverage and so that was that was the thought process.
In terms of the timeline.
You know just given the uncertainty I think it's difficult right now to determine just.
How this is going to impact our markets over the next several quarters. So we're monitoring that closely.
The board is going to really look to see from evidence of stabilization and recovery in our business conditions and cash flow you know more specifically, we're going to be looking at a number of factors, including market conditions customer demand broader economic environment as well as the read through on our cash flow liquidity position and leverage right.
Ratios, but I want to make this point really clear we are committed to re initiating a quarterly cash dividend as soon as practicable and imports going to continue to evaluate that.
On a regular basis.
In terms of the level you know, we're going to look to re initiated at a level that is appropriate and sustainable in the context of our cash flow in our business conditions.
And so I think we would you know we would be open to doing that in stages. We would expect to re initiate the dividend at a level that it can be sustainably increased over time as markets improve so wrestle do you want to touch on fixed cost question Schirmer. So when you look across the business or fix.
There is about 15% kind of in total.
For wood products would fibers largest input costs lumber, it's about two thirds of the cash costs must be it's about half the cash costs and the other half is.
Resin and wax and then engineered wood products was a little less again.
Fiber costs, and then and then resident waxes beyond fiber labor is the next largest variable costs and so then you get down to fixed overhead and our manufacturing operations. It's relatively small typically a mill manager utilities taxes et cetera, So, it's a pretty low overhead pretty low fixed cost structure.
Timberlands, we have very low input and maintenance costs, you really aren't in crane. Many cost until you cut the timber and then in real estate or fixed costs are really minimal closer to like 10%, which is mostly labor because we outsource really a majority of our broker network.
Yes.
I would just one clarification I'm, sorry that 15% was that for wood products or was that for the overall company. The first allusion 15 does.
The overall company wood products is probably the like 18% and then timberlands is probably right about 15%.
Okay, great. Thanks, a lot.
Thank you.
Your next question comes from the line of George Staphos from Bank of America. Your line is open.
Well, it's actually talking about part going on for George.
I just want to start out I was one if you can kind of remind us what is the what's kind of different about the southern markets versus the west such that you are cutting harvest attempts at in the south but.
No changes in the last I assume you export markets may have something to do that.
But then kind of the next several of the question is also if you could kind of dig a little bit more into the reduction operating expenses and what makes that up and also provide a little bit more color on where you're reducing capital spending that'd be helpful. Thanks.
Yeah, sure well, you're right, it's a different market dynamic in the west than it is in the south the west is fundamentally a more attention wood basket.
And we have a diverse set of markets that we can flex volume too and as I mentioned earlier really we have the domestic third party market. We have our internal mills and then we have the export markets out of the west and so as we saw the third party domestic demand drop we were able to flex additional volume to that export.
Market and so we anticipate that we'll be able to continue to move our wall our volumes in the west it at good margins in so we don't anticipate harvest reduction there south a little bit different story, you don't seem to have that same market outlet to the export markets.
I will say just as an aside we have seen the China export markets start up again in the south as those tariffs have fallen off but it's a really small percentage of our overall harvest volumes. So really when you see that.
Domestic third party mill consumption in the South go down dramatically.
That's really what's driving the reduction in.
We come to that conclusion really by doing a wood basket by wood basket analysis of demand and that 10% is really just roll up of that work.
In terms of what was that remind me what the next question was there John.
Yeah, just if you could provide detailed the operating expenses that your plan or reduce as well.
Next question.
Yes sure in terms of the operating expenses it really just cuts across the entirety of the company.
Covers things from the obvious like reduced travel and entertainment too.
Deferred I T projects.
Controlling other non discretionary spend really all across the entirety of the company in terms of the Capex you know the majority of that Capex came out of the wood products Capex budget and the rationale there was we're just going to differ.
The discretionary capital projects and really take that down as Russell mentioned to the bottom end of the range of our sustaining and maintenance capital range and so.
Those those projects that were deferring or good projects high return projects, we'll get to those in the future, but felt that that was the prudent action to take just given the current environment.
Okay. Thank you.
Your next question comes from alone of Brian Maguire from Goldman Sachs. Your line is open.
Hey, good morning, and circulating on for Brian.
Good morning wondering thanks for taking my question.
Yes, just a follow up on the comments on the southern log market and the 10% reduction in the harvest for this year.
I think you said, maybe the demand was down about 30%.
In April if that was right and then if that's the case then what gives you the confidence that 10% is the right cut here for 2020.
Yeah, I think you know couple of things first of all if you think about the market in total we have the fiber market and the grade market in the fiber market that has held up fairly well you know you think about paper towel toilet paper the hygiene market demand in that segment has remained relatively strong so the fiber market.
Is held up fairly well so really what we're looking at is in the grade market and.
I think one of the one of the advantages to our system and the vertical integration that we have is we do have a little bit more flexibility when we see that third party.
Domestic demand fall off we have the ability to flex additional volume into our own internal mills, and so that really gave us the flexibility to take the harvest levels down less than the overall demand reduction.
Got it Okay. That's helpful. Thank you and then just going back to wood products I appreciate you say that.
That's a pretty low fixed cost business and you guys give the sensitivity to EBITDA quarterly on price changes for lumber and LSB, but would it be safe to assume that.
Those are at sort of typical operating rates and and what are your sort of looking at operations in the second quarter that those sensitivity numbers might be a little bit north of avoiding the typical once you would provide thanks.
No I understand sensitivity numbers that we gave were on what we'd consider a typical operating rates and so I would expect that as volume comes down you're going to have to adjust for that.
Adjust down yes, just down for the right. Okay. Thanks, very much guys.
Your next question comes from alone all column wins from Raymond James Your line is open.
Good morning, calling.
I think all up.
Colin we're having a hard time hearing you.
Sounds like we might have lost.
Certainly your next question comes from the line of Mark Wilde from Bank of Montreal. Your line is open.
Good morning, Devon, corn and Russell.
Good morning, Mark.
Russell will coordinate and I'm just I'm curious are there other liquidity levers that that you could pull that you'd be willing to talk about.
Yeah, well Hino Mark really.
At a high level. The two additional places that you can go are either non strategic timberland sales or adding additional leverage to the balance sheet.
Speaking to the timberland sales, obviously, we've generated a significant amount of cash over the last few years through the transactions in Michigan in Montana.
We're always looking at ways to optimize the timberland holdings in the overall value of our portfolio, we're continuing to do that.
But we're only going to do transactions that makes sense grief that create value.
Looking for the right deal and we're going to continue to be very disciplined in terms of how we do that I wouldn't know just as an aside in terms of those larger transaction. The runway is probably a little bit longer right now just on the ground due diligence is a little bit more complicated with the social distancing title work.
Et cetera. Some of these things are extending that run way out a little bit and then the other Avenue is just adding additional leverage and so as we've said we think it's important to maintain investment grade credit rating, it's part of our overall balanced capital allocation philosophy.
I think we saw the benefit of that in our recent bond offering and so we're really focused on maintaining an appropriate level of leverage in this environment.
Our leverage ratio has been in excess of the three and a half times target as we maintain the dividend through an extended period of low lumber and OSB prices in late 18 and 2019. So we just didnt feel that it's prudent at this point to add additional leverage to the balance sheet in this environment. So those are the two primary levers in addition to the.
Capex operating cost and other changes that we announced today.
Okay, just two other ones I wondered first.
If you can talk about how you're handling the production cutbacks, whether you're just trying to roll this across your system or whether you're.
Shutting down or idling particular mills and then the other thing I'm curious about is just what you're seeing from your distribution business in terms of what the channel looks like.
Yes.
Well you know with respect to the operating posture decisions that were making it's really based on a few things. One is the cost structure of the individual mill and so clearly we're going to prioritize mills with a lower cost structure or worse cost structure, rather rather than our lowest cost mills as we make those decisions were also.
A weekly and frankly daily basis, looking at sell through and inventory levels at the mills to make those decisions dynamically depending on what's going on in the market.
With respect to the distribution business, obviously, they're they're very close to the ground in terms of gauging market conditions.
Generally speaking and I think this is really true across all of the products inventory levels are fairly low as you would expect I think people are cautious about building inventories in a very uncertain environment and so.
Theres just been a lot of purchasing kind of to cover immediate needs frankly, we think thats one of the things that we saw that that kind of stabilize lumber prices over the last couple of weeks. After we saw that initial significant drop where people were trying to gauge what was going on in the market people paused buying I think there was a fair amount.
Of Destocking and what we've seen over the last couple weeks is people just took their inventory levels down pretty low and had to go out and cover but I would say on balance inventory levels are still pretty low across the system.
Thats helpful turn it over thanks Devin.
Thanks Mark.
So we haven't next question operator comes from alone of Arc home from Stephens. Your line is okay.
Thank you two things you've said for quite a while that you run real estate to generate steady cash, but not growing cash given your comments Russell should we assume sort of 250 normal target is also subject for Q along alongside dividends.
Yes, Mark you're correct I mean, we've we've kind of set that business at about a $250 million plus run rate and we still believe that over the long term once we get through this coded disruption that that business will return to that type of the cash flow profile.
Okay and the second question just started.
Paul Werent owners themselves.
We were seeing small private owners is when working pretty hard to get their trees cut in the first quarter. Despite the weather, which which leads me to things that they were already looking to to raise cash.
Are you expecting that side of the business to curtail as quickly as you do or more.
Yeah, you know I think with respect to the small landowners.
I would expect that they're going to likely be some of the first to turn off their production. They don't necessarily have the same.
Delivered model that a lot of the bigger players do they rely more on stumpage and so.
As the mills dialed back their consumption often times that stumpage is one of the first to go. So yes, we would expect that that would be a segment that we get turned off earlier.
Thank you.
Thank you.
Next question comes from along.
[music].
Sure recover from view.
Your line is open.
Thanks, and good morning.
I want to take a little bit different spin on Mark Weintraub. His question, we were off to great start in wood products with.
Better housing late last year, good housing start applications and spiking prices until the end of February. So if we had never heard of co bid do you think you would have taken any action on your dividend at all.
You know as we think about the way the year started with 1.6 million housing starts and each of those months you know that kind of 1.5 million housing start level is really where we had expected this market to be even years ago and so in that environment as we.
Showed with our first quarter results, we generate a lot of cash flow out of our businesses and so certainly as we think about the ability to generate significant EBITDA across our businesses in that environment.
And our commitment to returned significant amount of that cash flow back to shareholders certainly in that environment. I don't believe we would be taking the actions we announced today by any means.
Okay and just.
Wondering why did you mention.
The fact that Weyerhaeuser will remain in compliance with re taxable income.
The doctrine, because presumably will be reinstating the dividend in due course and.
Possibly at a lower rate so why was that necessary to even mentioned.
Yes, Steve This is Russell I think through the suspension of the dividend I guess the question arises Joe can we meet that 90% minimum distribution requirement to read income and so we have no. We have complete confidence we can manage the distribution requirement in no way put to read status in jeopardy, we did make the dividend payments and.
After a $254 million and then we have net operating losses that we can carry forward to offset any.
Any other read income in absence of the dividend.
I mean, the real answer is we just we didn't want there to be any confusion about that fact, so thats why we put it in there.
You remain a right got it okay. One question in order to different tangent.
To the extent that you have sawmills in close proximity to tissue and board mills, which are running flat out.
Are you seeing a spike in chipper residual prices and can you take advantage of that by maybe.
Being a little less precise on your cuts.
Well you know we would I don't think it would necessarily be less precise on our cuts, but I, but certainly to the extent that that the pulp mills are in proximity to saw log or saw mills that have reduced production or thereby producing fewer chips the mark.
For that is stronger and so we'll certainly take advantage of that but.
Honestly in the Grand scheme of things that is really around the margins.
Okay. Thanks stay safe.
You too thanks.
Your next question comes from a line of columns from Raymond James Your line is local.
Thanks, Good morning.
Paul It does but I missed this and we cut out but just wanted to go back with some of the discussions on capital allocation over the near to intermediate term just to clarify will be only focus you on preserving liquidity or are there any appetite for share repurchases, just given where the stock price.
Like again in response than other question roughly you've highlighted the goal keeping leverage.
At a manageable level, but just kind of curious as you think about the alternatives out there where where share buyback might Ben.
Yep.
Well you know as we've said before share repurchase can be a good tool for returning cash to shareholders under the right circumstances and certainly we believe the underlying value of the company is not fully reflected in the current stock price, but we would balance share repurchase against other capital allocation priorities and.
I think as conditions improve improve we're likely to prioritize re initiating the cash dividend over share repurchase.
Got it answers that question just going to be in our guidance as well can you maybe elaborate a little bit more on the reduction you outlined in the prepared remarks.
Also I know you, particularly highlighted that a lot.
Hi, the challenges associated with closing deals in the current environment, but just to clarify are you seeing any shift in demand or prices.
Buyers are willing to pay.
Or is it just really brought about by timing lag and then on a related note is the lower contribution from energy and natural resources kinda back onto the business can you quantify bad at all.
Sure. So I would say on the real estate, we continue to see demand for the HBU properties in the values are remaining strong and we have a really large program I think as we look at the components of the program, we need to kind of break it into two pieces. You know we have small sized HBU properties and those are typically under around five one.
Hundred thousand dollars.
It's really a majority of the deals that we closed and that's pretty sustained activity. Those are typically cash buyers. They are not as complex to complete we're seeing some delays just because of the social distancing et cetera. The larger HBU deals and this is typically this is really what we're looking for adjusting kind of our guidance on this is the.
Deals that are over 500000 or the larger ones.
Especially the ones that required financing, we're experiencing some slowdown in those and that's really due to the challenges of getting the credit in place. So that's primarily the driver on the adjustment for the HBU sales.
But the fundamentals of the HP market really haven't changed.
One thing that we're seeing over hearing we're definitely getting a lot more traffic.
Kind of on our web sites I think thats because people are more time to spend on the internet, but we are seeing more interest in people seeking out some space.
Okay.
Robert opportunities so they can be future demand.
Or is the NR.
EBITDA, that's really driven by lower construction material volumes.
One second guys were going to fix this.
Okay, sorry, we had a little feedback on our side.
So for the in our that's really lower construction materials volumes. The primary driver assist the slowdown of activity because it cobot no. We have less lease activity I would say if you look at 2019, 20% reduction in the real estate kind of EBITDA, and then a 20% reduction applied to the NR.
EBITDA kind of gets you to where that adjustment is.
Appreciate the extra color there. Thank you move that.
Thanks.
We have another question operator.
Your next operator was from along when you pull along the lines local.
Yes.
Good morning, guys. This is actually Randy tole sitting in for Anthony.
Just quickly on the U.S. help export business have conversations have begun with Chinese log in quarter regarding the purchase of timberland other.
Yourself and could that business come back quickly or does the waiver nature of the tariff really limit the man any color there would be helpful.
Yes, so couple of things on the China export market and this is true really across the west end, the South and then I'll get specifically the South you know as we got into the late March and April period, we did see a reduction in the amount of log flow from New Zealand in Europe hitting that market next.
Created an opportunity for us logs to hit that market at the same time, our importers from China applied for and received exemptions from the retaliatory tariffs and so in the west that was 5% in the south that's 25%.
In the south taking that 25% tariff off really open that market back up and so we've been ramping up our production.
For the export market out of the South and I think as long as that tariff stays off there will continue to be good opportunity for us to grow that business.
Okay understood and then just maybe switching gears to the opex opportunities for you.
I was surprised with capex being cut by 30% or so.
Opex expectations remain unchanged can you maybe touch on what is driving that in the project being pursued this year. Thanks, Yeah sure a few things and clearly the capital that we put back into the business, particularly on the wood products side has really facilitated a lot of the cost reductions and other operating improvements that we've seen but.
What gives us I think covenants at this point is against that 50 to 70 million target, we got off to a really good start in Q1, and you know as we think about the opex opportunities not all of those are specifically capital related they are continuing to focus on getting better recovery better reliability Ben.
Sure Hi margin product production out of our mills those things we can continue to do.
Even with the reduction in Capex. Similarly on the timberland side, the things that we're doing about mechanized logging and improving the hall and logging efficiency, we're going to continue to work those yet it does get a little bit more challenging in this environment, but opex has become such.
An important part of the culture at Weyerhaeuser I'm confident that are our colleagues in the businesses will continue to drive that even in this challenged environment.
Okay. That's helpful.
Look in the quarter. Thank you.
Yes. Thank you.
Our last question comes from the line of Paul Quinn of RBC capital markets. Your line is open.
Yeah. Thanks.
I guess, just said already questions one one in reference to Steve's question on the dividend.
Devaney made.
I comment that at 101.5 million housing starts, whereas the throws off a lot of cast is that kind of imply that if we get back to you at starts at 1.5, you're able to reinstate the dividend that sort of a billion dollars year level.
Yes, again, so you know our view is that we're going to re initiated as soon as practicable I think it's really going to be dependent on what the cash flow and operating environment look like certainly as housing.
Eventually improves back to a.
A level that we had expected that gives us a lot more flexibility to continue to increase the dividend but.
For us that doesn't necessarily.
Required that level of housing starts for us to re initiate we would we would look to do that as soon as we can then adjust that as market conditions improve.
Okay. Thanks, and then you made an interesting comment about moving more weyerhaeuser logs to warehouse your processing facilities. So I'm just wondering what your self sufficiency was before that initiative in the west and will so from what it is after I you with the incremental differences.
Yes, so typically about 50%.
The the logs coming into our our mills come from our fee ownership and obviously that varies depending on region, but thats. The average across the system. You know that's gone up a bit in this environment, probably 10, 15% across the across the system.
And again I think just that vertical integration gives us the flexibility to move those logs to our internal mills when that makes sense and when market conditions require it.
Okay, and just maybe as a follow up we're having said that 50% differ regionally is that is that hiring you had spoken oil.
You know, it's pretty similar across the west in the south.
We do have timberlands on the Atlantic Coast, where we don't have mills. So obviously, we don't.
We don't have few logs going into.
Our internal mills in the Atlantic coast, but but pretty much everywhere else, we have pretty good alignment between our fee ownership and our mill manufacturing.
Great. Thanks, very much they say.
Yes, thank you too.
Okay.
Right that was our final question.
Thanks, everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser company.
That concludes today's conference call.
The other living for journey you may now disconnect.
[music].
Okay.
[music].
Okay.
[music].
Okay.
[noise] [noise].
Okay.
Okay.
[music].
Okay.
[music].
[noise] [noise].
[music].
Hello.
Yes.
[music].
No.
[music].
No.
[music].
Okay.
Okay.
[music].
Okay.
[music].
Oh.
No.
[music].
[noise] [noise].
[music].
Oh.
[music].
[noise] [noise].
Yes.
[music].
[noise] [noise].
[music].
[noise] [noise].
[noise] [noise].
[music].
Hello.
[music].