Q2 2020 Weyerhaeuser Co Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Weyerhaeuser second quarter 2020 earnings Conference call.
Time, all participants are they listen only mode. After the speaker's remarks, there will be a question answer session.
The question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to that bomb Vice President of Investor Relations and Enterprise planning. Please go ahead.
Thank you Regina.
Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's second quarter Twentytwenty earnings. This call is being webcast at www Dot Weyerhaeuser Dot 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 Devon stocks ish, Chief Executive Officer, and Russell Hagen, Chief Financial Officer, I will now turn the call over to Devon stock fish. Thanks Beth.
Good morning, everyone and thank you for joining us today, I hope, everyone is staying healthy and and as well.
This morning, Weyerhaeuser reported second quarter GAAP earnings of $72 million were 10 cents per diluted share on net sales of $1.6 billion.
Excluding that charge is a $5 million for special items, we generated earnings of $77 million or 11 cents per diluted share.
Adjusted EBITDA totaled $386 million in the second quarter. This is approximately 7% lower than the first quarter, but 13% higher than a year ago.
Our teams delivered strong operational and safety results. Despite the disruptions from cobot 19, and the unprecedented volatility caused by the pandemic.
In a moment I'll dive into our business results, but first let me set the stage with some comments on the housing market.
New residential construction activity declined sharply in March and April is the cobot 19 pandemic triggered stay at home orders in rising unemployment across the nation.
April housing starts were the lowest in over five years and over 25% lower than April 2019.
A rapid decline in new residential construction activity quickly translated to weaker order files for building products and significant production curtailments by wood products manufacturers.
Over the last few months demand for housing in wood products have shown unexpected resiliency in the face of broad economic disruption.
In late May states began to reopen their economies and U.S. housing activity rebounded sharply. Despite the continued extreme weakness in broader macroeconomic conditions.
Housing starts improved sequentially in June starts were only 4% lower than a year ago.
Repair and remodel activity is also shown remarkable strength driven by robust do it yourself demand.
Collectively these factors drove a sharp uptick in wood products pricing and demand as the quarter progressed.
As we look to the back half of the year, we're cautiously optimistic regarding a continued improvement in U.S. housing.
Mortgage rates are at historic lows demand for housing exceeds the available supply.
Societal preferences are shifting in favor of larger single family homes and less urban areas.
The pace of home sales is improving in June new home sales were 7% above year ago levels.
At the same time the trajectory of the broader U.S. economy remains uncertain in light of rising cobot infection rates and the pull back we're pause of many economic reopening plans.
Key indicators that we are monitoring have generally plateaued at recessionary levels.
Unemployment stands at 11% with initial claims well in excess of a million per week mortgage forbearance rates are near 8% mortgage availability remains tight.
Consumer sentiment is comparable to levels measured in April and May and U.S. GDP has contracted in an unprecedented manner.
Further the specifics regarding additional federal economic relief packages are also unclear at this point.
Our customers are expecting strong demand through labor day, but remain cautious of covert related economic an operating disruptions.
We'll be watching all of these factors closely to see how they influence our markets as we move out of the summertime and into the fall.
Turning now to our second quarter business results, starting with timberlands on pages six through eight of our earnings slides.
Timberlands contributed $75 million to second quarter earnings and $140 million to adjusted EBITDA.
In Western Timberlands, EBITDA decreased $20 million compared with the first quarter.
Log sales volumes and average realizations were comparable to the first quarter as reflects significant volume out of the domestic market to capture higher margin opportunities in China.
Fee harvest volumes decreased 3% Forestry and road building cost increase seasonally and export costs were modestly higher.
In the western domestic market log demand and pricing dropped sharply in April as mills curtailed production.
In response, many landowners reduced harvest operations or redirected volume to stronger export markets.
When demand and pricing for Douglas for lumber rebounded mills resumed production and actively sought to replenish log decks.
Log supply was slow to respond to the increased demand and pricing trended higher exiting the quarter.
On average our second quarter domestic log pricing was moderately lower than the first quarter.
Turning to our export markets.
In Japan housing starts are down approximately 11% year to date, if housing demand slowed following the fourth quarter 2019 consumption tax increase.
Demand for our logs is generally held up well enhanced by our strong customer relationships and limited availability of Canadian export logs.
However, our second quarter log sales volumes to Japan declined an average realizations to price decreased slightly as we began to see incremental effects from the cobot 19 outbreak on Japanese construction activity.
In China demand for our large rebounded sharply in the second quarter as construction and Sawmilling activity resumed following the cobot 19 outbreak and saw mills returned to near normal operating rates.
Socket softwood log inventories at Chinese ports decreased nearly 40% during the quarter and ended June at 4.4 million cubic meters.
Takeaway was strong in April is mills restock inventories and then eased as the quarter progressed.
Supplies of New Zealand Radiata and European Spruce logs were also below normal due to covert 19 disruptions.
Reflect significant volume into the China market to take advantage of this opportunity and average realizations for our China export logs increased modestly compared with the first quarter.
Compared with a year ago quarter log export revenues increased by $18 million due to higher sales volumes.
Moving to the south.
Southern Timberlands, EBITDA decreased $8 million compared with the first quarter.
As in the west demand for southern Sawlogs remained weak through April and into May as mills curtailed production and minimize log inventories.
As lumber demand and pricing rebounded capacity came back online.
Although lot takeaway for June was trending towards normal some customers remains cautious in log decks were generally below average levels.
Demand for our fiber lines remain steady through the quarter support supported by downstream demand for hygiene products.
Realizations for our Sawlogs in fiber logs were generally unchanged from the first quarter.
Average log realizations declined 2% due to mix as we harvested and increased proportion of fiber logs in the quarter.
Fee harvest volumes declined 4% compared with the first quarter and 7% compared with the second quarter of 2019.
As we began to implement the previously announced 10% reduction in full year southern harvest volumes.
Comparing our overall southern timberland second quarter results with a year ago period, EBITDA declined by $16 million due to lower fee harvest volumes and lower average sales realizations.
In northern Timberlands, EBITDA decreased by $4 million compared with the first quarter.
The harvest volumes declined seasonally as spring breakup limited activity across most of our northern operations.
Real estate energy and natural resources pages, nine and 10.
Real estate NR contributed $19 million to second quarter earnings and $57 million to adjusted EBITDA.
Second quarter, EBITDA was $44 million lower than the first quarter and $14 million lower than the year ago period.
As expected real estate sales were significantly lower than the first quarter.
We experienced continued steady interest in rural properties, the transactions were slower to close due to delays and title work financing approvals and recording deeds.
Average price per acre decreased an average land basis as a percentage of real estate sales was higher due to the mix of property sold.
As in the first quarter second quarter real estate sales included low productivity acreage in southern Oregon that we acquired with the Prime Creek merger.
Results from energy and natural resources were comparable to the first quarter demand for construction materials has remained steady as infrastructure projects have generally benefited from essentially industry designations during the pandemic.
Wood products pages, 11 and 12.
Wood products delivered its strongest performance since the third quarter of 2018, contributing $159 million to second quarter earnings and $198 million to adjusted EBITDA.
EBITDA increased $14 million compared with the first quarter as higher average lumber realizations and improved manufacturing cost were partially offset by lower sales volumes for most products.
In April we reduced production across our manufacturing facilities to align with customer demand.
As demand improved we increased operating rates and most businesses exited the quarter at pre cobot operating levels.
Manufacturing cost improved across our operations. Despite the production volumes the lower production volumes.
Our lumber business delivered standout performance for the quarter EBITDA was $24 million higher than the first quarter and $59 million above a year ago levels due to improved realizations and lower manufacturing costs.
Lumber pricing began to stabilize early in the second quarter as mills curtailed production in response to lower demand.
It was inventories extremely lean across the channel pricing strengthen steadily as demand improved this was particularly notable in the southern markets.
Benchmark lumber pricing improved by approximately $135 per thousand board feet or nearly 40% during the months of May and June.
On average the framing lumber composite price increased 2% in the second quarter compared with the first.
Our average lumber realizations increased by 5% as our mix of production is weighted more heavily to southern yellow pine.
Unit manufacturing cost decreased by 2% compared with the first quarter, our lumber mills delivered outstanding operating performance, achieving the lowest quarterly and monthly controllable manufacturing costs on record. Despite weekly fluctuations in operating posture I want to thank our entire lumber business for the commitment.
And to operational excellence, that's driving these industry leading results.
You know SB EBITDA decreased $4 million compared with the first quarter due to slightly lower sales volumes in average realizations supply demand dynamics generally mirror those of lumber, but with a more modest uptick in pricing.
Our sales volumes decreased 3% compared with first quarter average realizations decreased 2% in line with the change in benchmark SP composite.
Manufacturing cost improve compared with the first quarter due to slightly lower resin cost and focused cost control across the business.
Compared with the year ago quarter, LSB, EBITDA increased $33 million due to higher average sales realizations and lower manufacturing costs.
Engineered wood products EBITDA decreased by $9 million compared with the first quarter due to lower sales volumes.
Average sales realizations for solid section products were flat with the first quarter and average I joist realizations decreased by 1%.
Sales volumes decreased 12% for solid section products and 11% for I joist and the second quarter.
Because over 90% of these volumes are used in new residential construction. These product lines benefited minimally from the strong second quarter repair and remodel activity.
Controllable manufacturing costs decreased compared with the first quarter, but this was offset by higher input costs due to the increased cost of oriented Strand board.
Compared with a year ago quarter EBITDA for engineered wood products decreased by $22 million due to significantly lower sales volumes higher input costs and slightly lower average realizations.
Distribution EBITDA increased by $1 million compared with the first quarter as we continued to focus on improving product margin and controlling costs.
The business also set a new record for June monthly EBITDA.
Compared with the year ago quarter, EBITDA increased by $2 million due to higher product margins and lower delivery and warehouse costs.
Turning now to operational excellence.
Each of our businesses has remained focused on delivering on its opex initiatives. Despite the disruptions caused by the pandemic.
And that commitment is evident in our second quarter results.
Halfway through the year, we've made good progress against our 50 to 70 million dollar full year Opex School and I'm confident we will achieve this target by year end.
I'm extremely proud of the dedication and focus of our teams as they have safely adopted business practices rapidly and efficiently pivoted operating postures and capitalize on operational excellence opportunities, while navigating unprecedent in fluctuations in market demand.
Staying on track to achieve our Opex school is a real accomplishment given the rapidly changing environment in which we've been operating.
Now I'll turn it turned to a few comments regarding capital allocation.
The Board continued continues to regularly review opportunities to re initiate an appropriate quarterly dividend.
As we said last quarter. This review takes into account a number of variables, including our market conditions as well as the broader macroeconomic environment.
All else equal the board's preference is to re initiated dividend sooner rather than later.
While we have been seeing improved business conditions over the last couple of months, we need to get comfortable that those improvements will be sustainable even as the pandemic in other macro headwinds continue.
I want to be clear that we remain committed to returning a significant amount of our free cash flow back to shareholders as part of our capital allocation philosophy.
Our board also recognizes the need to deliver on that commitment through a sustainable dividend policy that will drive long term shareholder value.
Some of our businesses generate relatively stable cash flows other of our businesses are more cyclical in nature. Our overarching goal is to ensure a sustainable capital allocation framework that will enable us to return a meaningful and appropriate level of cash to shareholders across market cycles.
Our other capital allocation priorities include investing in our business and maintaining an appropriate capital structure.
We've deferred discretionary capital for 2020, but we continue to invest in the maintenance expenditures required to sustain and further improve our strong operating performance.
And we will continue to consider incremental opportunities to optimize and enhance our assets and operations.
Right. So we'll provide more details in a few minutes, but the actions we have taken to enhance our financial flexibility. In addition to the better than expected pricing and demand environment have allowed us to maintain our financial strength during this volatile period.
With respect to our capital structure, we are working to bring down our leverage over time, we've repaid our revolver balance redeemed. The majority of our 2020 went debt maturities and earmarked cash for the remainder of our 2021 notes going forward. We will continue to review opportunities to efficiently reduced our gross debt balance.
Now turn it over to wrestle to discuss financial items in our third quarter outlook.
Thanks, Devin and good morning.
At the beginning of the second quarter, we anticipated challenging market conditions throughout the quarter and potentially through the remainder of the year as the effects of coded 19 pandemic were largely unknown.
As a result of this uncertainty we took several steps to enhance our financial flexibility.
These actions coupled with our continued focused on safety and operational excellence enabled us to strengthen our balance sheet generates solid cash flow during the second quarter today, our financial position is solid and improving we are well positioned to fully capitalize on strengthening markets and successfully navigate the continued.
Economic uncertainty related gold at 19.
And with our key outlook items for the third quarter on page 15 of the earnings slides in our timberlands business third quarter earnings and adjusted EBITDA are expected to decrease by approximately $20 million to $25 million compared to the second quarter.
Which is a similar reduction to what we saw in the third quarter of 2019.
And our western Timberlands operations, we expect our third quarter domestic log sales volumes domestic average sales realizations to be higher than the second quarter.
Demand in the West has been favorable for the past several months in log inventories at domestic mills ended the second quarter on the low end of normal levels.
However, as July has progressed mills have begun to rebuild log inventories to moderate level in response to increased demand for finished product and as a cautionary measure ahead of fire season.
Moving to the export markets in Japan residential construction activity continues to soften due to the ongoing effects of last year's consumption tax increase and the cobot 19 outbreak.
Demand for logs flowed through the second quarter and is expected to decrease as the third quarter progresses. As a result, we expect our third quarter Japanese export log sales volumes to decline for the moderate decrease in average sales realizations compared with second quarter.
Chinese export logs sales volumes are expected to decline in the third quarter as we flex supplier to take advantage of improving domestic markets. Additionally, we anticipate slightly lower average sales realizations on Chinese export logs due to seasonally lower demand an increase log supply from the competing New Zealand radiata pine.
And European spruce logs shipments to China from these markets of increases coded 19 related disruptions of east.
Additionally, in the West Road Forestry and per unit logging in hauling spend seasonally be higher.
As is typical during the dryer warmer summer months, we harvest on higher elevation tracks favorable weather conditions also allow us to complete many of our civil culture and road activities.
In the South we expect seasonally higher forestry expenditures in the third quarter, which is typical as most of the activity generally is completed during the drier summer months, we anticipate slightly lower average sales realizations in the third quarter due to a higher percentage of fiber mix as we shift a seasonally higher trading activities.
Additionally, we expect lower fee harvest volumes in the third quarter compared to the second quarter as we continue to implement the previously announced 10% reduction in our 2020 southern harvest volumes.
In the north third quarter fee harvest volumes will be significantly higher than the second quarter as we moved past the spring breakup season.
Turning to our real estate energy and natural resources segment.
We anticipate third quarter earnings and adjusted EBITDA will be comparable with the second quarter.
Although many transactions have experienced longer than usual timelines to finance close and record property deeds due to cover 90 related social distancing and other safety measures. We continue to experience solid demand an interest in our real estate properties.
Demand for smaller HQ transactions, a strong and although the volume of larger transactions requiring financing has slowed we've continued to make progress on these transactions throughout the second and third quarters. In particular, we continue to further optimize the southern Oregon Holdings acquired with the Plum Creek merger.
As a result, we now expect full year 2020, adjusted EBITDA of approximately $235 million, which is a $35 million increase from our guidance last quarter. Additionally, we now anticipate land bases as a percentage of real estate sales will be between 65 and 75% for the full year.
And our wood products segment, we've continued to experience a strong repair and remodel market has seen a favorable rebound in residential construction for the ended the second quarter and into the third.
We are experiencing strong demand across all product lines.
Looking to the third quarter, we expect earnings and adjusted EBITDA offer wood products will be significantly higher than the second quarter, primarily due to stronger average sales realizations for lumber and oriented strand board as well as increased sales volumes across most product lines.
Entering the third quarter benchmark pricing for lumber and must be has continued to increase with lumber reaching record highs.
For lumber our quarter to date average sales realizations are approximately $110 higher and current realizations are approximately $130 higher than the second quarter average.
For oriented Strand board, our quarter to date average sales realizations $35 higher and current sales realizations are $50 higher than the second quarter average as a reminder, typical operating rates for lumber every $10 a change in realizations is approximately $11 million veeva on a quarterly basis for us.
The typical operating rates every $10 change and realizations as approximately $8 million of EBITDA on a quarterly basis.
For engineered wood products, we expect third quarter average sales realizations will be generally comparable with the second quarter.
Page 13 outlines the major components of our unallocated items.
37 million dollar favorable variance in earnings before special items compared with the first quarter is primarily the result of an $18 million non cash benefit from elimination of inter segment profit in inventory and LIFO in the second quarter.
Compared to $13 million charge in the first quarter.
The benefit recorded in the second quarter was primarily driven by reduced log and lumber inventories across our businesses.
Second quarter also saw benefit related to foreign exchange rates, resulting in an $11 million noncash increase over the first quarter.
These favorable fluctuations were partially offset by $14 million noncash fluctuation in the valuation over liability classified share based compensation.
This increase reflects the improvement in our stock price first quarter to second quarter.
Our second quarter noncash non operating pension and postretirement benefit costs remain comparable to the first quarter. We continue to expect approximately $40 million of expense for the full year 2020.
Turning to our key financial items, which are summarized on page 14.
We ended the second quarter with a cash balance of $643 million cash from operations. During the second quarter was $391 million, an increase of $305 million over the first quarter, which is typically the lowest cash flow quarter of the year.
Total expenditures for the second quarter totaled $66 million. We continue to expect total capex for 2020 will be approximately $270 million.
Moving on to financing we ended the quarter with approximately $6.3 billion a debt outstanding.
During the quarter, we redeemed our 569 million dollar 4.7% knows that were due March 2021, and incurred an $11 million pretax charge due to the early redemption.
This charge for early extinguishment of debt is included in our results as a special item.
Additionally, during the second quarter, we repaid the $550 million precautionary revolver draw taken at the end of the first quarter. Currently we have the full 1.5 billion dollar capacity available on our revolver.
As indicated last quarter, we intend to repay a $150 million, 9% note when it matures in the fourth quarter 2021, we will continue to review opportunities to reduce our gross debt balance as part of this we've begun to evaluating our 2023 debt maturities and are assessing options and timing to efficiently refinancing.
Repaid as debt.
Including or $11 million special item related to their early extinguishment of debt second quarter interest expense was $103 million. We continue to fully expect full year 2020 interest expense will be approximately $360 million excluding special items.
I'll wrap up the taxes.
In the second quarter, we recorded an income tax expense compared with an income tax benefit in the first quarter as we recalibrated, our annual effective tax rate to account for better than anticipated wood products pricing in sales volumes. We continue to expect our full year effective tax rate, reflecting expense of approximately 20% before special items wherever.
The tax rate will be sensitive to the level of mix of earnings between our read in taxable REIT subsidiary with respect to cash taxes. We now expect our full year cash taxes will be generally comparable to our overall tax expense I will turn the call back over to Devin I look forward to your questions.
Thanks Russell.
Before we open the line for questions I do want to touch briefly on sustainability.
Weyerhaeuser has just recently launched our new sustainability strategy and it builds on our solid foundation of environmental stewardship, social responsibility and strong governance, a core part of this new strategy is what we're calling three by 30 and its intended to drive increased focus in three key areas, where we as a company can make a.
Unique and meaningful contribution over the next decade. These include contributing to climate change solutions meeting the need for affordable and sustainable housing and helping rural communities thrive.
Over 100 years, we've been committed to managing this company sustainably and for the long term and that focus remains today as we navigate these unprecedented times.
In closing, we believe our company is well positioned with unrivaled assets industry, leading operations, a strong safety culture, and a solid financial position.
The underlying thesis for US housing remains strong and evolving societal preferences are further bolstering demand for single family homes and wood based construction.
Looking forward, we remain focused on operating safely and efficiently effectively capitalizing on opportunities across the full range of market conditions and driving long term value for our shareholders through industry, leading performance and disciplined prudent capital allocation.
And now I'd like to open up the floor for questions.
As a reminder to ask your question. Please press star followed by the number one on your telephone keypad. Our first question will come from the line of Mark will deal with bank of Montreal.
Good morning, Devin good morning Russell.
Good morning, Mark.
I was thinking you must feel like a personal injury lawyer dealing with whiplash right now [laughter].
Up into the last three months.
It's been interesting dynamic thats for sure Yeah, I've never seen anything like this I wondered if you have Russell could help people and just thinking about how these higher lumber and OSB prices that we see in the trade publications.
How that flows through to your results because I'm sure. This is going to be a big topic over the next couple of months.
Yes, sure and so I think as we've mentioned before we do have a little bit of a lag between what you see in the print and when that hits realization just because of the length of our order files and.
For I think this particular period the order files are extending out a bit as you've probably heard from some other companies with the strong market dynamic and low inventories we have extended our order files out a bit so it will flow through but when you look at our realizations. It takes a few weeks for that.
Actually hit our realizations.
Okay, and then other kind of qualifiers that we we should think about its always easy to good think about the good news, but there may be other things that were overlooking as we try to model of the third quarter.
Yes, So I guess just how had responded that is more in terms of the broader environment and what the key demand drivers are and so when we think about what's really driving the strong demand for wood products right now it's really a couple of things obviously, we've seen housing improve in and.
Our customers the builder, you've probably heard this on various earnings calls.
The demand for housing is really picked up a lot faster than we had anticipated you saw that in the June new home sales numbers and so I think generally the the overall view on housing over the next several months is pretty positive and so that's obviously a key driver for us I mean, it is important to remember, though you look at the June starts numbers that was still.
So.
Not overwhelming relative to what we're seeing earlier in the year, but I do think that the momentum is building around that so that seems like a positive at least for the next several months, but I'd say the other thing that's really been driving the wood products demand has been the repair and remodel market and in particular.
The home improvement do it yourself segment and that has just been remarkably strong and I think as we we think about that in retrospect with everyone being stuck at home folks not traveling no sports nothing else to do everybody's doing home remodeling projects and so that's just been a really key part of what's been driving this overwhelming demand of late.
So I think is your modeling out the third quarter, we have pretty good visibility through August I think with the order files and what we're hearing for customers I think August should be pretty strong I think the big question really is as we get through labor day and head into the fall what does that repair and remodel market going to look like and so to us.
That's really the big open question, what happens to that segment of the of the demand signal as we progress through fall ordinarily as the weather starts to cool you'd see a little bit a slowdown there, but again this year has been a little different than most years and so we'll see how that plays out.
Okay, and then just as a follow on Devin I wondered if we can get some thoughts from from you.
Where you see kind of inventories in the distribution channel because it feels like part of what we've got right. Now is just a bit of a short squeeze because so many people liquidated inventory early in the second quarter and then demand has come back much much more sharply then then people anticipated.
Yes, Theres no question inventory channels, our lean and Thats almost universally true and like you say Mark what what really happened news. When you saw so much production come out and demand picked up more quickly nobody had inventory in the channel and she has been a scramble ever since so I think thats that's been part of the driver.
People have they have customers that have needs. There are projects that are being built and they're just out scrambling for product trying to find that and.
The production capacities come back online for the most part I would say around the margins I do think.
Particularly in the south you're probably seeing a little bit of production that's being lost two producers struggling to keep up with covert related downtime for us we haven't had a meaningful amount of downtime related to co vid, but if you think about where a lot of the production capacity is.
For the southern yellow pine in particular, there in regions, where the cobot rates are really spiking up so I.
I suspect there is probably a little bit of production being lost to that dynamic and so we just as an industry haven't been able to keep up with demand and thats really whats driving the pricing dynamic.
Okay I'll turn it over good luck in the second half of the year.
Thanks Mark.
Your next question comes from the line of George Staphos with Bank of America.
Hey, Good morning. This has actually jump out cut went on for George.
First and actually it is somewhat follows suit with what Mark will he was asking him, but I just want to get a sense I mean as you know we've clearly seen as sharp rise in prices here and so I wanted to kind of get your sense. I mean, you talked a little bit about potentially repair remodel.
Demands volumes again to the fall and.
Obviously, maybe as we get beyond this jump in coated cases, maybe that has an impact on supply, but wanted to kind of get your read on how you expect the market to move.
From here, particularly kind of given these factors.
Yes, so what I would say at the outset is predicting commodity prices is extremely difficult under any circumstances and I would say given what's going on in the market today, that's even more so.
Again, I think we have a pretty good line of sight on August So I do think that the August timeframe should be pretty strong.
Each week that we continue to see strong pricing and strong demand that probably moose incrementally into September.
Honestly beyond that it's very difficult to tell I do think that the housing.
Market will continue to grow the slope of that curve I think it is very hard to say, particularly.
Given the offset you may see ultimately with high unemployment that hasn't seemed to really impact housing demand of of late historically, that's been a pretty strong correlation between unemployment.
In housing demand so as we get deeper into the fall I think thats, an open question, but sitting here today. It certainly seems based on what we're hearing from our customers that the demand for new homes is really strong and building and so.
Again, it's difficult to predict how all of those different puts and takes are going to play out over the course of the fall, but but certainly we are in a lot better space now than we had anticipated three or four months ago. So it's positive from that respect.
Thank you and then with regards to fee harvest volumes.
The primary drivers for your expectation for lower volumes in the South I mean, I I know you talked about for the year decreasing harvest volumes and Thats consistent with what you said last quarter, but particularly with the strength in wood product markets wire those few harvest volumes expected go hour.
Yes, so again I think it's just the it's the dynamic across the southern markets and so.
No we talk about the south is though it's a market it's really a combination of sub markets and notwithstanding the fact that that would products pricing and demand has been reasonably strong I.
I think on balance across the South you are probably still not up to full running capacity from a manufacturing and sawmilling perspective, partially because of of cobot I suspect, partially because there's still a little bit of caution around bringing back shifts if if you've taken a full shift out before you hire people back you want to have.
Some certainty that this run its going to last so I don't know that productions fully come back and then the other piece in the South is as we've talked about there's just a lot of lots supply in the south and so we made a decision to reduce the harvest volumes in the south by 10% just based on our projection of what that overall log demand is going to look like the supply demand.
Dynamic and as we think about that going forward you know thats, obviously something that can change depending on what market conditions are doing but bringing back volume and pushing it into a market where pricing is a little soft or the market just doesn't need it yet to be really thoughtful about that so at this point, we're still contemplating that 10% reduction.
Which will largely be taken in the back half of 2020.
Okay and then just last question before I turn it over just with regards to China and the volumes you're seeing there.
How did the ready yet.
Hogs.
Bruce volumes trend during the quarter.
Yes, so really you saw a pretty dramatic drop off in the log flow into China from New Zealand and European salvage logs related to the coded 19 disruptions. There. It was basically a full shutdown in New Zealand for a period of time, there were some supply chain disruptions coming out of Europe, and so Q2 really.
You saw that volume drop off pretty dramatically that started to come back and I think the demand signal in China is holding up pretty well takeaway is pretty good but the supply going into that system has has increased with the radiata.
In the European salvage logs coming in so theres still demand I suspect as we mentioned, we're probably going to swing more of our western volume back into the domestic market pricings better margin opportunities or better.
Thats really one of the advantages of our system in the west in that we have three key customers between the third party domestic our own internal mills in the export market that we can really swing volume across those customer bases to really go after what whatever the highest margin opportunity is so I think China, we'll obviously continue to be.
A good market for us, but at present, we have better pricing opportunities in the domestic market. So you'll see our volumes to China in Q3 go down a bit.
Alright, thanks for all the color.
Yes. Thank you.
Your next question comes from the line of Mark Weintraub with Seaport Global.
Thank you.
First on.
The growth that bounty indicated you want to bring that down over time can you give a sense as to.
Where you'd like to bring it to.
Yes, I'm not going to give you a specific gross debt number what I would say is we've been elevated relative to our three and a half times net debt to EBITDA target.
And so we're bringing that down overtime is Russell mentioned, we've got.
Fair amount of debt coming due in 2023, and Russell and Treasury team are looking at opportunities around that we also have some term debt. We have some opportunity there may be even more so in the near term. So it's something directionally Mark that we're looking to take down so that were more in line with that three and half times target over the course of the cycle.
I think what you saw really in 2019 was.
When we're on the bottom into that cycle. It starts pressing up pretty hard against the upper ranges of where we're comfortable going so directionally, we're bringing it down I don't know that we're prepared to give a specific number anything to add to that to wrestle.
No you know as as.
Kevin mentioned, we are elevated in the first quarter, obviously, because we issued that $750 million bond in the first quarter and then we paid down the 569. So we're at about 6.3 right now in our ratios have improved a little bit we're at about 4.1 times on our net debt to EBITDA on our net enterprise values improved obviously with the end.
Greece in the share price. So we have opportunities to start looking at that 2023 tower and and we'll figure out the best way too.
Financer repay that.
Okay and the path.
Weyerhaeuser has talked about paying 85% of it average cycle free cash flow in the form a dividend since that's still a good starting base to think about or has that evolved.
Yes, so I think thats in the process of evolving mark and what that 85% target was really a reflection of is.
Commitment by the company to return a significant amount of our free cash flow back to shareholders in and that broader commitment remains intact. I think is we consider re initiating the dividend going forward.
Looking at a number of factors and I think you know is the board considers that opportunity we want to make sure that the dividends sustainable and appropriate for our portfolio of businesses our business conditions. The free cash flow that we can generate from our businesses over a cycle and as I mentioned some of our businesses have generally.
Relatively stable cash flows others have more cyclical cash flows and so as a as we think about that.
Our capital allocation approach I think has to account for that variability in so ultimately the overarching goal is to ensure a sustainable capital allocation framework that enables us to return significant but appropriate levels the cash back to shareholders over a cycle. So it's evolving as part of the conversation that we continue to have as aboard.
And so if I were to.
Hypothesized that that mean given that there is some cyclicality.
Maybe that percent potentially evolving to a lower level, but then being more opportunistic with a certain portion as well a is that an appropriate way to think about at least that directional conversation and any color as to what that they use if that is indeed, the case what would be.
Contemplated as the use of that more opportunistic cash flow.
Yes, so what I would say as you know Thats, obviously part of the conversation. It's a decision the board will ultimately make and discussion that we continue to have so I can't give you a specific answer on that as I said, it's part of the dialogue.
With respect to the uses of additional cash I think it would flow through the same framework rights. So.
Obviously, we are intent on returning.
Good percentage of that back in terms of quarterly cash dividend over and above that we have opportunities I think to return cash to shareholders and create value through share repurchase and.
And so I think that basic framework would remain intact. Okay. Great and then just last if I could following up on some of the prior questions. I believe you said that the RSP price fewer kurnos be prices about $50 higher than what you registered in the second quarter.
And you've you've indicated there is a lag and so that must be capturing but very very substantial if you look at.
The random lengths that would be prints I mean, they are north of.
$200 higher than where the second quarter average was so.
Not wanting to recognize predicting commodity prices is dangerous that path, but if we were to assume that the commodity prices stayed where they are for the next period of time for the third quarter as a whole can you tell us how much higher as the flow through in the lag impacts.
Effect, where are the with be price.
And possibly the lumber price where were you might expect them to end up relative to the second quarter. So again not trying to predict but if we were to just keep the price where it is today how that flow through would end up.
Yes, so without giving a specific number mark I think just the way to way to look at that is when we see the composite go up by that amount you know our our order files are out, particularly you know as be a fair amount. So it typically takes you know we can take up to three to four weeks for that really to flow through to really.
As a nation. So it's slower on the upside for that to hit the realizations. We eventually get it of course.
But bid on the same token it's also slower on the downside. So I think as you as you think about our realizations relative to what you're seeing in terms the jump in print. It's just it's going to be a lag of several weeks Theres also a lag in lumber, but thats going to be shorter just because the order files and lumber typically shorter than SP.
Okay. Thanks much.
Your next question will come from the line of Brian Maguire with Goldman Sachs.
Hey, good morning, particularly on for Brian.
Good morning.
Thanks for all the detail so far maybe just to build on a couple of the earlier question on wood products certainly.
With lumber prices at all time highs, even though at the high end of the cost curve are profitable there if I could just that your sense for your expectations for the supply response and lumber and even in unless the we've seen a lot of curtailments. The last 612 months are you expecting some of those to come flying back into the market now or or maybe just a.
On the sidelines for that.
Yes, I mean, obviously, that's hard for us to say because each individual company has a better view on their individual cost structure, what I would say just generally and I'll speak from our standpoint, you know when you think about bringing lumber capacity back on that's usually a much easier decision because you can bring that on incrementally.
Okay.
And you can sort of layer it and depending on what's going on in the market, adding shifts taking a few shifts out that decision with respect to show SB is a bigger decision once you've decided that youre going to curtail a mill.
From our standpoint, I think the way we would look at it is you're going to have to have more visibility on the sustainability of this improvement when you make that decision, but obviously each individual company will make their their respective decision, but I think certainly on the lumber side.
Most of the capacity has has come back online to take advantage of this of this.
Good environment for lumber pricing.
Okay. Thanks, and then switching back to the western logs.
Get your ability to you'd be able to flex into the domestic market and to take advantage of some better pricing. There I guess looking at the outlook for the third quarter I guess my expectation would have been that you're expecting the realizations to be higher just given flexing into the.
Better domestic market, but I think I think it was expected to be down a little bit maybe you can certainly kind of square that in any other dynamics I might not be thinking about there.
Yes, and that's really just it's a mix question. So the domestic log prices in the west we are expecting to go up in Q3, but just given that the Japan market is soft in a little bit because there.
Their home sales has as really declined a bit this year. So that's just creating a little bit softer market. So we won't be shipping as much to Japan similar statement with China with the New Zealand and European salvage would going in there that's putting some pricing pressure there so.
We will see better realizations for the domestic logs, but it's just the overall western business as a whole you will see realizations go slightly down just because we'll have less export volume in the quarter.
Okay makes sense. Thanks, guys. Good luck.
Thank you.
Your next question comes from the line at Anthony Pettinari with Citi.
Hi, good morning.
Morning, Anthony.
You talked about the very strong demand in wood products, and obviously curtailments coming off Im just wondering in lumber SP and engineered products. If it was possible to say kind of where your operating rates are currently and to the extent that you have places where your maxed out are there opportunities for de bottlenecking or maybe even.
Even more kind of extensive capital projects that might show up this year.
Yes, so in terms of operating rates coming out of Q2, we were in kind of the mid to upper Eightys said somewhere in that range, maybe even it maybe even low nineties.
Yes be generally in the upper Ninetys eat HBP low to mid seventies.
I'd say as we head into Q3 kind of going business by business on the lumber side, there's a little bit that we can do here in the near term you know a few percentage.
You know to take advantage of of the good markets and we're looking to do that.
In terms of the longer longer time horizon and be de bottlenecking and that certainly part of of every Mills Road map is finding what bottlenecks you have in the mill and trying to eliminate that so.
Every year, we do pick up a little bit of volume just through those efficiency and debottlenecking efforts on the LSB side again, when you're operating in the high Ninetys Theres really not a whole lot left there may be low single digits in terms of opportunity in the near term you don't have as many debottlenecking opportunities and.
No SB mill oftentimes, it's the press or something right around the press that that's the bottleneck and and that's a pretty large capital investment to really do that so.
Not a whole lot more upside on the O. SP side. He WP I do think that theres opportunity for a little bit more pickup there and so we're looking that at that but again, that's that's really going to be dependent on what market conditions look like.
Okay, that's very helpful.
And then just switching to the sustainability initiatives that you've outlined our understanding is a very long term undertaking could you just talk broadly about.
Maybe the potential kind of financial opportunity for Weyerhaeuser, if we actually had kind of a functioning.
Carbon market and just maybe more broadly the importance of BSG for Weyerhaeuser.
Yes. So this is really exciting for us we've had a lot of internal work going on around putting out this new strategy I think it really reflects a commitment.
On behalf of the company to really double down on our sustainability efforts and so I'm really excited about this I think there are opportunities really across the board with this new sustainability strategy in terms of how we how we deal with our employees our workforce our communities.
So theres a lot more there than just the economic side, but on the economics and business side, certainly I think as we look forward. There a couple of opportunities I would highlight the first of which is mass timber CLP. That's a market that does seem to be picking up momentum. We've seen a number of projects come out it's moving quicker than I had anticipated even 12 18.
In months ago, and so thats a market I think that will benefit industry as a whole more would demand is obviously, good and I think there's a growing appreciation for the value of wood based construction relative to other.
Materials and building materials from an environmental standpoint, but specifically to the carbon market I do think that this is an opportunity you just have to look around the corporate landscape and most big companies have announced some initiative or another to be carbon neutral or even so I'm trying to be carbon negative there really aren't any technologies out there.
That are better suited to take carbon dioxide out of the atmosphere than trees and for us and so I think there is an opportunity over time, but the one thing I would caution is we're in the early stages of this we need to figure out the mechanics for developing these markets either private or public it needs to be something that's beneficial to everyone involved in the process and so.
We're looking at that it's something that we're actively assessing to determine how are we going to create these markets. So.
I think we're in the early stages, but over the long term I absolutely do believe this is an opportunity for us and and I think Weyerhaeuser has a role to play in something that we can really develop a nice business around.
Great I'll I'll turn it over.
Thanks.
Your next question comes from the line of Mark Connelly with Stephens.
Thank you.
You have to big changes, obviously in market conditions this quarter and Im curious if the speed of those changes led you to find anything.
You want to approach differently in operational excellence.
New opportunities are short comings, and that's one thing whether theres opportunities to get more nimble or more efficient.
Well I think in terms of how we've dealt with what is really an unprecedented level of volatility in our markets I would say I'm just extremely pleased with how nimble the organization has been.
Certainly I think the investments that we've made over the last five to 10 years in information technology has made this whole transition to more remote working and changing business practices doable I think if this had happened 10 years ago. This would have been a very.
Very much different and more challenging environment. So I think the organizations that wasnt very popular windy moon.
Well I T spinning never is but I think for most people that have ever run a business. You know that if you don't have that infrastructure, it's very hard to be successful in a lot of different areas. So it's necessary. It's important I think we're seeing the benefits of it as we speak and we'll continue to as we go forward.
In terms of Opex, specifically to my mind, the silver lining here is we have really I think demonstrated the the importance of Opex I think the strategy is being.
Further appreciate it across the workforce just the ability to continue to operate well cost structure gives you. So much more flexibility when you have these market disruption so.
My sense is that there's an even greater appreciation for all of the Opex work that we've been doing in the importance when you're going through some of these market swings.
That's super and just a broader question in the past year, we saw homebuilders struggling to find enough labor now you've got big markets like Houston with with Covidien shoes are you seeing any of that sort of issue start to creep up is that part of the caution that you're you're thinking about.
Yes, I mean, the labor issue hasn't gone away for certain I think obviously the demand side has has picked up.
Over the last several months in so I think the builders are trying to build as many homes as they can but the labor issue that we've been dealing with for many years didn't didn't disappear. It's still out there I havent heard the builders really talk much to us about coded specific labor concerns I would imagine there.
US be some around the margins, it's not something that we've heard a lot about but but I think that is something that we'll continue to be a struggle is just finding enough labor to put up houses as quickly as as to build just want to build them.
Very helpful. Thank you.
Our final question will come from the line of Paul Quinn with RBC capital markets.
Yes, thanks very much.
Good morning, Paul.
Maybe just starting timberlands just.
One of them.
Couple of years ago us log exports out of the so.
China, we're really picking up where does that market sitting and and then flipping over to the west when do you expect.
That that Japanese market, and China, I guess now to rebound.
Yes, so out of the South we had been growing that market. It means that really small piece of our overall business, but we had seen pretty strong growth on southern exports of southern yellow pine into China. When the trade war broke out in the 25% tariff came into place that really put a pretty hefty headwind in there and so we had kept that market.
Open just really at levels low enough that we could keep or levels that could keep the supply chain open when the tariffs came off in when you saw radiata and the European salvage would back off in Q2, we we did ramp that back up again, you know those those lives do compete with radiata pine they compete with.
Salvage would to some extent and so I.
I think for the next few quarters as we see those volumes kind of spike up again, we'll probably take our foot off the gas a little bit, but we're still shipping would into that market, we anticipate continuing to do that.
We're shipping into India again in small volumes, but those are those are markets I think in the near term might be a little stressed from southern export standpoint, just because of the.
The European salvage would but over the long term those markets are going to be good for us I think theres a home for southern yellow pine, we continue to develop a customer base. So good long term market for us out of the West I think the Japan market. The softness that we're seeing it's really three things. It's the demographics. The population is shrinks.
In Japan.
And so over the long term that's not ideal for housing, but it's been a slow decline in our customers have held market share. So that in of itself I think we manage through this year. It's just had the extra stresses of the increase in the consumption tax and obviously kobin 19 related disruptions. So.
I think it's going to be a tough year from a housing standpoint in Japan, I am hopeful you'll see that start to come back similar to other economies as we move past the cobot.
Pandemic, but again, it's still a good market for us we're still going to ship blogs, there, it's just a little bit softer resolved.
Okay.
Wood products I mean, you guys signaled that you're you exited Q2 back at clip grieco good levels of production.
What do you think the volume pick up will be in lumber and oldest be from Q2 to Q3.
Yes, I'd say in in lumber and no SBS, probably low single digits as the quarter progressed, we we brought that production back in.
And importantly, the mills ran remarkably well the reliability that they reliability work that they've been doing over the last year. So it's starting to yield real benefits and so we were getting a lot of good production for every hour that we are operating so I think it's low single digits.
We will try to take advantage, where we can but theres not a whole lot left there I think on MWP, it's probably slightly more than that but again that will depend on what market conditions look like over the back half of the year.
All right. Let's go ahead before okay, alright. Thank you.
And our last question will come from the line of Foods your cover with da Davidson.
Thank you I got booted off the call. So I was also to the Q.
In any event that's.
Good morning.
Good morning glad to be here.
Did you remarkable job on the cost side manufacturing. So the the first question is do you think you can hold that progress stable in Q3.
Yes I.
I mean, the whole essence of our operating strategy and its wood products, but it's also timberland, it's the company as a whole.
As we are working on Opex in every nook and cranny of the entire company and so it's become cultural it's become the expectation people throughout the company, whether you're in a leadership role or whether you're operating equipment in the mill are looking for opportunities to improve so I have every expectation that we will hold and continue to improve.
Move our cost structure going forward.
Terrific.
What I was hoping to hear so with that in mind and with the expectation of lower log costs and record high lumber and OSB either.
Pretty much booked through the end of the quarter I think.
Do you think you can approach meet or exceed the results you did in Q2 18, which is the the best of the modern era.
Yes, so I think it's a little earlier for estimated to offer that specific of guidance I agree with you we have pretty good visibility through August I think September we'll see.
We're hopeful, but but I think we're watching what happens post labor day pretty closely.
So ultimately I think we are going to have a good quarter, we're running the business well the pricing and demand environment on wood products is strong.
So that I think that bodes well for Q3 for sure.
Well, even the longest home run ball eventually comes back or Okay, and then when we last Chad.
We were discussing the risk of an air pocket Q3, which is obviously not going to materialize. So im just wondering do you think that fear it gets pushed into Q4 or does the net benefit of pent up demand low housing inventory low rates and recovering economy way.
Unemployment produce net net optimism.
Yes, I think the air pocket that we are concerned with never materialized I think just the the really really strong repair and remodel demand.
Followed by a quicker than expected recovery in housing.
Dealt with that air pocket I think as you get into the back half the year. The question is one what is going to happen with repair and remodel demand how's that going to hold up.
It's going to hold up reasonably strong is going to fall off thats something that we're watching closely and then I think as we think about housing into the fall and really even into next year at some point is the high unemployment level going to start impacting home new home sales demand and so.
That's an open question certainly what we're hearing from builders is there's a lot of demand there.
So we're watching that closely as we're watching the macro conditions.
But I think it's frankly, it's a little uncertain as to how thats going to play out later this year and into next year.
Sure, Okay, well, thank you and stay safe.
All right. Thank you.
All right well I think that was our final question. Thanks, everyone for joining us this morning, and thank you for your interest in Weyerhaeuser, Please stay safe and healthy everyone. Thank you.
Ladies and gentlemen that will conclude today's call. Thank you all for joining in you may now disconnect.
[music].
Okay.
[music].
Okay.
[music].