Q3 2020 Weyerhaeuser Co Earnings Call
Greetings and welcome to the Weyerhaeuser third quarter 2020, <unk> earnings Conference call.
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It is now my pleasure to introduce Beth Baum, Vice President of Investor Relations and Enterprise planning. Thank you Maam you may begin.
Thank you Rob.
Good morning, everyone. Thank you for joining us today to discuss weyerhaeuser's third 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 dead and stock fish, Chief Executive Officer, and Russell Hagen Chief Financial Officer.
I will now turn the call over to Devin stock fish. Thanks Beth.
Good morning, everyone. Thank you for joining us today, I hope, everyone is well and staying healthy.
This morning, Weyerhaeuser reported third quarter results re initiated a quarterly cash dividend and announced a new dividend framework, consisting of a base dividend plus a variable supplemental dividend.
I will begin by highlighting our third quarter results and then turn my focus to the dividend re initiation.
Weyerhaeuser reported third quarter GAAP earnings of $283 million or 38 cents per diluted share on net sales of $2.1 billion.
Excluding net charges of $103 million for special items, we generated earnings of $386 million or 52 cents per diluted share.
Adjusted EBITDA totaled $745 million in the third quarter. This.
This is 93% higher than the second quarter and over 140% higher than a year ago.
Each of our businesses delivered outstanding operational and financial results. Despite disruptions caused by severe storms in the U.S. south extra.
Extreme fires in the Pacific Northwest and the ongoing COVID-19 pandemic.
This strong operational and financial performance enabled us to deliver the highest operational cash flow since 2006 and take additional steps to meaningfully strengthen our financial position.
I'll begin the discussion of our results with a few brief comments on the continued improvement in the housing market.
U.S. housing activity rebounded sharply in the third quarter supported by a growing preference for larger single family homes in less urban areas total.
Total housing starts averaged over 1.4 million for the third quarter, an improvement of 33% over the second quarter.
Single family housing starts accelerated even more sharply averaging over 1 million units for the quarter and reaching the highest level since 2007.
On a seasonally adjusted basis third quarter single family starts improved by over 35% compared with the second quarter and over 15% compared with the third quarter of 2019.
We're seeing similar levels of improvement in key leading indicators single family permits and new home sales increased nearly 40% compared with the second quarter and were up approximately 20 and 40% year over year respectively.
Your family permits in September reached the highest rate since 2007 and builder confidence is reached all time highs for two consecutive months.
Repair and remodel activity has also remained robust supported by a do it yourself and professional activity and the remodeling industries confidence has continued to increase.
Several other fundamental factors also support a continued strong outlet for residential construction, including historically low mortgage rates demographic tailwinds and an aging housing stock.
Clearly there remains room for caution, especially as it pertains to U.S. unemployment.
The outlook for additional government stimulus and the risk of further koby 19 related disruptions as we approach the winter months. However.
However, we are increasingly confident that the recent strength in U.S. housing and the repair and remodel segment will continue notwithstanding ongoing macroeconomic headwinds.
Turning now to our third quarter business results, starting with timberlands on pages six through eight of our earnings slide.
Timberlands EBITDA decreased by $10 million compared with the second quarter and earnings decreased by $86 million due to an $80 million noncash timber casualty loss for Oregon fire damage.
The 2020 fire season in the Pacific Northwest was one of them most extreme that we had experienced in many years.
In early September highly unusual weather conditions transformed fire activity in the state of Oregon for minimal to highly destructive in a few short days.
Our thoughts are with everyone affected by this disaster and I want to acknowledge all of the firefighters first responders government and industry partners as well as our Weyerhaeuser employees for their extraordinary work to save lives protect property contain the fires.
As we previously disclosed these wildfires spread onto our Oregon timberlands affecting approximately 125000 acres to some extent.
The magnitude of the damage to timber varies based on topography age of the timber and many other factors.
We have commenced salvage operations to maximize the value of the damage timber and Russell will discuss that more in a few minutes.
The noncash charge, we recorded in the quarter represents the estimated book value the timber and related assets that cannot be salvaged based on information available at this time.
Moving onto our third quarter operating performance Westar.
Western Timberlands EBITDA decreased by $1 million compared with the second quarter.
In the western domestic market demand was strong and pricing improved throughout the quarter as mills sought to take full advantage of record lumber prices.
Log supply tightened abruptly in the second half of the quarter, particularly in Oregon, where wildfire shutdown harvest operations and most of the state for several weeks.
Our fee harvest volume decreased 15% compared to the second quarter as we lost 10 harvest stays in Oregon, and four days in Washington, due to fire restrictions.
As harvest operations resumed our teams did a phenomenal job of managing the operational complexity of coordinating multiple firefighting efforts, while at the same time rescheduling harvest operations and safely optimizing the deployment of dozens of logging and trucking crews to continue serving our customers.
This includes our own mills, where we were able to leverage our integrated model and operational agility to ensure our western mills did not lose a single shift due to out of luck downtime.
Turning to our export markets in.
In Japan demand for our logs a softer early in the quarter due to continued slow housing activity and incremental effects of the COVID-19 pandemic.
Demand improved as the quarter for Jeff Projet progressed, as Japan housing activity improved modestly and U.S. log availability was reduced by strong domestic lumber markets in western fire activity.
In China average realizations were flat with the second quarter and demand was solid.
However, our sales volumes to China decreased significantly as we flexed volume to more profitable domestic opportunities.
Moving to the south southern Timberlands, adjusted EBITDA decreased $8 million compared with the second quarter.
Fee harvest volumes declined by 5% compared with the second quarter as we continue to implement the previously announced 10% reduction in full year southern harvest volumes.
Although the U.S. south experienced multiple hurricanes and tropical storms during the quarter, we incurred very minimal damage and lost almost no production days as we redeployed harvest crews to alternative parcels.
Average log sales realizations were comparable to the second quarter the.
The southern Sawlog market experienced downward pressure in the quarter as favorable summertime logging conditions resulted in a bundled would supply.
However, our average sawlog realizations improved slightly due to marketing and merchandising efforts associated with our operational excellence initiatives.
This improvement however was offset by lower fiber log realizations in the quarter.
In northern Timberlands, adjusted EBITDA improved by $1 million compared with the second quarter due to seasonally higher harvest volumes as we exited spring breakup.
Real estate energy and natural resources pages, nine and 10.
Real estate and he and our adjusted EBITDA increased by $3 million compared with the second quarter, but earnings decreased slightly due to a higher average land basis on the mix of property sold.
Real estate sales increased slightly from the second quarter as an increase in the number of acres sold was largely offset by lower average price per acre due to mix.
Third quarter again included some sale of low productivity acreage in southern Oregon that we acquired with the Plum Creek merger.
Results from energy and natural resources were slightly higher than the second quarter due to seasonally higher production of construction materials.
Wood products.
Pages 11, and 12, we.
Wood products delivered its strongest quarterly performance ever contributing $566 million to third quarter earnings and $615 million to adjusted EBITDA.
This exceeds the previous record EBITDA attained in 2018 by almost 60%.
Our lumber Oh, SP and distribution businesses, all delivered the highest quarterly results on record and engineered wood products achieved record third quarter results.
Although these results were enabled by historic increases in commodity prices. They would not have happened without continued strong operational performance across the business through hurricanes and tropical storms in the south extreme fire activity in the west and the ongoing impacts of the global pandemic. Our teams have continued to deliver outstanding.
Operating results and maintain record low controllable cost across multiple product lines.
In the third quarter demand vastly outstrips supply in virtually all of our product lines, driven by strong new residential construction and repair and remodel activity.
With inventories lean across the channel benchmark pricing for lumber and oriented Strand board escalated rapidly until mid to mid September.
Customers began to purchase more deliberately late in the quarter, particularly for lumber as repair and remodel activity began to show some signs of a seasonal slowdown.
However, order files remained extended for most products as the quarter closed, especially LSB and engineered wood products.
In lumber adjusted EBITDA was $260 million higher than the second quarter as a 54% increase in average sales realizations was slightly offset by higher western log costs.
We incurred a small amount of weather related downtime in the quarter due to wildfire smoke in the west and Hurricanes in the south.
And no SB adjusted EBITDA increased by $119 million due to a 65% increase in average sales realizations and slightly lower manufacturing costs.
Adjusted EBITDA for engineered wood products increased by $16 million sales volumes for solid section and I joists products increased by 21% and unit manufacturing costs improved slightly these.
These improvements were partially offset by higher raw material cost for oriented Strand Board web stock.
In distribution adjusted EBITDA was $24 million higher than the second quarter. This.
This is attributable to improved sales volumes and higher margins, including operational excellence initiatives.
Turning briefly to operational excellence group.
Through three quarters, we've made excellent progress against our $50 million to $70 million full year Opex goal and I'm confident we will achieve this target by year end.
I'm extremely proud of our teams for their continued focus and dedication to achieving our opex goal. Despite the disruptions caused by the pandemic in recent natural disasters.
Let me now turn to capital allocation and the re initiation of our quarterly dividend pages 14 to 16.
We remain firmly committed to returning cash to shareholders as part of our balanced capital allocation philosophy.
Early in the pandemic, we made the difficult decision to suspend our quarterly dividend to preserve financial flexibility.
Since may the board has regularly reviewed opportunities to re initiate an appropriate quarterly dividend. This.
This review has taken into account a number of considerations, including our market conditions, the broader macroeconomic environment. The desire for dividend framework that will drive long term shareholder value across market cycles.
Over the past several months demand for housing and wood products is proven resilient, even as macroeconomic headwinds continue.
Our businesses have delivered strong operating and financial results through an unprecedented range of market conditions and our outlook on the near term business climate has improved markedly since late spring.
Additionally, as Russell will discuss in more detail, we've taken a number of actions to significantly reduce leverage and strengthen our balance sheet.
Accordingly, we are re initiating a quarterly cash dividend. We are also adjusting our dividend framework to ensure that the dividend and our overall approach for returning cash to shareholders are both sustainable and appropriate for the company's portfolio and the cash flow that we generate from our businesses across market cycles.
This framework, we are targeting an annual payout of 75% to 80% of adjusted funds available for distribution.
This is comparable to the targets communicated as part of our prior dividend framework and underscores our commitment to returning a significant portion of our free cash flow back to shareholders.
Going forward. However, our new dividend framework will include two components, we will pay a sustainable quarterly base cash dividend and each year, we will supplement that base dividend with an additional return of cash as needed to achieve the targeted 75% to 80% of adjusted EPS I'd.
We believe this new dividend framework will enhance our ability to return meaningful and appropriate amounts of cash to our shareholders across a variety of market conditions, while positioning weyerhaeuser to deliver superior long term value creation.
The sustainable base dividend remains our core mechanism for returning cash we are re re initiating this quarterly cash dividend at 17 cents per share.
This base dividend payment, which totals approximately $127 million per quarter is supported by the cash flow from our timberlands real estate and in our segments. We intend to grow this payment sustainably overtime segment cash flows increase.
The second component of our dividend framework is a variable supplemental dividend. This will generally be an annual payment declared and paid in the first quarter based on cash flow generated during the prior fiscal year.
We will apply this new supplemental dividend framework to our 2021 results and accordingly, we currently expect the first supplemental dividend will be paid in the first quarter of 2022 based on full year 2021, adjusted EPS I'd.
We expect the supplemental dividend will be our primary tool for returning cash above and beyond the base dividend to achieve our targeted annual payout. However.
However, we may also utilize opportunistic share repurchase to return cash under certain circumstances.
Page 16 shows our adjusted EPS and adjusted EBITDA back to 2017, when our current portfolio was established timber.
Timberlands real estate knee and our results have been relatively stable over time, well earnings for our wood products business have fluctuated with lumber and oriented Strand board pricing.
The two part base plus variable supplemental dividend framework will enable our shareholders to more fully benefit from the mix of cash flow profiles generated by our businesses.
Shareholders will receive a stable income stream that is fully supported even in adverse market conditions and they will also benefit from significant upside and strong commodity markets through the variable dividend component.
The remainder of our cash generation that is the cash in excess of our base in supplemental dividends will be deployed consistent with our stated priorities for opportunistic allocation. These.
These priorities include value enhancing growth opportunities liability management and opportunistic share repurchase we're committed to allocating this excess cash in a disciplined manner to grow our base dividend and drive superior long term shareholder value I will.
I now turn it over to Russell to discuss financial items, and our fourth quarter outlook.
Thanks, Devin and good morning.
I'll begin with our key financial items, which are summarized on page 17 cash from operations. During the third quarter was $608 million, our highest operating cash flow since the fourth quarter of 2006, we.
We used a significant portion of this cash to strengthen our balance sheet by redeeming some of our 2023 debt maturities.
We ended the quarter with approximately $6 billion of total debt outstanding and strong liquidity, including a cash balance of $787 million in the full 1.5 billion dollar capacity available on our revolver.
Page 18 highlights actions, we have taken to reduce our gross debt balance during the third quarter, we redeemed $325 million three in a quarter notes that were due March 2023, we incurred a $23 million charge on the early extinguishment, which is included in our results as a special item.
Earlier this week, we submitted a notice that we will be redeeming in mid December our $500 million for Inphi Bates notes due September 2023.
And in this repayment our gross debt will be approximately $5.5 billion, we will have reduced our total debt by nearly $900 million since since 2019 year end.
We have also significantly reduced our net debt to adjusted EBITDA leverage ratio improving it by approximately two turns from a high of 4.9 times at the end of 2019 to 2.9 times at the end of the third quarter.
Our leverage ratio now sits comfortably below our target of 3.5 times net debt to adjusted EBITDA over the cycle.
As previously indicated we have cash earmarked to repay our $150 million or 9% note when it matures in the fourth quarter of 2021.
Today, we are operating from a strong financial position and with the progress we have made on our debt reductions, particularly the 2023 maturities we have reduced leverage to a level that we believe is appropriate and sustainable for the company over the cycle and supports our solid and breast investment grade profile.
Turning now to key outlook items for the fourth quarter, which are summarized on page 19.
And our timberlands business fourth quarter adjusted EBITDA is expected to increase by approximately $20 million compared to the third quarter.
Western Timberlands operations, we expect our fourth quarter domestic log sales volumes and domestic average sales realizations to be moderately higher than third quarter logged.
Log demand and the west remains favorable and due to strong lumber markets log inventories at domestic mills ended the third quarter on the lower end of the normal levels as log supply was restricted due to the due to the extreme wildfire activity. In September. This has resulted in improved pricing during the month of October we expect market tension to moderate.
During the quarter as log supply improves and mills replenish inventories.
We anticipate fourth quarter fee harvest volumes will be higher than the third quarter as we resume harvest operations. Following the third quarter fire restrictions and begin to prioritize our salvage activity on affected timberlands in Oregon.
We are experiencing little downgrade in the quality of the salvage logs delivered to our customers and we do not expect pricing for the salvage logs will negatively affect our fourth quarter realizations.
Unit log and haul costs will increase modestly compared to the third quarter. The salvage activity will result in lower productivity and increased hauling distance to market.
We currently expect to complete a majority of our salvage operations over the next 12 to 18 months and we'll recover a significant portion of the merchantable timber value.
Although additional work is needed to determine the impact on our operations going forward. Our preliminary expectation is that our 2021 western harvest volume will be roughly comparable to 2020 as we redeploy our current logging capacity into salvage activity.
We'll provide you an update on our year end earnings call.
Moving to the export markets in Japan housing starts improved modestly in the third quarter.
Now for our logs has strengthened slightly we expect fourth quarter sales volumes and realizations will increase compared to the third quarter.
Chinese export log realizations are expected to be comparable in the fourth quarter log sales volumes will increase due to the timing of shipments demand for a large remains solid supported by an improving economy and government infrastructure spending.
In the South we expect higher forestry expenditures in the fourth quarter as we complete work that was deferred during the third quarter Hurricane Isaac.
Through the third quarter hurricane activity.
Average log sales realizations will be slightly lower than the third quarter due to mix we.
We anticipate a higher proportion of fiber log sales as we complete additional plant in activity.
Harvest volumes should be comparable to the third quarter.
In the North average log sales realizations should increase slightly with continued favorable demand for hardwood and softwood lumber.
I'll now turn to the recently announced transactions to enhance our Oregon Timberlands holdings. So.
In September we entered into an agreement to sell 149000 acres of southern Oregon, Timberlands to $385 million and a separate agreements or purchase 85000 acres mid coastal organ timberlands for $426 million. The net cost is approximately $40 million and we expect significant and sustained cash flow accretion from.
These transactions.
We continue to expect these transactions will close in the fourth quarter and the southern Oregon Timberlands are now shown on the balance sheet as held for sale we.
We expect to record a gain on the sale with no accompanying tax liability. The game will be reported as a special item in our timberlands business.
Turning to our real estate energy and natural resources segment interest in our real estate properties remain strong as shifting societal preferences are driving increased demand for rural HBU properties.
Wherever transactions remain slower to close due to extended timelines for financing and other key activities.
We expect fourth quarter earnings for real estate energy and natural resources segment will be approximately $10 million lower than the third quarter and we continue to expect full year 2020, adjusted EBITDA of approximately $235 million.
We anticipate land basis as a percentage of real estate sales will be approximately 50% for the fourth quarter and approximately 70% for the full year.
For our wood products segment, new residential construction activity remains strong and our builder and dealer customers are optimistic moving into the winter months.
Repair and remodel markets, we have seen some seasonal slowdown in demand for our products. The take away remains above historical averages for this time of year channel inventories remain generally lean with buyers limiting purchases to immediate needs.
Looking to the fourth quarter, we expect earnings and adjusted EBITDA for wood products will be lower than our record performance in the third quarter, but above previous record set in the second quarter 2018.
Excluding the effects of changes in average sales realizations, we expect fourth quarter results will be significantly lower than the third quarter. We.
We expect a modest seasonal reduction in sales volume as well as higher western Canadian log costs and higher raw material costs for engineered wood products. We also expect lower operating rates for some product lines as we complete maintenance outages that were deferred early in the pandemic.
The framing lumber composite has retreated from its late September peak, but remains above the record levels of 2018.
For lumber our quarter to date average sales realizations are approximately $15 higher and current realizations are approximately $50 lower than the third quarter average.
Entering the fourth quarter benchmark pricing for oriented Strand board remains at record levels and our current quarter to date average sales realizations are approximately $140 higher than the third quarter average.
As a reminder, forever for lumber every $10 change in realizations is approximately $11 million of EBITDA on a quarterly basis.
Gross be every $10 change in realizations as approximately $8 million of EBITDA on a quarterly basis.
For engineered wood products average sales realizations for our solid section and I joists products.
It will be slightly higher as we begin to capture the benefit of announced price increases.
These increases generally range from 4% to 8% and will be captured over the next several quarters. We expect realizations for other engineered wood products will be lower than the third quarter average.
Page 13 outlines the major components of our unallocated items third quarter included a $9 million noncash charge from elimination of inter segment profit in inventory and life on the third quarter compared to an $18 million benefit in the second quarter charge.
Charge recorded in the third quarter was primarily driven by higher unit costs for log and lumber inventories across our businesses.
Third quarter expense also included a year to date adjustment for performance based incentive compensation.
I'll wrap up with a few additional outlook items highlighted on page 20 include.
Including our $23 million special item related to the early extinguishment of debt third quarter interest expense was $111 million. We now expect full year 2020 interest expense will be approximately $350 million excluding special items.
This is $10 million lower than our prior guidance due to the reduction in our gross debt balance.
Turning to taxes, we expect our full year 2020 effective tax rate will be between 20 and 22% before special items based on the forecasted mix of earnings between or read in taxable REIT subsidiary, we expect our full year tax cash taxes will be lower than the overall tax expenses, we defer some payments into early 2021.
Last we now expect total capex for 2020 will be approximately $280 million.
This is $10 million more than our prior guidance, reflecting a few additional high return capital projects in wood products slightly lower timberlands capex through the third quarter fires and severe weather I will turn the call back to Devon I look forward to your questions. Thanks.
Thanks Russell.
With our unrivaled portfolio of assets strong operational performance, our financial strength and focus safety culture. We believe we are well positioned to capitalize on strong and growing fundamental demand for U.S. housing.
We are committed to returning a meaningful portion of our resulting cash flow back to shareholders and our new dividend framework positions us to deliver on our commitment in a way that is sustainable and appropriate across market cycles look.
Looking forward, we remained focused on industry, leading performance and disciplined prudent capital allocation to sustainably grow our base dividend and drive superior long term value for shareholders and now I'd like to open the floor for questions.
Thank you.
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Our first question comes from Anthony Pettinari with Citi. Please proceed with your question.
Good morning.
Good morning, just a question.
Just a question on the supplemental dividend. So you indicated you'll paid at the beginning of the year based on prior year's free cash flow and I'm. Just curious in terms of any flexibility. There. If you have a situation where you generated a lot of cash it in year, one but heading into year two the outlook is due.
Deteriorated based on macro or market trends would you make the judgment call to payout less or should we think of this is just kind of a mechanical payout that we should expect to get paid out regardless of market conditions.
A couple of things on that first just with respect to the timing you know the.
The general approach under the new framework is to pay out the supplemental dividend annually in Q1 and based on the prior year's F.D.. So that would mean Q1 2022 that being said you know could there be a situation, where we would consider an interim supplemental dividend during the year you know.
Certainly I think thats conceivable, we wouldn't shut the door on that possibility, but again the general view is that thats going to be paid out on an annually annual basis.
With respect to the 75% to 80% really that's going to be the target and I think the benefit of this dividend framework is that you know we're going to be in a position to pay out 75% to 80% of EFI d. really across all different market cycles, certainly when we're.
When we're in a down market, we think we have sufficient cash flow from the real estate.
Our in timberlands business to cover that and then when we see strong commodity markets like we are seeing today, obviously, there's a lot of upside with the supplemental piece.
Okay. That's helpful.
And then just we're finally back to 1.4 million housing starts and you indicated your southern Sawlog prices ticked up in the quarter.
Commercial and merchandising activities I'm, just wondering if you saw underlying kind of apples to apples price improvement in any regions of the south, especially with the saw mills running full out and would you anticipate price improvement in two.
2021, assuming we stay at or above that.
Starts level.
Yeah, you know Anthony we've historically talked about that in terms of housing starts I think in retrospect the more applicable.
Look there is what's happening in supply and demand in each individual wood basket and as you alluded to some of those regions are more attention than others and so.
Clearly there are regions say, the Atlantic Coast, North Carolina. Some some regions that just have a little bit more attention and you see a little stronger log pricing. There I do think as we look out over the longer term, obviously, we've seen a fair amount of sawmill capacity coming into the south over the last several years.
Call It five and a half 6 billion board feet of new capacity.
Weve, even seen a few new ones announced here just of late I do think over the longer term you are going to continue to see saw mill capacity coming into the U.S. out. It's one of the best places certainly in North America, if not the world to manufacture lumber and so our expectation is that over time, we'll continue to see more converting cups.
Asti come in and with each new mill that comes in that has attention effect in that particular wood basket. So we do expect that to improve over time.
I would say, obviously housing repair and remodel activity is an important piece of that and that drives that in demand for lumber and other wood products, but ultimately log prices are going to be based on the supply demand dynamic in that individual wood basket. So I think we are optimistic.
That over time that will improve I think it's just going to be.
Slow going as each new mill comes in that will overall improve the supply demand dynamic overtime.
Okay. That's helpful I'll turn it over.
Thank you.
Our next question comes from George Staphos with Bank of America. Please proceed with your question.
Hi, good morning, everybody, thanks for taking to George Sutton.
Ideal and congratulations on the quarter. My first question given you know Anthony teed it up I want to segue from that question and maybe the answer you can be more or less the same but given the supply constraints that you are seeing on the west given the higher pricing that we're seeing for logs and west.
Are you seeing any tangible.
Tangible evidence of maybe some substitution recognizing their different regions.
Large distances between the two regions.
From Douglas for southern yellow pine and in turn.
And the expectation that might happen.
Such that you see even more capacity come into the market to ultimately hopefully.
Tension in the southern markets more any thoughts on that would be helpful. I had a couple of follow ons.
Sure well you know George you don't really see much in the way of substitution between southern yellow pine and Doug for and that's generally just the builders have preferences within.
With an individual species and they generally stick with that so you don't see a lot of crossover. So the short answer to your question is really notwithstanding some of the you know the pricing dynamics, you don't really see a whole lot of of crossover between Doug for and southern yellow Pine I do think where you see a little bit more substitution is with the SPF in.
Southern yellow pine and as we've seen some.
Some of the us that SPF.
Supplies come down due to the pine beetle up in Canada, I think we are seeing in certain markets southern yellow pine gain market share over SPF and I would expect that would continue to be the case.
Okay. That's helpful Devon and good reminder, on that.
One thing I want to go back to I think it was slide 10, you had the realizations.
On the price per acre that you're seeing within real estate in energy and natural resources.
And there's been a general trend lower.
You show on the chart in terms of the realizations are getting per acre any things that we should be taking away from that as we look out to 21, and 22 and it would seem like mix will stay relatively lower not higher if in fact, you're seeing more demand for rural land, because what's going on with Cove, it and the like.
The last six months any thoughts on that.
Yeah. George This is Russell I would say that in 20, how you doing charge.
In 2020, we definitely had a higher mix of some properties in our southern Oregon. These are legacy Plum Creek properties.
With the high basis, we had step those up at the time of the merger and so I think as you look forward into 2021, and 2022, you will see a more kind of normalized.
Pattern the sales coming through the real estate program. So again it is definitely skewed in 2020 with those organ transactions.
Okay. Okay. Thanks, Russell My last question and I'll turn it over if we look at the transaction that you announced store here.
Essentially.
Was that your wording, but trading land in Oregon, Youre effectively getting I think from what we read better stock Landenburg basically getting cash upfront versus cash later can you give us a bit more detail in terms of why you're selling one portion in buying another.
Recognizing the deal Hasnt closed you might be limited in terms of what you can share there. Thank you and good luck in the quarter.
Yes, George I'll take that.
You look at what we're selling in our southern operations I would say that those were good timberlands, but they were not as strategic or as strategically located as the timberlands, we're acquiring and so when you look at the timberlands, we're acquiring they're really well fitted for our current operating.
Region, there and it also supports our export program and then supports a couple of our mills within that region. Also so again, it's really a good trade for us it fits our operations really well.
They will be cash accretive very strong cash accretion and I think overall it definitely improves the overall profile of our western.
Oregon Timberlands.
Thank you so much have a good quarter you bet.
Our next question is from Mark Wilde with Bank of Montreal. Please proceed with your question.
Morning, Devin good morning Russell.
Good morning, Mark.
I wanted to start off could you just give us some more thoughts about sort of.
How you want about setting this initial dividend level the base dividend.
Yes, sure. So the level of the base quarterly dividend was really based on the cash flows that we generate across business cycles, both at the business level and the company level and as we look to set that we looked at the cash flow generation of each of our businesses across a variety of pricing scenarios historical cash.
Cash flows from the businesses, we looked at our company level F.A.D. over the last several years and also modeled out FMT under a number of different market and pricing scenarios and really the idea was to set the base quarterly dividend at a level that is both sustainable and supportable from our cash flow even in a challenged market condition.
And so we expect that 17 cents per share quarterly dividend largely to be able to to be supported largely from the cash that we're generating from the more stable timberlands real estate in the in our business and then obviously overtime, we would expect to grow that base dividend as we grow our timberlands in the in our cash flow.
I'd, just recalling I think Devon that back in 18, when you made the last dividend raise that actually.
The percent of kind of cross cycle Epay D you'd raised up to 85%. It seems like you pulled that down here, but would you care to comment on that.
Yeah, and just in terms of the 75% to 80% payout ratio. It's in the general vicinity you know over the last several years, it's been anywhere from 75 to 80 per 85% and as we are thinking about re initiating the dividend and the new framework that 75% to 80% is really.
What we believe to be an appropriate balance of returning a significant amount of cash back to shareholders, while still retaining some amount of cash to support growth and maintaining a probe maintain an appropriate capital structure.
Okay and would you care to provide people with just some thoughts on kind of share repurchase I mean, if we think about share repurchase programs and cyclical businesses, they've been devilishly hard to pull off well.
Yeah, you know and as we think about the ways in which we are going to be returning cash to shareholders. Obviously, you know as we said, we're going to lean toward the supplemental dividend as the primary vehicle over and above the base, but that being said.
Share repurchase can be a good way to return cash to shareholders under the right circumstance. So that's something that we're going to look at on a regular basis and to the extent that our shares are trading at a meaningful debt discount and thats something that we could look at to return cash to shareholders. Okay, well I think if you can provide.
30 to be kind of going forward about how you're going to make those judgments I think thats helpful and the last one for me is just.
Thinking about how you would grow the land base over time can you share some thoughts with us on that because I think this kind of steady settling down to the land base I think it raises concern among some investors that that they are buying a melting ice cube and I just I'd like to get your thoughts.
On that issue.
Yes, so I guess a couple of comments on that Mark obviously, we do have a real estate program, where we're trying to capture the value of our HBU profile, we've done some portfolio moves.
Over the last few years as well, but I do think it's important to remember that if you go back to 2013 Weyerhaeuser had about 6 million acres, whereas we have about 11 million acres now and so.
It's something that we're always looking at its an opportunity I think for us going forward to continue to deploy some of our excess cash to timberland acquisitions were always in the market looking for transactions to both improve and grow our timber base and so thats certainly something that we're going to continue to look at.
Matt.
We do want to make sure that we're being disciplined about it though obviously, we want to make sure that we're not just doing acquisitions to grow or doing acquisitions that we think that can create real value, but certainly that's something that is top of mind for us and it's going to be something in Russell's new role that it will be even more focused on going forward all right sounds.
I will turn it over to Kevin Thanks.
Thanks Mark.
Our next question is from Mark Weintraub with Seaport Global. Please proceed with your question.
Thank you I wanted to just drill down a little bit more on the average pricing in the wood products.
You mentioned in lumber up $15 quarter to date.
And then up 140 for LSB roughly how much of the volume you that you'd expect to sell.
Sell in the fourth quarter, what would be in those categories at this point.
I want to make sure I am not sure I understood. Your question Mark So.
Maybe can you rephrase that im not sure what you're getting at with that you're so.
Stick with lumber so quarter to date.
Average realizations are $50 higher than the third quarter is that about a third of the volume that you would expect to sell in the quarter that that $15 higher would apply to or is that up 40%.
Yes, I think a good way to think about that is it's somewhere in the in the third category. So you know I think generally speaking.
It's going to be similar each each month or that over that Q4 period.
Okay, because I guess I'm, just trying to understand how order files et cetera come into play in the way, we're thinking about when thinking about this and then likewise when you talk about it being $50 lower currently is that based off where the random print was two or three weeks ago or is that based on where the random.
Printed today.
Yes, so just I guess, a little context for the lag that you see and realizations and ill be specific to lumber. Although it's a similar dynamic you know SB, but just different supply demand dynamics.
So in lumber generally you know you're going to be pricing one to three weeks prior to shipment, which that's that's the lag effect that you see.
Between the print and the delivered realizations and generally speaking the nature of the market is that.
Order files typically extend in hot markets and they shrink and soft market. So when we go back to Q3 is plate prices were climbing.
Our order files extended out several weeks in the inventories are pretty lean.
As we approach peak pricing customers start moving to the sidelines in the order files shrink down fairly quickly and so that lag effect that you see on the upside often times is a little bit longer than what you see on the downside and so when you look at that you know that the current pricing relative to print thats going to be based on a shorter order file is.
It's coming down versus what it was when it was going up.
And so order of magnitude that that $50 lower.
What time reference would be most applicable and saying, okay that if we try to mark to market.
Yes. So at this point you know, whereas our order files were three plus weeks you know as the prices were going up there now down to about one week one to two weeks.
Okay, Okay, and then you mentioned.
I think Ross that channel inventories are generally lean.
And more color on that if you could and and where would they be would you say in the various businesses relative to where they normally would be now.
Yeah, I think you can say generally across the board in all product categories and I'll comment on each specifically, but generally speaking the inventories in the channel are pretty lean across the board and when you think about lumber.
Really the buying is is mostly limited to covering immediate needs I would say most folks in the market are still trying to determine what lumber prices are going to shake out at and are cautious about.
Really starting to build inventories, where they are not clear on what a more stabilized pricing is going to look like so I would say generally speaking lumber inventories pretty lean across the system Oh SB also very lean a little bit different dynamic their order files in SP at least for us are still pretty extended.
Our four ish weeks and so there.
Theres just not a whole lot of extra inventory in the system you see no SB pricing hold up a little better I think thats largely just a function of order files continue to be pretty extended.
GWP similar story long strong order files and E WP and I'd say generally pretty minimal inventory in the channel in that product.
Okay, Great one last very quick clarification on the.
The reference to the debt.
Leverage ratios being where you want them to be.
Obviously, EBITDA goes up and down in EBITDA is extremely strong right now is the absolute level of debt at the level, where you would want it to be.
Yeah, I'd say from a gross debt perspective in you're right that the ratio is a function of EBITDA as well, but from a gross debt perspective, I think we are in the in the ballpark of where we want to be with the actions. We've taken this year and then the 150 that we have earmarked for the 2021 maturity that gets you in the neighborhood of 5.3.
Gross debt and I think that gives us adequate flexibility really through our all parts of a market cycle to stay right around that three and a half times net debt to EBITDA.
Thank you.
Yep.
Our next question is from Mark Connelly with Stephens. Please proceed with your question.
Thanks, Devin we've been hearing about labor availability as well.
Challenge for.
Years now.
And yet housing activity seems to be constrained by other stuff and we haven't really seen a big change in construction approaches which come slowly anyway. So I'm wondering if your experience in trust is manufactured.
Are you seeing any signs that the market is preparing to shift or trying to shift to more prefab or something else to reduce labor content.
Yes, there's certainly lots of talk about that and I think there are certain homebuilders that are investing in that frankly, some of the dealer network.
Partners are also looking at opportunities to to really help with some of the offsite manufacturing to deal with the challenges around labor. So it's something that we hear a lot about you're seeing some of it I.
I don't know that we're at a point, where it's really starting to make a meaningful difference yet, but theres. No question that labor has been a challenge I think it remains a challenge in talking to the homebuilders. It's certainly something that is still top of mind for them and they're really looking at all different avenues is to try to help with that from you.
Our site Panelization to really ramping up their programs to incent people to come into the trade. So they are really looking at that across the board.
Because it does still remain a challenge I think to get to you what would otherwise be full building Mr.
Mr role for Weyerhaeuser in that process.
Yes, I think there is in the sense that we want to make sure that we stay very close to all of our customers throughout the value chain to make sure that we're looking for opportunities whether its panelization, whether its offsite manufacturing to leverage our supply chain expertise to get them Prada.
Next in what they need to be successful at the right cost. So it's something that we we are focused on we're certainly in discussions with all of our partners on how we can help them I don't know that were necessarily looking to get into panelized manufacturing if thats. The question, but I do think we'll look for opportunities to less.
Bridge that if it does get some momentum with our customers.
Just one question you mentioned the fiber log demand in south being down if that stays down how meaningful will that be assuming more normal lumber prices and clearly some some paper pulp markets have been hit market to come back quickly. So I'm curious is that can lead you to think about shifting harvest cycles or marketing programs or is it.
Just not big enough to matter.
Yeah, I don't think it's big enough to matter you know a couple of comments on the southern fiber markets obvious.
Obviously, you know weve seen some puts and takes in pulp log demand some.
Some segments, whether its containerboard boxboard those kinds of markets. Those have done okay printing paper, obviously in a code environment has been has been somewhat challenged I don't think all all things considered its at a point now where it is going to make a meaningful difference to us one way or the other just in what's going on in the current market conditions.
I would say a couple of other comments there going into fourth quarter for whatever its worth I think the log decks for most of the pulp and paper manufacturers are pretty light relative to normal so certainly not sick.
Significant log inventories in that market and then the other just piece of color. There is we did see a number of our pulp log customers.
Defer maintenance earlier in the year when the markets were a little stronger.
In a lot of that ran through Q3, and so thats a little bit of the softness that you saw as well those are mostly coming out of those maintenance shutdowns as we head into Q4.
Thank you.
Yes.
Our next question is from Paul Quinn with RBC capital markets. Please proceed with your question.
Yes, thanks, very much and good morning, Hey, just a couple of questions and and wood products Theyre driven.
Take a look at slide 12, and third party sales volumes. So this is just shipments for lumber knows me over the last seven quarters, it's pretty much flat I'm just wondering on the production side, where that production is has been flat and whether you've been able to meaningfully increase.
And also whether you are running at capacity, what's your ability to pick that up going forward.
Yes, I do think you know, particularly on the lumber side, we will grow that production over time, we've got the Derricks and the mill poor mills that are up and running I think with respect to Q3 in particular.
There were a few things in the quarter, we had to take some some downtime in the west due to wildfire smoke we had downtime at some of our mills in the south with the various hurricanes coming through and power outages.
Some maintenance downtime those kinds of things, but over time, our lumber production will will increase and even I'd say on Oh, let's be around the margins just as we continue to improve on.
Reliability across our various products, we'll see some improvement there as well.
And then just on my.
Customer and is part of what Mark was asking around but there has been a lot of activity. There and this is this is an area. That's growing street in line with your sustainability goals and you guys already.
Manufacturing number components were just wondering if that's an area of interest.
To to be able to expand that that side of the business.
Yes, well, we're really excited about the momentum we're seeing around cross laminated timber mass timber it's from it's certainly something that has.
Gotten people excited across the board and we're seeing that move frankly faster than we had anticipated. So we're in touch with the manufacturers of CLP I don't know in the near term, we're really looking to get into manufacturing CLP, but certainly we know how to manufacture wood products and we'll continue to talk.
Look at that market down the road, maybe that makes sense, but I think in the near term, it's really more of an opportunity for us to sell lumber and other engineered wood products into that space.
Alright, Thats, all I had best of luck.
Terrific. Thank you.
Our next question is from Buck Horne with Raymond James. Please proceed with your question.
Hey, Thanks, good morning, guys.
I wanted to go back to the dividend for a quick quick follow up maybe you maybe I missed this earlier in the discussion and I'm just curious on the timing of the initial supplemental dividend.
With the suspension of the dividend for the better part of this year and of course, the strong EBITDA results coming out of wood products. What was the decision process in terms of.
Not doing a supplemental dividend in the first quarter 21, and then waiting another full year for the first payment to be in 2022, what's the what was the thought process and going.
That much further out with the supplemental.
Yes, a couple of comments on that you know I guess first when we think about the cash flow that we generated from 2020, clearly we have prioritized debt reduction with the cash flow that we've generated this year you know we've allocated over $1 billion to debt reduction.
Which has been a significant percentage of our overall 2020 cash flow, which is you know the 400 million that weve reduced gross debt year to date, the 500 million, we're paying down in Q4. Another hundred 50, we've got earmarked for 2021 and so this has really taken us to a place where we've reduced leverage where we feel it's an appropriate level across busy.
In cycles. Obviously, we have also returned 375 million of cash is the dividend payment that we made in Q1 in the fourth quarter dividend, we just declared so.
On balance that's how we allocated to cash flow from 2020, you know when we talk about the supplemental dividend. We talk about Q1 2020 to pay out Matt generally going to be the approach with the dividend framework to do that annually, but again as we said, we're not going to be overly dogmatic there could there be a situation where we would.
Consider an interim supplemental dividend.
During 2021, even Q1, certainly I think thats conceivable, we wouldn't we wouldn't shut the door on that possibility, we're going to continue to look at that but but again, we're expecting that on it as a general matter the supplemental dividend will be paid out annually in most circumstances.
Okay. Thanks for that color I appreciate that and just nodes.
No to the wood products, a little bit further just maybe longer term bigger picture I think we agree with you certainly on the potential runway for the.
The housing recovery and the single family.
Your housing shortage that all the demographic factors that go into that equation.
Equation of course, the demand for lumber capacity is going to likely continue to increase.
How do you guys look at the longer term potential of your existing.
Wood products capacity in terms of.
Additional capex projects could move the needle.
To increase your capacity internally with higher return projects.
And or would you need to or would you consider additional acquisition opportunities. If there are any out there do you in.
Increase your manufacturing capacity.
Yeah, well I think there definitely are opportunities for us through our capital expenditures program to continue to drive value through the wood products business. We have done I think a remarkable job over the last four or five years.
With our Capex in the wood products business, we have been primarily focused during that time on cost reduction I think you've seen that shown up.
In our relative performance in that business. We've we've reached the point of being black at the bottom. We did have some come along volume that came through those programs to date as I mentioned with Dirksen with mill Port We've got a number of additional projects in the queue that we think can return very good.
Turns continued to ensure that we have a very cost effective efficient mill set.
And in in that will be some opportunities for.
Increased lumber capacity and production as well. So this is something I think is really it's a great opportunity for us and we'll continue to look at that.
I would expect us to provide more guidance on 2021 Capex on our next earnings call.
All right. Thanks. Good luck. Thank you appreciate it thank.
Thank you.
Our next question comes from Steve Chercover with D.A. Davidson. Please proceed with your question.
Good morning, Thanks for taking my question.
So if memory serves I had to step away from my desk.
You took an $80 million write off for the Oregon fires in a prime west sides, Oregon land is about $4000. An acre is it safe to say that greater than 20000 acres were destroyed or can you just give us a number.
Yes, so just a little context around that so for US we had about 125000 acres that were impacted to to some extent.
What I would say is when you think about each individual acre. They were they were impacted depending on top biography the age class the rate of spread species. So it's variable the extent of the damage, but what I would say is at a high level at least based on our early work in the salvage operate.
Patients, we think we're going to be able to capture the vast majority of value on our merchantable timber. So in other words as we have gone in and even on the acres that had relatively severe burn we're still able to capture the value of the fiber the bark has done its job in protected the underlying.
Fiber. So we do think the good news there obviously, it's never good news when you have a big fire like this but the good news is we think we are going to be able to capture most of the value on on that merchantable timber.
Over the next call it 12 to 18 months.
Yes, that's why I assume that the acreage impacted was substantially more than call. It the total loss for certain var.
Volume.
So over the 20 years I've covered Weyerhaeuser and also Plum Creek, everyone has self insured.
And I'm wondering if it makes you rethink.
The whole notion of insurance acknowledging that premiums tend to go up significantly after a disaster.
Yeah as a practical matter, there's really no economically feasible way to buy insurance on significant acreage of timberland and so for us the way we mitigate fire risk is we have a diverse area of timberland coverage across various read.
Engines, we are very active in our work around fire management working with other landowners in the state to make sure to the greatest extent possible that we're protecting our lands but.
But theres going to be some risks that's the nature of the business and it's really not something that you can uncover that you can cover through insurance.
And finally, our minority so I can attest to this tariff when the it was and how extreme the weather was normal your land loan it's that.
It's really only adjacent land federal lands that.
Catch on fire that impact here and was this a whole new kettle of fish.
Well, it's just that it was a situation. This is the worst fire situation. We've had in decades and it was just a situation where the.
The humidity dropped really low we had a period of no rain. So it was very dry you had fire startup and then you had the significant wind and when all of those things happened together. It can get it can get bad quickly as we saw this year, but if.
We're not it's not anything new for dealing with fires, it's something that we see in the west every year. Most years, we have very minimal damage and impact. This was just a tough year.
Okay. Thanks, good luck in the quarter.
All right. Thank you.
There are no further questions at this time I'd like to turn the floor back over to Devin stock fish for closing comments.
All right well, thank you and thanks to everyone for joining us this morning, and thank you for your interest in Weyerhaeuser stay safe and healthy everyone.
This concludes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.