Q2 2021 Weyerhaeuser Co Earnings Call
[music].
Greetings and welcome to the Weyerhaeuser second quarter 2021earnings conference call. At this time, all participants are on a listen only mode. After the Speakers' remarks, there'll be a question and answer session to ask a question. During the session you need to press star 1 on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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It is now my pleasure to introduce your host Beth Baum, Vice President of Investor Relations and Enterprise planning. Thank you Ms. Ma'am you may begin.
Thank you Ron.
Rob.
Morning, everyone. Thank you for joining us today to discuss Weyerhaeuser second quarter 'twenty 'twenty..1 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.
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 on the earnings materials on our website.
On the call. This morning are Devin Stockfish, Chief Executive Officer.
And Nancy Loewy, Chief Financial Officer.
I will now turn the call over to Devin Stockfish.
Thank you Beth good morning, everyone and thank you for joining us today.
This morning, Weyerhaeuser reported second quarter net earnings of $1 billion or $1.37 per diluted share on net sales of 3.1.
Dollars.
I'm extremely proud of our team's accomplishments in the second quarter their collective efforts delivered the company's strongest quarterly adjusted EBITDA on record at $1.6 billion, surpassing last quarter's record by 43%.
Our year to date adjusted EBITDA is almost $2 billion.
Higher than the first half of 'twenty 'twenty.
Wood products delivered another record quarter at $1.4 billion of adjusted EBITDA, surpassing last quarter's record by 56%.
Turning now to our second quarter business results I'll begin the discussion with timberlands on pages 5 through 8 of our earnings slides.
Timberlands earnings and adjusted EBITDA improved by approximately 5% compared with the first quarter.
In the West adjusted EBITDA increased slightly in the second quarter.
Western domestic markets remained favorable despite the decline in lumber prices late in the quarter and a healthy supply of logs to the market.
Demand remains strong as mills took precautionary measures to bolster log inventories in response to an early fire season, resulting from persistent dry conditions in a period of extremely high temperatures.
This steady demand poll drove our sales volumes modestly higher during the second quarter.
Salvage operations from last year's.
Aspires, and Oregon are continuing to supply an abundance of smaller diameter logs to the market.
Consequently prices for smaller diameter logs in Oregon have experienced some downward pressure.
As a result of this dynamic our domestic sales realizations were slightly lower in the quarter to.
To date, we've harvested nearly 2 thirds.
<unk> of our planned salvage volume in Oregon.
<unk> productivity has slowed somewhat as warm summer weather arrived early and we began to transition salvaged salvage harvest operations into higher elevation tracks, which generally have lower productivity and higher operating costs.
Forestry and road costs were seasonally higher during.
As we do a significant amount of this work during the warmer summer months.
Turning to our export markets in Japan, and China demand for our logs remained strong and our sales realizations increased significantly.
Global Legit logistics constraints, particularly with respect to shipping container availability.
The quarter on North American lumber prices continued to impact the availability of imported lumber into Japan and China.
This has resulted in strong demand for locally produced lumber and increased demand for imported logs.
Additionally, a ban on Australian logs continues to reduce the supply of imported logs to China.
And so our China sales volumes increased in the quarter as we intentionally flexed volume from the domestic market to capitalize on strong demand signals and pricing from our Chinese customers.
Moving to the south.
Southern Timberlands adjusted EBITDA increased by approximately 10% compared with the first quarter.
Southern.
Log markets improved due to record lumber and panel pricing for most of the quarter and supply limitations, resulting from persistent wet weather.
Fiber markets also strengthened as mill inventories remain lean and wet conditions constrained supply.
As a result, our sales realizations were slightly higher than the first quarter.
<unk> fee and sales volumes were significantly higher in the quarter despite impacts from multiple heavy rain events across the Gulf South.
The wet weather in the quarter did however limit our ability to catch up on delayed harvest from the first quarter snow and ice events.
Log and haul costs increased slightly and forestry.
Turn solid costs were seasonally higher.
Although southern export represents a small component of our operations, we continue to see strengthening demand signals from China, and India, resulting in increases in both sales volumes and realizations in the second quarter.
However, container availability and increased freight rates continue to.
In ruble headwind.
In the north adjusted EBITDA decreased slightly compared to the first quarter due to significantly lower sales volumes associated with seasonal spring breakup conditions, partially offset by significantly higher sales realizations.
Turning to real estate energy and natural resources on pages.
No 9 and 10.
Earnings and adjusted EBITDA decreased by approximately 5% compared with the first quarter due to timing of real estate sales and mix of property sold but were significantly higher than the year ago quarter.
Earnings increased by more than 230% compared with the second quarter of 2000.
Pages money.
Demand for HBU properties has been very strong year to date and average price per acre remains elevated compared to historical levels.
We continue to capitalize on this market and have been increasing our prices in many regions.
This is resulting in a steady stream of high value transactions with significant prime.
Premiums to timber.
In energy and natural resources production of construction materials increased as demand remained strong during the quarter.
Wood products pages 11 through 13.
Wood products earnings and adjusted EBITDA improved by almost half a billion dollars compared with the prior quarter.
2 our lumber OSB and distribution businesses, all established new quarterly adjusted EBITDA Records in the second quarter.
These exceptional results were delivered notwithstanding ongoing challenges with transportation and resin availability in the quarter.
I want to specifically call out and thank our supply chain and.
6 teams for their tremendous work in helping us successfully navigate these headwinds.
In the lumber market average framing lumber composite pricing increased 29% compared with the first quarter.
Demand was strong during the first half of the quarter, but began to soften as do it yourself repair and remodel activity.
Logistic IND towards the latter part of May.
The drop off in the do it yourself segment, largely a result of changing consumer spending habits coming out of Covid restrictions and to some extent record high lumber prices resulted in lower sales activity and higher inventories at the home centers and treaters.
As a result.
The weak lumber prices peaked in late May and retreated at a rapid pace for the remainder of the quarter on.
Although inventories at home centers, and treaters increased inventory levels at dealers and distributors, serving the homebuilding and professional repair and remodel segments remained below normal at quarter end.
By our positioning remains.
Cautious with the reluctance to build meaningful inventory positions and dynamic pricing environment.
Adjusted EBITDA for lumber increased $291 million or 57% compared with the first quarter.
Our sales realizations increased by 25 per cent and sales volumes increased moderately.
Log costs increased slightly in the second quarter, primarily for Canadian logs.
OSB markets experienced historic strength in the second quarter as demand continued to outpace supply.
Inventories remain lean throughout the channel and supply constraints persisted due to resin availability and transportation.
<unk> causes.
As a result pricing continued to accelerate to record levels before peaking at the end of the quarter.
Average OSB composite pricing increased 52% compared with the first quarter.
OSB adjusted EBITDA increased by $172 million or 57%.
Channel and compared to the first quarter.
Our sales realizations improved by 48 per cent per.
Production and sales volumes decreased modestly and unit manufacturing costs increased primarily due to a planned extended maintenance outage to complete a capital project at our Elgin OSB mill.
Fiber costs were slightly.
Higher in the quarter, primarily for Canadian logs.
Engineered wood products, adjusted EBITDA increased $11 million compared to the first quarter, a 26% improvement.
Realizations improved across all products and we continue to benefit from the price increases announced over the last year for solid.
<unk> section and I joist products.
This was partially offset by higher raw material costs for oriented Strand Board web stock resin and veneer.
Sales and production volumes increased for solid section and I joist products.
In distribution adjusted EBITDA increased $36 million compared to the first.
All et cetera, and 92% improvement as strong demand drove higher sales volumes from those products and the business captured improve margins.
With that I'll turn the call over to Nancy to discuss some financial items and our third quarter outlook.
Thank you Devin and good morning, everyone I'll begin with our key financial.
<unk> items, which are summarized on page 15.
We generated over $1.3 billion of cash from operations in the second quarter and over $2 million year to date.
These are our highest first half operating cash flows on record.
Adjusted funds available for distribution or adjusted.
Adjusted F a D.
For year to date second quarter, 2021 totaled nearly $1.9 billion with approximately $1.2 billion related to the second quarter operations as highlighted on page 16.
Year to date, we have returned $255 million to our shareholders through payment of our quarterly.
Quarterly base dividend.
As a reminder, we target a total return to shareholders of 75% to 80% of our annual adjusted F E D.
In the case of 2021, the majority will be returned to the variable supplemental component of our new dividend framework.
Turning to the balance sheet, we ended the quarter with approximately.
$1.8 billion of cash and just under $5.3 billion of debt.
During the second quarter, we repaid our $225 million variable rate term loan due in 2026 and incurred no early extinguishment charges.
We plan to repay our $150 million, 9% note when.
<unk> in the fourth quarter.
Looking forward key outlook items for the third quarter and full year 2021 are presented on pages 17 and 18.
In our timberlands business, we expect third quarter earnings and adjusted EBITDA will be approximately $25 million lower than the second quarter.
Maturing to our western Timberland operations domestic mills ended the second quarter with ample inventory, we anticipate slightly lower domestic log sales realizations in the third quarter absent significant fire related disruption.
This is primarily due to modestly lower pricing for smaller diameter saw logs.
We expect large.
<unk> log pricing will remain favorable due to limited supply and strong export demand.
We anticipate seasonally higher forestry and road spending as those activities accelerate with favorable weather condition.
Typical of the drier warmer summer months harvest activity will focus on higher elevation tracks where operations.
Or less productive, resulting in slightly lower fee harvest volume and higher per unit log and haul costs.
Moving to the export market.
In Japan log demand remains strong we expect our third quarter sales realizations and log sales volumes to be generally comparable to the second quarter.
In China we.
To pay significantly higher sales volumes and slightly higher sales realizations on.
Low Chinese log demand generally moderate during the summer rainy season, we expect demand for U S. Logs will remain strong as imports from other countries remained constrained.
In the South we anticipate significantly higher fee harvest volume.
As well as higher per unit log and haul costs during the third quarter due to a seasonal increase in thinning activity.
Although our saw log and fiber log pricing should be comparable to the second quarter. We expect average sales realizations will be slightly lower due to a higher percentage mix of fiber logs.
We also expect seasonal.
On the higher Forestry and road costs as most of this activity is completed during these drier summer months.
In the north sales realizations are expected to be lower due to mix while fee harvest volumes are expected to be significantly higher as we come out of the spring breakup season.
I'll wrap up the timberlands outlook with the comment on.
On the sale of our North Cascades, Timberlands, which was completed on July 7th in the third quarter, we will record a cash inflow of $261 million and a gain of approximately $30 million related to this transaction.
The gain will be reported as a special item within the timberlands segment.
Turning to our real estate energy and natural resources segment, we expect third quarter adjusted EBITDA will be comparable to the third quarter 2020, but earnings will be approximately $20 million higher than 1 year ago due to a lot lower average land basis on the mix of properties sold.
As Devin mentioned, we continue to capitalize.
<unk> on exceptionally strong demand and pricing for HBU properties in.
In addition, we've seen strong year to date production of construction materials.
As a result, we are increasing our guidance for full year 2021, adjusted EBITDA to $290 million, we now expect land basis.
As a percentage of real estate sales to be approximately 30 to 35 per cent for the year.
For our wood products segment third quarter benchmark pricing for lumber has significantly reduced from record levels and benchmark pricing for oriented Strand Board has also recently declined.
As a result, we are expecting adjusted EBITDA will be significant.
And on the lower in the third quarter.
For lumber are quarter to date realizations are approximately $425 lower and current realizations are approximately $535 lower than the second quarter average for.
OSB are current realizations are still significantly higher than the second quarter average.
Net due to the length of our order files.
Quarter to date OSB realizations are approximately $155 higher and current realizations are approximately $125 higher than the second quarter average.
As a reminder for lumber every $10 change in realizations is approximately $11 million.
EBITDA on a quarterly basis and for OSB every $10 change in realizations is approximately $8 million of EBITDA on a quarterly basis.
For lumber as prices have retreated we expect higher sales volumes as inventories at home centers, and treaters normalized and demand signals improve for do it.
A activity.
We're also anticipating improved unit manufacturing costs during the quarter.
We anticipate this will be partially offset by slightly higher costs for Canadian and western logs.
For oriented Strand Board, we expect demand will remain favorable due to continued strength in new residential construction activity.
We expect improved operating rates following the second quarter outage to complete the capital project at our Elkann OSB Mill previously mentioned.
With increased operating rates, we anticipate higher third quarter sales volumes and improved manufacturing costs.
These improvements are expected to be partially offset by higher fiber costs.
For engineered wood products, we expect higher sales realizations for our solid section and I Joist project products.
As we continue to benefit from previously announced price increases.
In May 2021, we announced another increase which ranges from 15% to 25% and we will be captured over the next several quarters.
We anticipate significantly higher raw material costs, primarily for oriented Strand Board web stock as the cost of web stock lagged benchmark OSB pricing by approximately 1 quarter.
So our distribution business, we're expecting the recent declines in commodity pricing will result in reduced margins and significantly.
<unk> lower adjusted EBITDA.
Business results are expected to remain strong compared to a historical perspective.
I'll wrap up with a couple additional comments on our total company financial items.
So each year in the second quarter, we finalized prior yearend as estimates for pension assets and liabilities.
As a risk.
We recorded $138 million improvement in our net funded status as well as the reduction in our noncash nonoperating pension and post employment expense.
Slide 18 includes our current full year outlook for pension and post employment items. It also shows the $40 million capital expenditure increase we announced back in.
June for some additional high return projects across our businesses.
Turning to taxes. We are now we now expect our effective tax rate to be between 20% to 24% based on the forecasted mix of earnings between our REIT and taxable REIT subsidiary.
The $90 million tax refund associated.
Adult with our 2018 pension contribution has now been approved and we expect to receive the refund in third quarter of 2021.
So now I'll turn the call back to Devin and look forward to your questions.
Great. Thanks Nancy.
For wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets.
U S housing activity continues at an impressive pace with total housing starts in the second quarter, averaging $1.6 million units on a seasonally adjusted basis and total permits averaging 1.7 million units.
Single family starts in June reached their highest monthly level since may of 2007.
<unk> dealt with standing a slight pullback in the second quarter as homebuilders navigated supply chain disruptions year to date momentum is strong and our customers continue to expect robust housing activity over the back half of the year.
Our near term and longer term housing outlook remains very favorable and is bolstered by encouraging long.
From housing demand fundamentals.
Turning to repair and remodel although demand for small do it yourself projects has softened from the elevated levels established in the pandemic demand for larger professional remodels remains healthy.
Our long term outlook for repair and remodel continues to be favorable supported by.
Long term housing stock rising home equity and low interest rates.
In closing, we delivered our best financial performance on record in the second quarter and were well positioned.
Physician to capitalize on favorable demand fundamentals for U S housing.
Looking forward, we remained focus on industry, leading performance across our.
By and Asians and are on track to deliver our 2021, opex target of $50 million to $75 million or.
Our balance sheet is extremely strong and with year to date adjusted F. A D of nearly $1.9 billion, we expect to return significant amounts of cash to shareholders through the variable supplemental.
<unk> of our new dividend framework and.
And finally I'm pleased to announce that we will hold a virtual investor day on September 22nd.
Nancy Russell and I will give an update on our key longer term strategic capital allocation and sustainability initiatives event details and registration instructions.
Will be included in a press release later this morning, we're excited to share that update and we'll look forward to speaking with you all again in September.
And now I'd like to open up the floor for questions.
Thank you we will now be conducting a question and answer session.
If you'd like to ask a question. Please press star 1 on your telephone.
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Our first question comes from Anthony Pettinari with Citi. Please proceed with your question.
Good morning.
Good morning Devin.
Kevin can you talk a little more about kind of how you see the lumber market currently I mean price declines seem to have moderated over the last week or so.
Talked about inventories below historic levels.
And I would think that prices are below cash costs for a decent chunk of your competitors I'm not sure if you'd agree with that and.
And specifically you talked about anticipating a pickup in demand in <unk> I'm. Just wondering are you seeing that right now at the end of July or is that something that you'd anticipate.
So you just see in August or September just wondering if you can give any more color there.
Absolutely.
Well, just a little bit of context, and then we'll address the different pieces of the question.
Obviously lumber and OSB pricing for that matter reached historically high levels. This spring and that was really a function of housing.
<unk> per remodel just being very strong through through most of the spring into may.
We've seen the pricing come off significantly here recently, although I will mentioned pricing is still reasonably strong by historical measures measures.
I'd say, what's been going on of late is really primarily a function.
<unk> of the smaller do it yourself market.
We've seen that over the past couple of months come down 15% to 20% in terms of our sales into that market.
In June and July relative to the spring. So that's that's caused a little bit of inventory to build up in the home improvement Weyerhaeuser.
Warehouse and treater segments, which that's really been sort of the pricing pressure as the producers look to move that product that would have gone into those those markets to other customers in terms of how we're looking at the current situation.
Situation and as we head into fall.
I think the do it yourself market should.
Be picking back up here in fact, even just this week, we've seen a little bit of a pickup there in terms of sales activity into the home improvement warehouse and the treaters. So.
That's going to start picking up and we would expect that to accelerate as we get into the fall youll see cooler weather Youll see kids going back.
We will have vacation season will be winding down and you know.
Frankly, I think just the moderation in lumber prices I suspect some of the some of the downtick in the do it yourself was a little bit of sticker shock with the high lumber prices and all the all the press that that was getting so.
On the pricing environment, we think first of all.
I wouldn't be surprised at all to have seen the lumber prices over correct, a little bit we've seen that in the past when prices have come down we're expecting that to settle into a range that certainly.
Higher than historical levels, albeit probably not at the record levels that we saw earlier in the spring.
A couple of comments.
Just on inventory I think it's differential depending on what part of the channel you're talking about I think in the home improvement warehouse and Schreder segment, it's probably still a little bit elevated relative to normal, but when you look at the builder and dealer portions I think that's probably a little lower than normal as they were at.
Wanted to build inventory in a dynamic pricing environment.
I will say with respect to your question about cash costs, certainly I think in British Columbia with.
With the increase in log prices in some of the other dynamics there.
Is entirely possible that a segment of the PC manufacturers.
Really have on below cash cost were pricing went.
So we'll see how that develops I do think overall, probably the cost floor in North America has gone up a little bit because of that dynamic relative to history.
So again, we're expecting residential construction should.
Should should remain strong the pro segment of repair and remodel should stay strong and that do it yourself segments should start picking up here as we head into fall. So overall, we're expecting pricing to settle into a new range.
That's still very strong pricing by any historical context.
Okay, that's very.
Very helpful. And then just shifting gears can you talk about the market per higher quality timberlands I mean, we saw a pretty big transaction announced this morning, I think at an attractive price seems to be a lot of M&A just sort of accelerating across sectors can you talk about valuations youre seeing for high quality industrial timber ones.
Have the risen versus maybe 2019 is there any ESG premium that youre seeing creep in.
And then should we think about weyerhaeuser as sort of a net buyer or net seller in this environment.
Well I think no doubt, we're starting to see the activity pick up a little bit it was a little slow I would say for the first half of the.
A year, but certainly we see that picking up.
Are valuations, we've definitely seen a pickup in interest in quality timberland and that's a statement both in the west and in the South you can see that in some of the valuations of recently announced deals.
I think there is a lot of interest.
In this space the ESG piece, the carbon piece I think that may be playing into it a little bit.
But I do think certainly we are seeing those valuations tick up a bit certainly that's what we're seeing in the market.
With respect to our activity as we've always said we are always looking to.
Optimizing.
<unk> and improve the quality of our timberlands to grow the value of our timber base. That's something we're doing day in day out and sometimes that's on the sell side, but that's also on the buy side, you've seen us with Oregon in Alabama, a couple of transactions of late so we're always looking we look at every deal that comes through.
I think we will continue to be active.
Net space Russell and his team.
Or looking at deals they are having lots of conversations, but you've got to be disciplined and so we will remain disciplined and execute on deals that make good financial sense and that are value accretive for us. So we expect to be active we'll continue to look in terms of just.
And then in optimizing the improve on our timber base.
Okay. That's helpful I'll turn it over.
Thanks.
Our next question is from George Staphos with Bank of America. Please proceed with your question.
Thanks, very much on Anthony Hi, Kevin Hi, Best Hope, you're doing well thanks.
Thanks for taking my question.
Congratulations on the on the quarter.
Question I want to come back to something that that Anthony had teed up so we've heard about.
Dealers and distributors, keeping their inventories low and something of a standoff right no 1 wants to order and then C.
Just as those fixed on lumber showing up for price that had lower yet.
Dealer or distributor taking on the risk that.
Prices and demand start to pick up on your on your left with low inventories. What do you think we will we'll break that logjam are you seeing any signs at all that.
The distributors and dealers are.
We need to rebuild inventory.
Or maybe not just because of where prices are going to be in this peer.
Period of very very low hands.
Hand to mouth kind of ordering which might not be the best thing for you how do you see that shaking out.
Yeah, well, you're exactly right. That's the dynamic that plays out in our markets day in day out in <unk>.
Has for a very long time, when you have pricing that's in a falling environment people are going to be very cautious about building inventories and I think what really starts to bring people back into the market as 1 of 2 things first they get a sense that you've really started to bottom out in terms of what's going on in the pricing environment.
You look at what's going on today in fact, the print last night. It showed that we saw the smallest downtick in pricing that we've seen in 10 or 11 weeks I think because of the fires in British Columbia. There are some other dynamics that are going on that perhaps are starting to give people to feel that we've reached a floor and things will start normalizing upwards.
Or does that usually gives people some confidence to start building inventory. The second thing is it's always a matter of if you are in that space you have to make sure that youre supplying your customers and so.
To the extent that you feel like Theres any risk whatsoever that youre going to have enough inventory.
To meet your customer demands and people.
We will have to come in I would say with the fire situation with someone some of the transportation challenges what.
What we are hearing from the builder customers in terms of their outlook for the back half of the year. It's a it's a careful dance for them to make sure that they don't get too low and get caught short and we've.
It happens when when that dynamic has played out and that usually results in pricing taking up relatively quickly. So I wouldn't say in terms of the dealer distributor network, we've seen them really start to build material inventories at this point, although as I said earlier.
We have seen the home improvement.
<unk> warehouse and treat or start coming back even this week, there's been a little bit of an uptick that we've noticed to the extent that that gains momentum and starts pulling inventory out of the system you could see that dynamic change share relatively quickly.
Okay. Thanks for that day.
Very helpful. I wanted to switch gears from my second question.
1 on acute part on timber.
We've heard of some disruptions in China as they've been in particular with Thaicom.
Re mediating redoing the way they handle timber and from what we've gathered inventories are relatively high so I was a little surprised pleasantly surprised.
<unk> still seeing strong demand on timber and to China, If you could.
Blaine why you think thats happening and to some degree why the U S is gaining share versus other other regions and then in the south.
I want to say prices have begun to pick up on stumpage.
A couple of 3 Bucks a ton.
Year on year, you're starting to see some commentary now that prices are lifting from more than seasonal reasons do you buy that or are you fairly skeptical of that and you think we're still on a flat, perhaps deflationary period on a real basis in terms of timber. Thank you.
Well thanks.
I'll cover the China question first and the China market has been very strong for us. This year pricing has been well above what we've seen are really in a number of years.
Part of that has been the supply chain challenges from European exporters, the ban on Australian logs.
But all of those things have come together and really open that market back up from North American logs and so that's been a really nice market for us as you mentioned the inventory levels at the ports at the end of June did go up $5.5 million cubic meters, which is up from may take.
Take takeaway at the ports down a little bit overall.
Thanks, I'll get to Weyerhaeuser specific comments momentarily, but there are a few things that are driving that George I mean first of all there is always a little bit of a tick down in demand when you get into the heart rainy season, we see that every year into China. So that's a piece of it but they're also some regulatory issues they've had some increased environmental inspections on the big 1 you mentioned.
Which is just a changing dynamic at the port.
Which is 1 of the largest log import facilities and what they're doing is essentially they're trying to push the saw saw mills deeper inland and so theres a little bit of a dynamic going on there where they're trying to move some of those some of those meals away from that port.
That happens from time to time in China. It will get resolved, we're still very optimistic that.
Youre still going to need a lot of logs are imported into that China market. So I think that's really more of a temporary issue for us in particular, our Chinese customer log demand is still very.
Strong pricing is strong and so were actually contemplating or expecting rather.
To have our export volume into China up quarter over quarter Q3 versus Q2, so a little bit of dynamic going on there just from the items I mentioned, but we're still very positive about that market over the back half of the year.
Moving to this.
Southern market, obviously, we have seen a bit of an uptick in pricing and I think there are 2 things going on there 1 of them is certainly the weather dynamic when you see multiple wet weather events in the south that keeps the logging out of the woods for a period of time, which limits the supplier.
Fly to the sawmills in the pulp mills and that's been going on over the course of the summer in the spring and Thats really particularly on the pulp log that's kept inventories pretty low for this time of year and so that's been a piece of it but I do think there. There's also an increment to that which is in certain geographies the new sawmill.
Capacity, that's come in and we've been talking about this for several years. If you put 7 billion board feet of new capacity in the south in those wood baskets, where that new capacity is coming you see attention effect and so.
I think it's going to be a hockey stick by any stretch of the imagination, it's just going to be slow steady improvement across differential.
Biographies.
And so we think that's going to slowly tension or number of wood baskets and again, it's going to be specific to each geography.
But that will continue to happen we've seen a number of mills announced even just even just recently and we expect that to continue here for the foreseeable future because.
The south is a great place to manufacture lumber.
Clearly thanks to the fast Kevin Good luck on the quarter guys. Thank you.
Our next question is from Mark Connelly with Stephens. Please proceed with your question.
It's been a long time since weyerhaeuser.
Weyerhaeuser has talked much about silviculture games.
Used to be a big topic of conversation, but can you talk about how advances in civil cultural reflecting the trends in your yield versus.
Other issues that we talked about more like the weather.
Yes, I think part of the reason, we don't we don't talk about it as much as.
It's just become part of our day to day operation and we have.
And R&D team that works on sealing improvements and different silviculture regimes to maximize the yield across our portfolio. So you are probably right. We don't talk about it as much maybe as we used to just because it's become part of our.
Our normal course, I would say that that is something I think over time will continue to be a competitive advantage for us I think we do silviculture and forestry very well we have a lot of.
Great folks a lot of ph D. As a lot of foresters that are working every day to make sure that were driving the best yield.
Across our land base and so I think it is an important part I will say, even when you think about climate change for example, the ability of our teams to really make sure that we're using the right ceilings. For example, as the climate gets warmer and really targeting the ceilings that we're planting.
Lanting across our landscape.
To ensure that we're maximizing the growth and survival.
In a changing landscape. So it is definitely something that is still very important in the quarter to what we do even if we're not talking about it on a day to day basis as much.
That's helpful.
Switching.
Switching gears.
The homebuilders are talking a lot about affordability labor challenges.
We've been talking about this for a couple of years and we haven't actually seen big shifts in the weighted homes being constructed.
Those changes are actually coming anytime soon.
Or is that going to require a change on your reported.
Big investment.
Well I think when we talk to folks throughout the supply chain. There is an awareness of the need to get more efficient in how we build homes and that's at the homebuilders. That's at the Big dealers are really across the board just for a variety of reasons.
<unk> to make housing more affordable number 1 and to overcome some of the labor challenges that we've seen for many years. So there's a desire to make improvements there but.
But I think youre right. The improvements that we've seen to date have really been around the margins I think it's tough to really fundamentally changed.
<unk>, how we build houses and that's going to be a slow <unk>.
Process and I'm not sure if we're having this conversation 345 years from now Youre going to see a real material change in the way that we build homes, you'll you'll probably see continued improvements around the margin.
But it's.
It.
It's an established supply chain in terms of how we build this build these homes and so we just haven't seen big improvements to date and I'm not sure I am overly optimistic that that's going to change in the near term we talk to our customers. We're very close with them and we're I think we're a very nimble supplier so to the extent that we need to adjust how we do business.
<unk> customer needs will be well positioned to do that.
Thanks, Kevin that's helpful.
Our next question is from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone.
Good morning, good morning.
To meet on my first question is around your thoughts on capacity, especially as we think about the the emerging kind of stories around the forest fires out west and some of your peers, taking capacity offline in Canada can you talk a little bit to your outlook for your business on the potential implications from these natural events.
Events as they do potentially come together.
Yes, so I guess a comment here on the near term and then maybe some observation longer term in the near term.
Obviously, we're seeing a fire situation in the west and we can we can speak to that here in a moment no no issues on.
On our land, but certainly it's a.
It's been a rough start to the fire season overall, British Columbia, even worse I would say at this point.
Nothing in the near term that we're expecting from our production specifically around natural.
Disasters or fires.
We said every year, we have to stay nimble and adjust as we see these things play out and so that's.
That's something on a day to day basis that can change, but nothing to announce here at this point I will say over time, certainly the environment that we're seeing with forest fires.
In the west and some of the natural Ah Hurricanes.
Hurricanes other events in the south.
It's something that you have to bake into your long term planning and so.
We see British Colombia for example, having another serious fire season will obviously over time those those trees are not available.
For for wood products manufacturing, so as we think about our long term planning, we do take that into consideration.
As we decide where are we going to put capital to work.
Okay, that's very helpful.
Second question is you mentioned in your comments that you announced a 15 to 20.
5% increase in your engineered wood.
Products in May.
Think about the dynamics around alternative products like framing lumber those prices coming down can you talk to your ability to realize and sustain that pricing going forward.
Well, the AWP market as a <unk>.
<unk> has been very tension.
We primarily send that product into new residential construction and so unlike lumber and OSB that have a little heavier component of repair and remodel.
AWP markets, primarily primarily residential construction, which really hasn't seen.
Any sort of noticeable slowdown in nor are we expecting that for the back half of the year. So the dynamic there is a little different than lumber and OSB.
Part of the issue there too is with the run up in OSB web stock prices.
The resin challenges veneer pricing some of the input costs.
Cost for making AWP has gone up quite a bit as well so there's that balance in terms of.
On the pricing for AWP to overcome some of those raw material costs.
Absence, something happening on the residential construction market I think we feel pretty good about capturing that pricing increase that we announced in may.
Okay, Alright, that's very helpful. Thank you good luck.
Thank you.
Our next question is from Mark Wilde with Bank of Montreal. Please proceed with your question.
Good morning, Devin answered both.
Good morning.
I'd like to kind of come back on that last.
Question, because we have seen virtually all of the big Western Canadian lumber producers take some production cuts over the last couple of weeks, they're pointing to players were pointing to inventories the floating debt.
Prices that are at or below cash, but I'm also aware that there are some producers on the Pacific northwest from U S.
<unk> reduced scheduling in July can you talk about your activity levels in July.
Uh huh.
In terms of both production in Canada on production on the West coast to the U S and whether you ratchet it back at all.
Yeah, Mark Thanks for the question.
And we have not to date had any material reductions in our production in either the west or British Columbia, I would say and this is a general comment across the portfolio of manufacturing, we're probably dialing back in the sense that we're you know we're not trying to run those extra shifts and overtime hours that we were.
Just going earlier in the spring when you had the pricing at all time peak. So it's really dialed back to a more normal operating posture, but thats something that we look at closely.
All the time the fire situation is something I do think we're keeping a close eye on as I mentioned, no real impact to our timberlands.
At this point and we've still got reasonable log decks across.
The northwest in Washington, and Oregon, but that's something that obviously, we'll watch closely British Columbia, we only have the 1 mill in British Columbia, I would say the fire situation up there is probably even a little worse than it is in Washington and Oregon.
We're on.
A lot of the logging activity has ceased at this point in BC.
On a number of operating areas just because of the fire situation.
If that doesn't change at some point here in the near term I think log availability at RBC mill is going to be challenged at which point, we would obviously have to take some downtime.
At this point we haven't.
And just to kind of follow up on the <unk> situation.
Situations BC log costs.
From a formula standpoint are due to go up again.
In October.
Can you talk about what impact that might have on your operations. There, it's a pretty significant income.
But as I understand it.
Yes significant increase you know the 1 that was announced on July 1 significant increase and so log costs in B C have certainly gone up I think that just adds additional challenge to.
The issue from a cost floor standpoint across the industry that we already had in BC.
For us Weyerhaeuser specific.
We've been focused on having a low cost mill I think we're.
Probably top quartile, if not top decile from a cost structure standpoint at our Princeton mill, but that being said the log costs and other costs associated with operating <unk> have gone up and I think thats.
That has raised the cost floor. So.
We at this price I think we can still operate that profitably, but it certainly is.
It's getting closer even for our top cost mill, our low cost mill rather.
Okay. That's really helpful for a follow on I just wanted to go back.
Couple of months ago.
And I think about that variable supplemental that you talked.
<unk> talked about paying in the first quarter of 'twenty, 2 there seem to be kind of a little bit of an opening that you might want to pay some of that in our in 2020.1.
Is it safe to assume with what we've seen go on on the markets. The last couple.
Months, Youre, just going to wait until the first quarter of up 22 now.
Well youre right in that the the new dividend framework anticipates, the supplemental dividends typically going to paid be paid out in Q1 for the prior fiscal year end.
You know Mark the primary reason there is just to ensure that we're matching that.
We will component to the cash flow that we're generating for the year, but we've said previously we haven't definitively ruled out the possibility of some sort of interim supplemental dividend later in the year and really you think about where we are we're in a little bit of a unique situation in that through the end of the second quarter, we've already generated nearly.
That Varian point $9 billion of adjusted Avi F. A D. We have a very significant cash balance and so you know that.
It is something the board's continuing to assess in terms of both those factors on how we see the rest of the year playing out so I'd still say at this point, we haven't ruled that out for at some point later in the year, but I would say.
Nearly 1 than if we were to do that which again the board is going to consider over the back half of the year, we'd still expect the vast majority of that supplemental dividend from.
For the 2021 cash flow would be paid out in Q1 of 2022.
Okay. That's helpful I'll turn it over.
Thanks.
Our next question is from Paul Quinn with RBC capital markets. Please proceed with your question.
Yes, thanks, very much from where you guys.
Thanks.
Hey, I noticed you.
Increase your Capex budget, just wondering if you could give us some more details on the major projects you've got there.
Say I guess.
Issue in Q2 in terms of production is that is that projects finish now.
To get the volume is back in Q3.
Yeah. So we did announce an increase in our 2021 capex by $40 million as we said.
About $20 million of that is wood products about $10 million or so is on the timberland side and then we had some it projects largely that were focused in our mills.
So that's the breakdown when you think about that 40 million a couple of things to keep in mind for context. If you go back to 2020, we did reduce our capex budget in 2020 so.
Elk number of projects in the queue really across the wood products business that.
We think will generate strong returns continue to position the business for to be low cost highly efficient very reliable. So we have a variety of projects in the queue. They they run the gamut from CDK is to upgrade.
<unk> order stacker.
The Elkann project, which we completed was the forming line. So just a variety of projects across the mill largely focused on debottlenecking, reducing costs and improving reliability. So.
There's not 1 thing necessarily that I would highlight in those projects really as I said, it's just a per.
Broad.
We had in projects and it's all based on the individual mill mill Roadmaps that we have to get each of our manufacturing assets up to top quartile performance.
Okay, and then if I, if I turn over to lumber capacity in North America, having a number of projects have been announced they've.
Range of immuno totaling $1.7 billion in 2021 coming up on 1 another $2.2 billion in 'twenty 2.
That level of capacity addition, worry you in terms of future lumber pricing or supply into the marketplace.
It really doesn't for a couple of reasons. So when we think about the north.
Got it can market as a whole which is the way we typically think about it we do think youre going to continue to see capacity coming into the U S. South we know that's a great place to manufacture lumber.
I don't think youre going to see much in the way of new capacity coming into the Pacific Northwest, primarily just it's such a tension wood basket.
<unk> I think the log costs associated with that probably will prevent folks from putting too much capacity there.
And I do think over time, we're going to lose capacity in British Columbia because of the fiber availability issue that you are well aware of.
I think on a net net basis, we will see more capacity overall in North America.
<unk>.
But look we need it right I mean, if you think about the amount of housing that we're anticipating over the next 5 to 10 years, we won't be able to cover that without some continued capacity additions across North America and so.
I think we will we will continue to see that I think the demand.
Signal, we'll we'll keep that more or less intention. So it's not something that overly worries me at this point.
Okay, and then just lastly, I mean, you guys have put up back to back record quarters Youre stock is flat through.
Through the year here to date.
Somebody like a range.
Which is up 25 per cent like what are investors missing here any urgency at weyerhaeuser to be able to do something to to help shareholders here.
Well you know as we always say and I'll emphasize it here again, we are extremely focused on driving long term value for our shareholders and we do.
That in a in a number of ways, we're actively managing our portfolio to constantly improve the value of our underlying assets you've seen a number of timber transactions to that affect our capex programs in wood products.
We have an unrelenting focus on operational excellence and driving industry, leading performance you've seen that in terms of our opex results.
<unk> per years as well as our competitive.
Positioning from an EBITDA margin and I think importantly over the last year. We've made a series of capital allocation decisions that have really positioned us very well for the future. We've paid down over $1 billion of debt. Our balance sheet is strong we have a new base plus variable supplemental.
Dividend structure that is really going to enable us to return significant amounts to cash of cash to shareholders over time.
As you've seen with the fed that we've generated through the first half of the year, we're positioned to deliver a very meaningful supplemental dividend payment in the first quarter of 2020.
<unk> overview and Thats something I think the market is probably just starting to digest the magnitude of what that variable dividend is going to be.
So I think as our investor base and the market gets more familiar with the new dividend structure starts to see the benefit as we pay out that variable dividend, we should start seeing the share price better reflect the.
<unk> thousand 10 value. The other thing I'd say is we're optimistic that the other actions that we're taking to position the company for the future.
Including our increased focus on natural climate solutions and some of the other business development opportunities are really going to be.
A catalyst to drive investor interest in advance.
Underlines our market valuation over time.
I hope you're right best of luck.
Thank you.
Our next question is from Mark Weintraub with Seaport Global. Please proceed with your question.
Okay. Thank you maybe just first.
In him.
On the last question on the current dividend yield a little over 2%, because obviously you would cut the ordinary dividend and increase it but not nearly back to the prior level. So.
Here you large supplemental dividend can you kind of really again sort of what would be the thought process on the.
The core dividend how.
How much upside might there be to the core dividend and do you think that debt investors haven't yet really embraced the new framework that you're using and youre getting hurt by the fact that your core dividend level is low.
Well again, Mark I think it's a.
Typically new dividend structure and so the market is digesting it I would say with respect to the base dividend a couple of things as we've said, we certainly do intend to grow the base dividend over time, that's a core part of our overall dividend.
<unk> philosophy and framework, we want that.
Relative to dividend to be sustainable and supportable from the cash that we generate across our businesses over business cycles. So the growth in the base dividends largely going to be driven from the growth in our more stable timberlands in anr businesses and that can come from a variety of different angles, the organic growth in the business.
Net base, taking costs out disciplined acquisitions. The key is is incremental cash flow that sustainable across the bottom of market cycles, but certainly we intend to grow that over time.
And I would note just as you think about the overall dividend framework, obviously, when the pricing environment strong.
Strong or even reasonable.
We're going to generate significant cash flow that we will get distributed out to the.
The shareholders over and above that base dividend. So I think the short answer to your question is the market is still digesting. How this is going to work.
I think as they start to see the variable dividend come into play as they start to see the base.
Business over time, there will be a <unk>.
Creased, an appreciation for how this is going to work overtime. Okay. Thank you and 2.
2 quick follow ups on debt.
Demand for lumber in particular, so you had mentioned there have been declining in the do it yourself, but that the big renovation business you thought could.
<unk> rolled up order of magnitude how much of your lumber going into the do it yourself typically versus say the big big renovation type projects.
Yeah. So for US we have a big business into the home improvement warehouse segment, and so that can be up to.
In the south up to 30% in the Pacific Northwest, maybe slightly less than that so it's a decent part of our overall lumber business. When you think about the market as a whole.
The do it yourself segment is somewhere in the neighborhood of 20%, we think of overall repair and remodel demand. So.
We do sell a lot into the big box stores of course, but on.
You look at that across the overall market the do it yourself is.
Is a much smaller portion of the overall repair and remodel spend.
Okay. So just to make sure I understood that do it yourself is is like half of the repair remodel.
Or it's 20% of wood.
Understood.
Yes, so when you think about small.
Okay, Yeah, when you think about repair and remodel spend in total the do it yourself segment, we think is about 20%.
These numbers are hard to come up with in terms of a concrete.
Look, but I think that that estimate is borne out from some of the stuff we've seen from the Harvard Joint Center as well on some of the other <unk>.
<unk> that we look at and so we triangulate that and we think it's about 20%.
Okay and.
So you mentioned kind of housing builders are still quite optimistic.
And certainly they've got a lot of backlog and a lot of homes to build on.
That said that they're confronting supply chain issues et cetera.
Are those supply chain issues, creating any impact you think on the demand that you're seeing maybe stretching things out.
As opposed to killing it but are you seeing negative impact because of the supply chain issues affecting the builders.
Yeah, I think that's been the primary issue to the extent that <unk> seen slowdown in building I think the largest reason behind that has been the building products supply chain issues.
Use and so when you when you go and talk to the builders will we hear is.
They're having troubles getting everything from appliances to paint to windows really just it runs the gamut and I think on some level they've slowed the sales activity a little bit to try to catch up with some of that but.
But again as we talk to those customers. They are optimistic for the for the back half of the year. The demand is there notwithstanding some of the affordability challenges I think from the buyer community, but but the demand for housing still is incredibly strong.
And we think based on on those conversations.
<unk> and other discussions we've had with customers in the supply chain that.
We're still going to build a lot of houses in the U S. This year.
Right and just on so there is no doubt they've slowed the sales pace.
Yes. The question was more are you seeing that there is a slow in their production pace too right now or not so much.
I definitely think we've seen a little bit of that on the conversations that we've had you've heard.
Anecdotes like we have to tell buyers that we can't sell them a house right now will put them on a waitlist they'll have to come back on a couple of months. So I think there has been a little bit of that.
On the magnitude of how much that's kind of hard to pin down exactly.
But directionally, we think that's right.
Okay, and then just real quick.
In the past, you've given us sometimes sort of bracketing ex pricing what the impact of various changes in the wood products might be.
Versus the prior quarter is that something you can share with us.
Order of magnitude.
On the.
Yeah.
Efficiencies and things like that.
Yeah, So I think ex price wood products EBITDA would be up quarter over quarter I'm not going to give you a magnitude because I think just in terms of what's going on with the home improvement warehouse sales volumes, there's a little.
Bit of question there as to whether that's up some are up materially, but certainly we expect sales volume to be up and we expect cost to be down so ex.
Ex price EBITDA would be up in the quarter for wood products.
Okay.
Thanks very much.
Thank you.
Our last question comes from Kurt Yinger with D. A Davidson. Please proceed with your question.
Great. Thanks, and good morning, everyone.
Good morning.
On on the wood products side I'm, sorry on the Timberland side, you know the fundamentals for lumber looked pretty solid export demand sounds pretty healthy.
You know you'll lap the salvage activity and you sound pretty optimistic on potential gains in southern pricing do you think we're finally at an inflection point, where that business can start to see a sustained improvement in profitability and what would you consider kind of the big factors that could get in the way of that.
Yeah. So you know I would say and I'm going to answer this by west and by South because they're slightly different dynamics going on in each market.
In the West we're seeing good pricing this year, it's a very tension wood basket and so as long as lumber demand in lumber pricing is reasonable.
That's going to be a good strong business, we saw a little bit obviously of a dip in harvest levels. As a result of the Oregon fires last year, but we'll work through that salvage this year and you'll start to see the harvest levels kind of ticking up slowly here over time. So we feel really good about that business I think it'll continue to be strong here for the foreseeable future.
<unk> the south obviously, we've had some disconnects between demand and supply just in terms of the amount of inventory out in the woods coming out of the great recession, we've talked about that.
Quite a bit.
And I do think that there are markets within the south geographies within the south debt are starting to tension up a little bit.
Sure.
Largely a function of new capacity coming in that's continuing to happen. We've got for example, several mills that have been announced the viewer mill, the Idaho Forest products mill in Mississippi.
The Taco mill that was just announced on Louisiana and those are in good wood baskets for us and as we continue to see that play out.
Out over time, I think that will just put pressure on.
On pricing to slowly recover I don't think that's going to happen overnight. It's a process that's going to play out over a number of years, but directionally I'm feeling good about where we're going there.
From an overall margin standpoint, putting aside pricing we are very focused on operational.
<unk> excellence are operating performance I think is.
He is very good in that business, but we're trying to improve every day, that's part of our Opex program, we put new targets out every year to increase the efficiency and lower costs and so I feel good about the margin improvement opportunity there as well. So we've got good businesses, we've got good.
Overall story around housing and repair and remodel demand to drive wood.
Wood demand through the system I think is positive so we feel good about both of those businesses.
Got it okay.
And maybe just looking at the second half for timberlands.
It looks like you know the harvest should.
Should be up pretty meaningfully from the first half maybe 15% or so.
Yeah, Q3 profitability down versus Q2, it sounds like Theres some seasonal costs. In there is is there any way as we look ahead to the fourth quarter that we could see that incremental volume have kind of a greater overall impact.
People on profitability.
Yes, so a couple of things there Q3, that's always a lower earnings quarter for us because we do more forestry and road work in that quarter than in the West we typically move up the hill the higher cost elevation units are higher elevation units.
That's a typical seasonal pattern.
In Q2, we did we did ramp up harvests are certainly relative to Q1, there has been a lot of rainy weather in the in the south and so we werent able to catch up as much of the Q1.
The issues that we saw with the ice storms as we had anticipated.
So I expect we'll get most of that up over the back half of the year absent weather events that are hard to control. So youll see the harvest activity pick up.
Cost activity is cost typically in Q4 are a little better because it's the reverse the dynamics I just mentioned so.
I can dimension it that way, but.
But probably not just in terms of giving you a specific number.
Okay No that's.
That's great. Thank you alright.
Alright, Thats all I had appreciate the color.
Alright, well I think that was our final question.
I think that was our final question. So thanks to.
Everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser have a great day.
Okay.
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