Q4 2021 Weyerhaeuser Co Earnings Call
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Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's fourth quarter 2021 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.
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Your line is live.
Thank you Rob good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's fourth quarter 2021 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 the conference call.
We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website.
On the call. This morning are Devin Stockfish, Chief Executive Officer, and Nancy <unk>, Chief Financial Officer, I will now turn the call over to Devin stockfish. Thanks.
Thanks, Andy.
Everyone and thank you for joining us today.
Weyerhaeuser reported full year GAAP earnings of $2 $6 billion or $3.47 per diluted share on net sales of $10 2 billion. Excluding special items, our full year 2021 earnings totaled $2 $5 billion or $3 37.
<unk> per diluted share.
Adjusted EBITDA was a record $4 1 billion more than 86% increase over full year 2020.
For the fourth quarter, we reported GAAP earnings of $416 million or <unk> 55 per diluted share on net sales of $2 $2 billion.
Excluding a total after tax benefit of $49 million for special items, we earned $367 million or <unk> 49 per diluted share for the quarter.
Adjusted EBITDA was $674 million.
I'll start this morning by thanking our employees for an exceptional year through their collective efforts Weyerhaeuser delivered its strongest financial performance on record.
Each of our businesses executed remarkably well.
<unk> maintained our safety focus and continue to serve our customers all while navigating persistent operational and market challenges.
I'm extremely proud of our accomplishments in 2021, which further position the company to drive superior long term value for our shareholders.
Notable 2021 highlights include delivering record adjusted EBITDA from our wood products business of $3 4 billion, a 120% increase over 2020 capture.
Capturing more than $70 million of company wide operational excellence improvements optimizing our timberland holdings through strategic transactions in Alabama and Washington.
Launching our natural climate solutions business with the growth target to achieve $100 million of annual EBITDA by year end 2025.
Publishing the Companys inaugural peer leading carbon record.
Establishing a leadership position amongst our north American peers, and setting a science based greenhouse gas reduction target.
Strengthening our balance sheet by paying down an additional $375 million of debt and increasing our share repurchase authorization to $1 billion.
In addition, as highlighted on page 19 of our earnings slide we generated more than $2 $6 billion of adjusted <unk> in 2021 further demonstrating the strong cash generation capability of our unmatched portfolio of assets and industry, leading operating performance.
Based on our 2021 results, we announced this morning that our board of Directors Directors has declared a supplemental cash dividend of $1 45 per share payable.
Payable on February 28 to holders of record on February 18th.
This supplemental dividend represents the final installment of our cash return to shareholders based on 2021 results.
When combined with our 2021 quarterly base dividends of <unk> 68 per share and the onetime interim supplemental dividend of <unk> 50 per share that was paid in October .
We're returning a total of $2 63 per share of dividends to shareholders based on 2021 results.
Which equates to a 75% of 2021 adjusted F E D.
Including the $100 million of shares repurchased in 2021, Weyerhaeuser is returning more than $2 billion of total cash to shareholders based on 2021 results or 79% of 2021 adjusted.
Which is at the upper end of our commitment of returning 75% to 80% of F. D on an annual basis.
Moving forward in 2022, we remain committed to returning a significant amount of cash to shareholders. This will continue to be supported by our sustainable quarterly base dividend, which as previously announced we intend to grow by 5% annually through 2025.
As outlined in our cash return framework on page 18, we will supplement our base dividend with an additional return of cash as appropriate to achieve our targeted annual payout of 75% to 80%.
As demonstrated in 2021, we have the flexibility in our framework to return this additional cash in the form of a supplemental cash dividend or a combination of a supplemental dividend and opportunistic share repurchase.
We continue to believe this flexible and sustainable cash return framework will enhance our ability to drive long term shareholder value by returning meaningful and appropriate amounts of cash back to our shareholders across a variety of market conditions.
Turning now to our fourth quarter business results I'll begin the discussion with timberlands on pages seven through 10 of our earnings slides.
Timberlands contributed $110 million to fourth quarter earnings adjusted EBITDA increased by $11 million compared to the third quarter.
For the full year timberlands, adjusted EBITDA increased by 14% compared to 2020.
These strong results were delivered despite persistent weather transportation and pandemic related challenges in 2021, and I would like to specifically recognize our western timberlands team for their exceptional work managing through the salvage operations, resulting from the 2020, Oregon fires.
As of year end, we have completed substantially all of the planned salvage harvest.
In the west adjusted EBITDA increased by $3 million compared to the third quarter.
Western domestic log markets showed signs of improvement at the outset of the fourth quarter. Following a brief softening in demand in September .
As of the as the fourth quarter progressed log demand further improved as mill sought to capitalize on rapidly increasing lumber prices.
While log supply in the western system was sufficient as the quarter began it became constrained later in the quarter, particularly in Oregon, as a result of supply chain disruptions and adverse weather conditions.
Despite this dynamic our fee harvest volumes increased slightly compared to the third quarter.
With lower log inventories and limited regional log supply as the quarter progressed.
We increased the volume of RFP logs to our internal mills, resulting in modestly lower third party domestic sales volumes compared to the third quarter.
This is a great example of how we leverage our integrated business model to effectively navigate and capitalize on temporary market disruptions.
Our average sales realizations in the west were comparable to the third quarter, but increased each month and ended the year at their highest levels of 2021.
Per unit log and haul costs decreased in the fourth quarter as did forestry and road costs.
Turning to our export markets in Japan demand for our logs remained strong in the fourth quarter as persistent global supply chain disruptions as shortage of shipping containers and strengthening U S domestic lumber markets reduce the availability of imported lumber into Japan.
This dynamic continued to drive solid demand for locally produced Japanese lumber and for our imported logs to support that domestic production.
As a result, our Japanese log realizations in the fourth quarter increased slightly compared to the third quarter.
Sales volumes were modestly lower due to the timing of vessels.
And China end market demand for our western logs remained favorable in the quarter, despite lower than expected overall Chinese consumption and elevated log inventories at the ports.
Imports of lumber and logs into China continued to be impacted by global shipping container availability and the ban on Australian logs.
As a result, our sales volumes to China increased significantly compared to the third quarter.
Sales realizations for our China export logs decreased slightly and ocean freight rates improved during the quarter.
Moving to the south.
Southern Timberlands, adjusted EBITDA increased by $4 million compared to the third quarter.
Southern saw log and fiber markets continued to strengthen in the fourth quarter, despite ample log supply, resulting from drier weather conditions.
Mill inventories returned to normal levels in most geographies during the quarter, but log demand remained strong across the south as mill sought to capitalize on rising lumber and panel pricing and focused on bolstering log inventories heading into the first quarter.
As a result of these dynamics, our sales realizations increased slightly compared to the third quarter and fee harvest volumes were modestly higher.
Per unit log and haul costs increased slightly in the quarter, primarily for transportation costs.
Turning now to southern export, which remains a small component of our overall operations.
During the fourth quarter Chinese regulators implemented new rules for imported pine logs to address potential phytosanitary concerns.
These regulations imposed additional costs and administrative requirements.
As a result, we paused, our southern pine log exports to China.
And consequently, our export log volumes to China decreased significantly compared to the third quarter.
In response, we redirect redirected logs to domestic mills and significantly increased our export log volumes to India in the fourth quarter.
We are optimistic that this headwind for pine exports to China will be transitory and still maintain a constructive longer term outlook for our southern export business.
In the north adjusted EBITDA increased by $2 million compared to the third quarter fee.
Harvest volumes were significantly higher resulting from favorable weather conditions and robust log demand as mills built inventory.
Realizations increased slightly primarily for hardwood logs.
Turning to real estate energy and natural resources on pages 11 and 12.
Real estate and <unk> contributed $36 million to fourth quarter earnings and $49 million to adjusted EBITDA.
Fourth quarter, EBITDA was $11 million lower than the third quarter due to the timing of transactions similar.
Similar to 2020, our real estate activity in 2021 was heavily weighted toward the first half of the year.
For the full year the segment generated $296 million of adjusted EBITDA slightly higher than our revised full year guidance and 23% higher than 2020 does.
Despite a year over year reduction in acres sold full year earnings increased by 144% compared to 2020 due to the mix of properties sold.
And average sales prices increased by more than $2000 per acre and 120% increase.
These results underscore the strength of the HBU market in 2021, the quality of our properties and our team's ability to capitalize on the strong markets to deliver significant premiums to timber values.
Now I'll make a few comments on our natural climate solutions business, which we launched in 2021.
As shown on page 22 full year adjusted EBITDA from this business increased by 73% compared to 2020, driven primarily by growth from existing businesses in our portfolio, including mitigation and conservation as well as renewable energy.
Additionally, we continue to make progress on our forest carbon pilot project in Maine, and we continue to look to seek approval in 2022.
We're also advancing discussions with high quality developers of solar wind and carbon capture and storage projects across our ownership.
We continue to see multi year growth potential from these businesses and maintain our target of reaching $100 million of annual EBITDA by the end of 2025.
Moving to wood products pages 13 through 15.
Wood products contributed $466 million to fourth quarter earnings before special items and $517 million to adjusted EBITDA.
Our AWP business established a new quarterly adjusted EBITDA record in the quarter, surpassing the prior record established just last quarter by 50%.
For the full year, our lumber OSB and AWP businesses established new annual EBITDA Records in our distribution business generated the highest annual adjusted EBITDA in over 15 years.
This is all notwithstanding ongoing challenges, resulting from supply chain transportation, whether and pandemic related disruptions.
It is truly exceptional performance and I'm extremely proud of the resiliency flexibility and determination exhibited by our teams as they navigated multiple headwinds in 2021.
In the fourth quarter demand remained unseasonably strong across our wood products businesses, driven by continued strength in new residential homebuilding and repair and remodel activity as well as favorable weather conditions for construction for the majority of the quarter.
Starting with the lumber and OSB markets.
<unk> lumber prices entered the quarter on an upward trajectory driven by strong homebuilding and repair and remodel demand.
In contrast, OSB markets remained fairly balanced for the first two months of the quarter, resulting in relatively flat composite pricing.
Both lumber and OSB pricing increased at a rapid pace starting in December as supply was disrupted by a myriad of factors, including major flooding in British Columbia that disrupted transportation and supply chain networks across Western Canada labor challenges exacerbated by the omicron variant which impacted industry.
<unk> mill operations log supply and transportation character carriers and.
And significant weather events that further impacted transportation and log supply in the northwest in Canada in December .
Channel inventories of both lumber and OSB ended the year in a lean position with continued strong demand.
Adjusted EBITDA for our lumber business increased by $77 million compared to the third quarter.
Our average sales realizations increased by 15% in the fourth quarter, while the framing lumber composite pricing increased by 40%.
This relative difference was largely a result of extended order files that lag surging lumber prices and shipping delays due to transportation disruptions or.
Our sales volumes decreased significantly in the fourth quarter, resulting from weather related transportation challenges in Canada, and lower inventory dry down compared to the third quarter.
Production volumes were modestly lower and unit manufacturing costs were moderately higher resulting from weather related events in the northwest in Canada.
Including one week of downtime at our Princeton Mill following the flooding event in British Columbia.
Adjusted EBITDA for our OSB business decreased by $168 million compared to the third quarter.
Despite a rapid increase in pricing in December our average sales realizations decreased by 29% in the fourth quarter, while the OSB composite pricing decreased by 20%.
Similar to lumber. This relative difference was largely a result of extended order files that lag surging OSB prices and shipping delays due to transportation disruptions.
Our sales volumes decreased slightly compared to the third quarter, resulting from weather related transportation challenges in Canada.
Production volumes and unit manufacturing costs improved in the quarter due to less downtime for planned maintenance fiber costs were moderately higher in the quarter.
Engineered wood products, adjusted EBITDA increased by $38 million compared to the third quarter, a 50% improvement.
Raw material costs were significantly lower primarily for OSB web stock <unk>.
Sales realizations improved for most of the most products and we continued to benefit from previously.
This increases for solid section and I joist.
Sales and production volumes were lower for most products as a result of planned annual maintenance during the quarter and the impacts of Covid related staffing shortages.
In distribution adjusted EBITDA increased by $18 million compared to the third quarter and 82% improvement as the business captured improve margins, primarily for lumber and OSB, partially offset by seasonally lower sales volumes.
I'd like to now turn to operational excellence.
In 2021, our teams captured more than $70 million of margin improvements meeting, our $50 to $75 million target, while also making meaningful progress against our other opex priorities, including with respect to future value creation cost avoidance, driving efficiencies and cross business synergies throughout the call.
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This was a remarkable accomplishment when considering the numerous challenges facing our business in 2021.
Once again, our people demonstrated unwavering focus and exceptional teamwork to deliver innovative and creative solutions to overcome obstacles and drive opex across the company.
In addition, I am pleased with how well our employees continue to drive cross business Opex that improved margins in both timberlands and wood products.
These efforts optimized internal log deliveries to weyerhaeuser mills to maximize value and avoid out of log downtime and our teams work together across our businesses to ensure that we maximize the recovery value from our salvage operations in Oregon.
As we look forward to the future, we're targeting another $175 million to $250 million of Opex improvements across our businesses between 2022, and 2025 and I look forward to sharing more about our key initiatives and results in the years ahead.
With that I will turn the call over to Nancy to discuss some financial items and our first quarter in 2022 outlook.
Thank you Devin and good morning, everyone.
Covering key financial items, and fourth quarter financial performance before moving into our first quarter and full year 2022 outlook.
I'll begin with key financial items, which are summarized on page 17.
We generated $494 million of cash from operations in the fourth quarter, bringing our total for the year to approximately $3 2 billion our.
Our highest full year operating cash flow on record as Devin mentioned were returning over $2 billion to shareholders based on 2021 results, which includes $100 million of share repurchases.
With quarter share repurchase activity totaled $74 million at an average price of $37 60.
This leaves us with approximately $926 million and the remaining capacity as of year end 2021 under the $1 billion program, we announced in the third quarter.
We will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically. When we believe it will create shareholder value.
Turning to the balance sheet, we ended the year with approximately $1 $9 billion of cash and cash equivalents of which nearly $1 $1 billion is earmarked for the supplemental dividend we announced this morning that will be paid in February .
We ended the year with total gross debt of $5 1 billion at the beginning of the fourth quarter, we repaid our $150 million, 9% note maturity and we have no additional maturities until 2023.
Fourth quarter results for our unallocated items are summarized on page 16.
Fourth quarter unallocated adjusted EBITDA decreased by $24 million compared to the third quarter. This.
This decline was primarily attributable to higher than expected healthcare expenses, partially due to pandemic related deferrals of non essential medical treatment from 2020 end of 2021.
Key outlook items for the first quarter and full year 2022 are presented now on pages 20 and 21.
In our timberlands business, we expect first quarter earnings and adjusted EBITDA will be significantly higher than the fourth quarter.
Beginning with our western Timberlands operations domestic log demand continues to be favorable as mills capitalize on strong lumber pricing we.
We anticipate this dynamic continuing for most of the first quarter.
As a result, our average domestic sales realizations are expected to be significantly higher than the fourth quarter.
As Devin discussed.
Have substantially completed our salvage our harvest operations in Oregon. In addition, we have made the seasonal transition to lower elevation in lower cost harvest operations. As a result, we expect our first quarter fee harvest volumes will be significantly higher than the fourth quarter with lower per unit log and haul costs and seasonally low.
Our forestry and road costs.
Moving to the export markets in Japan log demand remains favorable and we anticipate our first quarter sales realizations will be moderately higher than the fourth quarter with comparable sales volumes.
In China, despite elevated log inventories at the ports.
<unk> is expected to remain favorable in the first quarter as imports of lumber and logs from other markets continue to be constrained.
We expect our first quarter sales volumes to be comparable to the fourth quarter, partially offset by slightly lower sales realizations.
In the south.
<unk> inventories near target levels log demand continues to be strong as mills positioned to benefit from strong lumber and panel pricing and build inventory to avoid potential disruption from wet weather conditions that are typical in the first quarter.
We anticipate comparable sandal sales realizations and seasonally lower forestry and road costs.
This is expected to be offset by slightly higher per unit log and haul costs.
Slightly lower fee harvest volumes due to seasonal weather patterns.
In the north sales realizations are expected to be slightly lower in the first quarter due to mix with slightly lower fee harvest volumes, resulting from a seasonal reduction in harvest activity.
Turning to our full year harvest plan.
For the full year 2022, we expect total company fee harvest volume to increase to approximately $34 5 million tonnes.
In the West we anticipate our harvest volumes will be slightly higher than 2021 as salvage harvest operations in Oregon are substantially complete.
We expect our southern harvest volumes to increase moderately as we resume a more normalized level of activity.
<unk> reduced harvest levels in 2021, resulting from persistent adverse weather conditions.
Similar to 2021, we expect our northern harvest volumes will be moderately lower year over year due to softening fiber markets in new England.
Turning to our real estate energy and natural resources segment.
Demand for our real estate properties remains strong and we continue to expect a consistent flow of transactions with significant premium to timber value.
Expect full year 2022, adjusted EBITDA of approximately $300 million for this segment.
Similar to 2021, we anticipate our real estate activity will be heavily weighted towards the first half of the year.
Basis as a percentage of real estate sales is expected to be approximately 35% to 45% for the year.
First quarter earnings and adjusted EBITDA are expected to be slightly higher than the first quarter of 2021 due to an increase in real estate acres sold.
For our wood products segment demand remains favorable supported by strong new residential homebuilding and repair and remodel activity.
As Devin mentioned channel inventory started the year and our lean position and supply continues to be constrained by persistent and transportation supply chain and COVID-19 related labor challenges.
This dynamic is expected to continue for most of the first quarter and has driven lumber and OSB benchmark pricing unseasonably high levels quarter to date.
Excluding the effect of changes in average sales realizations for lumber and oriented Strand Board.
We expect first quarter earnings and adjusted EBITDA will be comparable to the fourth quarter.
For lumber, we expect improved production volumes and unit manufacturing costs in the first quarter was slightly lower sales volumes, resulting from ongoing transportation disruption.
Log costs are expected to be moderately higher than the fourth quarter, primarily for western logs.
For oriented Strand Board, we anticipate improved production volumes in the first quarter, driven by less planned maintenance and modestly higher sales volume.
We expect this will be partially offset by moderately higher fiber costs.
As shown on page 23, our current in quarter to date sales realizations for lumber and oriented Strand board are both significantly higher than the fourth quarter average.
For engineered wood products, we expect comparable sales realizations to the fourth quarter and sales and production volumes will be higher resulting from less planned maintenance in the first quarter.
For our distribution business, we are expecting lower adjusted EBITDA in the first quarter due to moderately lower sales volume.
So I'll wrap up with some additional full year outlook items highlighted on page 21.
Our full year 2021 interest expense was $313 million due to the additional debt reduction during 2021, we anticipate interest expense will be $305 million for the full year 2022.
Turning to taxes, our full year 2021 effective tax rate was 21, 5% excluding special items driven by the higher percentage of total income coming from our taxable REIT subsidiary.
First quarter and full year 'twenty, two we expect our effective tax rate will be between 19% and 23% before special items.
Based on the forecasted mix of earnings between our REIT and taxable REIT subsidiary.
For cash taxes, we paid a net $609 million for full year 2021, which included a $95 million tax refund received in the fourth quarter.
Is this associated with our 2018 voluntary pension contribution.
Excluding this tax refund our cash taxes were in line with our tax expense.
Our 2021 cash taxes were slightly higher than our prior guidance due to the timing of Canadian tax payments.
We expect our 2022 cash taxes will be comparable to our overall tax expense.
For pension and post employment plans.
The year to the year end 2021 funded status improved by nearly $500 million as a result of favorable asset returns and higher discount rates compared to year end 2020.
Discount rates increased by approximately 40 basis points for the U S plans and approximately 60 basis points for the Canadian plans.
Our noncash nonoperating pension and post employment expense was $19 million in 2021.
We expect to record approximately $60 million of expense in 2022.
Cash paid for pension and post employment plans in 2021 was $59 million in.
In 2022, we do not anticipate any cash contributions to our U S qualified pension plan and our required cash payments for all of their plan will be approximately $30 million.
Turning now to capital expenditures, our full year 2021 capital expenditures totaled $441 million, which was slightly below our guidance due to supply chain and contract labor constraints experienced during the fourth quarter we.
We expect total capital expenditures for 2022 will be approximately $440 million, which includes $110 million for timberlands inclusive of reforestation costs $320 million for wood products and $10 million for planned corporate it system investments.
Now I'll turn the call back to Devin and look forward to your questions.
Great. Thanks Nancy.
Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets U S housing activity continued at a strong pace in the fourth quarter with total housing starts averaging more than $1 6 million units on a seasonally adjusted basis and total permits averaging more than one 7 million units for the full year.
Total housing starts were nearly $1 6 million units, representing a 16% increase over 2020 and the highest annual level since 2006.
These increased levels of housing activity are notable considering the persistent supply chain and labor challenges that homebuilders faced in 2021.
Notwithstanding the recent uptick in mortgage rates and ongoing affordability concerns both our near term and longer term housing outlook remain optimistic and is supported by encouraging housing demand fundamentals, including favorable demographics, a decade of under building and historically low inventory for new and existing homes.
Turning now to repair and remodel activity, which strengthened in the fourth quarter <unk>.
Demand continued to be strong bolstered by large professional R&R projects, which remained healthy for most of 2021.
And a resurgence of smaller do it yourself activity following a period of temporary weakness in the summer months.
As we enter 2022, our outlook for repair and remodel activity continues to be positive with demand supported by an aging housing stock rising home equity and healthy household balance sheets.
In closing our 2021 financial performance was among the best in our company's history.
I am incredibly proud of our employees and their efforts to achieve these outstanding results.
Additionally, in 2021, we continue to drive improvements across each of the value levers of our investment thesis, we made great progress on upgrading our portfolio improving our operating performance building on our ESG leadership and demonstrating our commitment to disciplined capital allocation.
Looking forward, we have announced a series of multiyear targets that will drive additional growth and deliver superior value for our shareholders.
With our unmatched portfolio of assets industry, leading performance strong balance sheet and supportive macro tailwind, we're well positioned to capitalize on favorable demand fundamentals generate strong cash flows grow our company and returned significant amounts of cash to shareholders and now I'd like to open 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 one on your telephone keypad.
Information tone will indicate your line is in the question queue.
You May press star two if you'd like to withdraw your question for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from George Staphos with Bank of America. Please proceed with your question.
Alright, Thanks, operator, good morning, everybody. Thanks for the details and congratulations.
On a year and congratulations on everything that you're doing with Opex. It's amazing what the company has done over the last year I appreciate on that front.
So quick questions first in the South could you give us a bit more color in terms of the outlook for timber.
This year and what Youre seeing the first quarter I would have expected maybe a bit more positive outlook for one Q.
And obviously, we're a lumber prices are what you've discussed in the past that would.
Going into the market any thoughts there would be great.
Second question.
What is what are you seeing in terms of the near supply and how are you set up relative to engineered wood and what are the sort of commercial opportunity we see in AWP for maybe further.
Realization improvement over this year and then I had one follow on Tiger, allowing.
Sure well, let's start with the southern markets just as we think back to what happened in 2021, obviously, we did see some pricing improvement for southern logs, that's both with respect to pulp logs and saw logs.
I think several drivers behind the pricing improvement that we've seen lately first.
Obviously on the supply side some of that price improvement was driven by the persistent wet weather that we saw across many regions in the south.
I think certainly that reduce the flow of logs to the system tension in the market to some extent I think COVID-19 transportation other supply chain issues had some effect on log availability as well, which.
I think pushed up pricing a bit but then on the demand side. We did have very strong wood products markets across the south and that supported healthy log demand middle certainly didn't want to run out of logs and miss out the opportunity to capture the benefits of higher lumber and OSB prices and then lastly, you alluded to this just the continued pace of.
New capacity coming online in the south.
<unk> certainly has helped tension in the market and certain wood baskets, but in any event demand was strong pricing improved and we certainly do anticipate that to continue to be the case in the first quarter really across the south inventory levels right now I'd say range from normal two to even a bit lean depending on.
<unk> customers are going to want to protect inventory levels to make sure that they're fully loaded to avoid out of log downtime in the stronger wood products markets.
I do think we continue to see some challenges for logging and trucking availability in certain geographies and so that can.
Have some tension affect particularly if we see additional weather so look for the balance of the year, we're expecting solid demand for logs across the south perhaps.
Perhaps not as much pricing appreciation as we saw last year some of that I think was driven by weather.
Certainly there is still plenty of regions, where there is excess inventory in the forest, but as we've been saying for a number of years with each year that we have more capacity coming into the region, which we've certainly had plenty of that over the last several years we continue.
To see that continuing into the future that tension things up wood basket by wood basket. So we're optimistic about the trajectory in the south and we think we'll have a solid year.
This year in 2022 moving to your second question around veneer supply. That's certainly a challenge that is one of the constraints for AWP production.
Thats, our Weyerhaeuser statement for sure, but I think it is a broader industry statement.
And that's an area that we're really focused on both with our internal veneer supply we have some veneer manufacturing within our AWP business and certainly as we partner to <unk>.
Source veneer for our AWP products I think thats an area that we're seeing very very strong demand our.
Our order files are quite extended from an EW P standpoint.
So we're doing everything we can to make sure that we're meeting customer needs.
Some of the pricing environment, we obviously did raise prices a number of times for AWP products last year as of now we've substantially captured all of those price improvements and so a strong environment in terms of the pricing for the remainder of the year not in a position today to talk about any sort of price increases will continue to to <unk>.
Monitor the market in that respect, but but overall very very strong market for AWP right now.
Alright, Kevin Thanks.
Thanks for that I will turn it over and if Theres time I'll come back in queue. Thanks, David Thanks, Nancy Great. Thank you Kim.
Our next question comes from Anthony Pettinari with Citi. Please proceed with your question.
Hi, good morning.
Good morning, Anthony.
We've seen a fairly sharp jump in mortgage rates this month.
Maybe a view on a more hawkish fed and obviously this is just a few weeks but.
Have you seen any impact to customer discussions or maybe even order patterns or activity and then just maybe from a bigger picture perspective.
Is there anything you can say about how you'd expect the business to perform kind of longer term in a rising rate environment. Given timber obviously has a role as an inflation hedge but you obviously have exposure to housing.
How you think about that and how it is.
With historically.
Yeah sure no Thats a great question.
With respect to the rising interest rates certainly I think there is some angst among.
Many about what rising mortgage rates are going to do to housing demand and I think thats.
A fair thing to you to give consideration to you I can tell you as of today, we are not hearing any sort of change in tone from our homebuilder customers.
I think from where we sit and this is based both on our own internal view, but also the conversations that we have with folks really across our customer universe, we're still sitting at a place where we're relatively low in terms of mortgage rates by any historical context.
I think even if we assume that mortgage rates are going to go up over the next 12 months to 24 months, which we do think that they will.
We still have a ways to go I think between where we are today, and where youre going to see a material amount of demand drop off from a mortgage rate standpoint.
I think it's also important just to remember the context of what what we've got going on in the market right now and we've talked about this before but just the under building that we've done in the U S. Over the last decade has left a real shortfall for housing and we think about the demographic trends with millennials coming in the market and you've certainly seen.
Some data to support that.
The price increases that we've seen that's largely a function of there just not being a nut housing supply for the demand out there and so from our standpoint, we're certainly looking to a strong year of housing in 2020 to our customers. When we go out and talk to the homebuilders theyre, telling us that they are expecting.
A good strong year, we're certainly starting off from a good spot when you think about the homebuilder confidence levels. When you think about.
Home sales numbers that we just saw the number of sold not yet started there's a big backlog there so.
Notwithstanding obviously, there can be some headwinds at times with housing, whether it's product availability labor demand or rising mortgage rates, but I think the demand levels out there is just.
Very strong and should support.
I think a strong homebuilding year in 2022, as we think about interest rates and inflation. There are there are puts and takes there obviously as you see inflation.
An issue that we have to deal within our business and where we're very focused on that a big part of our Opex program is trying to make sure that we're very focused on cost I think that will serve us well if we're in an inflationary environment.
But again as you mentioned historically.
<unk> has been a pretty good inflation hedge and so there are.
Puts and takes there.
Do think from an interest rate standpoint, and how you value timber and discount rates generally speaking people take a pretty long term view. So we're not seeing any sort of big impact.
From from higher interest rates in terms of timber valuations. So.
Notwithstanding that it does create some challenges here and there on balance I think we'll manage it pretty well.
<unk>.
Again, we're looking forward to a strong 2020, even in a slightly higher inflationary environment and with interest rates rising somewhat.
Okay. Okay, that's very helpful.
Maybe a very quick follow up on timber wins, you talked about pausing I think southern pine log exports to China, given maybe some regulatory changes there and you talked about that headwind potentially lifting I was wondering if you could.
Is there any sort of timeline or if you can talk about what causes that pause or that headwind to lift and are there any sort of costs associated with that.
For the color.
Yes, yes, sure and so really just it relates to a new role that the Chinese government put into place there is a <unk> issue.
That was discovered on some exports into China, not weyerhaeuser exports, but that.
That was a new rule set they put in place and it adds administrative <unk>.
<unk>, some additional costs around fumigation and channeling into different ports and so its relatively new at this point it doesn't make a lot of sense for us to continue to export in to China out of our southern business in the near term.
Ultimately our view is China needs fiber supply the U S South is.
Wood basket that is healthy and can support that over time, particularly as you think about the Russian log band the Australian law ban some of the challenges over time, I think with the European supply going down as they work through their <unk>.
<unk> will issue.
I think net net China is going to need fiber supply and so our hope is that as these rules.
Kind of get figured out over time some of those burdens in sourcing wood from pine regions into China will ease a little bit and we will resume our activity, but as I noted.
In the meantime, we've got a very active program going on into India that we're continuing to look to grow Vietnam, Pakistan, Turkey. So we're going to continue to look to grow our export business, regardless of what happens in China, and we do think that ultimately will be back in that market and that will just be another increment to support our growth of the export.
Program.
Okay. That's helpful I'll turn it over.
Thanks.
Our next question is from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone and congratulations on a great quarter and year.
Thank you good morning, guys.
My first question is just turning to get a little bit more details on the operational backdrop and the outlook as it relates to your forecast can you talk a little bit about supply chain and COVID-19 related disruptions that you are seeing or sort of expect that you could see in the near term and then does your outlook assume any level.
The improvement related to some of those disruptions and how should we be thinking about the labor force and your ability to sort of ramp up there.
Yes, well I'll start with with what we saw in Q4 and what we're seeing so far in Q1 around transportation and Covid.
Candidly, it's been a challenging environment starting with transportation.
We've had some challenges as an industry with transportation as most other industries are also having challenges.
Trucker availability is very very tight I'm sure you've heard about that numerous times.
When we get into the winter months, particularly up in Canada with some of the cold weather and weather events, the rail becomes pretty challenging and so.
When you think about just the overall transportation infrastructure right now is pretty tight and it's pretty challenging and so we've done I think a reasonably good job of navigating that but its nevertheless, a tough situation to get product moved I don't necessarily anticipate that getting dramatically better here in the very near term.
Hopefully as the weather improves and omicron starts to trend down maybe we'll get a little bit better, but transportation has been a challenge even even before the last few quarters I would say on <unk>.
We like pretty much every other company have been struggling through just keeping our mills and our operations staffed with the high levels of Covid and Covid outbreaks with <unk>, we haven't lost.
A significant number of shifts but it certainly has.
Impacted our operations and in many respects, it's prevented us from running extra shifts where we otherwise otherwise might have done so.
I do think we're either at or starting to come down off of the peak.
As we look at.
Daily quarantine levels. It does look like we're starting to see that break a little bit. So we're optimistic that over the next several weeks, we'll really start to get past this wave of Covid.
And hopefully that will ease things up a bit.
No on balance as we think about the overall supply chain other than OMA crime getting better labor availability being tight I don't see that really easing here in the near term hopefully as the year progresses, but certainly not in the first half in and I'd say similarly, with transportation I'm not sure we see that getting dramatically better than the first half of this year.
We are hopeful that over time as more people return to the workforce that some of these will we.
We will start to ease but doesn't feel like a first half of the year.
Issue for us.
Yeah. Okay. I hear you that is helpful. And then my second question.
Kind of focusing a little bit more on the DIY and the consumer.
As we think about the move up in commodity prices that we've seen sort of post labor day can you talk a little bit about how you're thinking about that market's ability to continue to absorb that level of inflation. When you go back to last summer you think about the fact that that was sort of the piece that really kind of drove that.
The relative supply demand dynamics and the impact of pricing that had so as we do go into the spring here can you talk a little bit about what youre hearing in terms of the home improvement retailer inventories in that channel and the order rates that youre seeing there as we do go into the busier season.
Yeah sure well I'll start with the second half of your question and then get specifically to the to the DIY segment.
Terms of what we're seeing today from repair and remodel.
The pro segment has been strong really across 2021, you didn't really see the dip like you saw in the DIY segment and that's certainly the case as we head into Q1, we're seeing good takeaway good demand from big box as well as just the R&R segment and generally.
So feeling pretty good about where that is particularly for this time of year. I think you asked a great question with respect to the DIY segment as you see pricing trend up no question I think last year.
As we got into the summer time, and you saw $1000 lumber prices were in the news every day no question that caused a pullback in the DIY segment now how much of that was just coming out of Covid wave, where it was the first time people could go out and really go to concerts movies ball games as opposed to do repair and remodel some of that.
A little hard to tell but I think certainly just the level of press that we saw around high lumber prices probably caused some people to pause on those smaller do it yourself projects now whether we see that same demand impact now that we're back up in that range, we're not seeing it yet, but I think thats an open question, whether youll see a.
A little bit of a tick down now the flip side of that maybe people may ultimately become more accustomed to $1000 lumber prices I can tell you just in terms of the level of press coverage that youre seeing from thousand dollars lumber prices today versus last summer, it's a little less so.
Maybe people become a little bit more accustomed, but that's something we'll certainly be watching closely but again as we think about where we are in the year with pricing where they are we've got long order files inventories across the channel are moderate to lean for lumber and I'd say pretty darn lean for OSB in AWP.
Heading into the building season, it does feel like it's a pretty good setup for for market dynamics.
Okay I appreciate all that color. Thank you and good luck.
Thank you.
Our next question is from Mark Weintraub with Seaport Research Partners. Please proceed with your question.
Thank you Kevin Congrats on a very good year.
You just mentioned order files being long could you give us some more specificity in terms of how long they are in lumber and OSB for Ya.
Yeah sure well thanks Mark.
So when we talk about lumber.
Bumping up against three week order files, which for US is on the long end of where we typically would see those on OSB were out three to five weeks, which again is pretty much on the outside of where we like that to be a you didn't ask about AWP awp's essentially on allocation.
Through the second quarter so.
Pretty pretty long order files for this time of year.
Okay. Thank you quick question for you.
On.
Demand for on lumber in particular, if we if we look actually structural panels as well if we look at industry data last year it.
It looked like apparent consumption for structural panels up about 5%. If you look for lumber I guess I've only seen it through October but it was up three 5% or so.
Quite a bit lower than what housing starts were up which more on the order of 15% a little less than that single family, but close to it.
Do you have a perspective as to what might be driving that variance be it.
Is it reductions in inventory channel.
Is it.
Economizing on the use of lumber and OSB that fluctuations in repair remodel or is it something else.
Yes, there's probably a little bit of all of that in there Mark but I also think on some level.
There are houses that are started that have not been completed and so theres, probably a little bit of gap there that will catch up over time as well.
If I had to say what I think the biggest driver is I think thats, probably yet, but theres a little bit of the other items you mentioned as well.
Okay. That's helpful. And then lastly, kind of a similar type of question and maybe it's trying to quantify.
The comments you were making on Covid.
In supply chain and how thats impacting production for you and also for the industry I mean, interestingly enough again and maybe the data we get is not fully accurate, but it suggests that production of lumber in the U S South.
I actually was only up like one 6% at least through the first 10 months of the year, which.
Seems surprising given the level of demand and given the capacity.
Do you think that there's a.
Is there the capability for there to be a significant ramp in production and obviously that has implications for lumber markets, but it also has implications potentially for your timber sales in the south so any thoughts on that please.
Yes, there is no question that Covid and supply chain disruptions impacted overall production in the south.
We saw that obviously, we sell logs to a number of customers and we saw that in terms of our customer base. We also saw that in our own operations. Just in terms of an inability to get people for extra shifts or a good portion of the year, because we had people out with quarantine, but it also I think even goes beyond the mill in it.
It goes to some of the labor shortage issues that you have.
To staff mills higher turnover levels, the ability to get trucks in transportation, even I think in some geographies the ability to get logging contractors and so all of those things together I think is the reason why you saw that production volume increase being so.
So minimal over the course of last year I'm not sure I see anything thats going to be dramatically different here in the near term, even as we get through omicron, which will certainly help.
There is a real challenge in finding labor and thats across the system, it's not just our industry, but our industry has certainly affected finding truck drivers logging contractors.
Adding employees to work in the mills really across the supply chain I think that makes it challenging to you to really dramatically ramp up that production.
Great I appreciate your insights.
Okay.
Mark I'll, just add that for the fourth quarter to help quantify it.
There is probably about a $25 million impact in the quarter from the COVID-19 related issues and supply chain disruptions.
Thank you and that presumably that includes Canada as well.
Correct, yes, great. Thanks, a lot.
Okay.
Our next question is from Mark Wilde with Bank of Montreal. Please proceed with your question.
Thanks, Good morning, good morning, Nancy.
Good morning, Mark start off.
I wanted to just follow on Mark <unk> question.
Do you think it's fair to say that.
Similarly, 60% to 65% of your first quarter shipment volume has been sold at this point.
Just kind of taking what you said about the order book.
Okay.
Yes, I don't have the specific percentage number right off the top of my head Mark So I don't want to misquote that and we can certainly follow up but theres. No question as we think about those extended order files that certainly pushing out of a pretty healthy percentage of our Q1 volume.
That's been sold and not ship.
Yes, Okay, and then to the question we were just talking about.
The impact of Covid and not only on just people being out but any.
Increased labor turnover.
That had a material effect do you think I'd just productivity across your operations.
Yes, there's no question that has had an impact as you think about.
Running a saw mill running an OSB mill.
As you have higher and higher levels of turnover that impacts just the expertise running the equipment impacts reliability.
It impacts safety all of the things that make you a top notch producer when you have higher levels of turnover with new folks all of those things become more difficult and so that's been something that we've really been working on and making sure that we.
Institutionalize a lot of the Opex innovation reliability things, so that we make it easier for people to get up to speed quicker, but it does have an impact there's no question.
Yes.
Just more broadly.
We did have some nice improvement in southern log prices.
2021, do you think we are beginning to see a sustained recovery in the region or do you view this as.
More cyclical events.
No.
A trend the structural pickup in southern log markets, particularly for saw logs.
Yes, I think as you think about the south as a whole.
I do think some of it was driven by weather events. Some of it was driven by the Covid labor all of those all of those challenges that had an impact. There is no question. Now. There also is no question there are certain geographies, where youre seeing that new capacity tension attention things up so.
Arkansas, North Central Louisiana, North Carolina, I mean, there are spots, where we've seen the mill has come in ramp up to full production, where you see a tighter wood basket. So that's also having an impact we still have several billion board feet of new capacity, that's been announced that's not up up and run.
And yet.
And I think we'll continue to see as those new mills come in get up and running and get to full production that will continue to have.
Upward.
Impact on pricing, but if the question is do we think that we've hit the point now where southern saw log recovery recovery across the south has happened.
Im not sure thats going to be the case, but we do think that we're on the right path that will continue to see improvements, albeit slower in some areas than others, but the trajectory is right, but I do want to I don't want to leave anyone with the impression that 2021 was all just new capacity some of that was weather some of it with supply.
Chain disruption.
Yes, Alright, I think Thats fair finally can you just give us any color on the perspective solar project in the South you know whether this is a land sale or this is a long term lease which it sounds like there is more common.
In other People's discussions.
Yes. So if you are referring to the apex deal that we just announced that's really the relationship that is going to cover.
A number of different potential projects over the time and it's a continuation of an existing relationships. So we've done we've done other work with apex.
Now assuming that all of the projects that we've got under this agreement move from the exploration stage to final development.
The number of acres is going to vary depending on project physical characteristics, but we would retain the fee ownership.
You you would get milestone payments as the projects move through various stages of development and then once it's operational you'd have an annual lease payment for each acre in the footprint. So again, we keep the fee we have the timber.
Economics, and then we get paid on lease payment overtime.
Okay, Alright sounds good I'll turn it over.
Alright, Thanks Mark.
Our next question is from Paul Quinn with RBC capital markets.
Proceed with your question please.
Yes, thanks, very much good morning, Yes, I know.
As others have that lumber production was up less than a percent in 'twenty. One just wondering if we're still on track for a 5% gain.
Even in 'twenty two as per your Investor Day, and then on the Capex budget.
$320 million in wood products, the Holden, Louisiana project any other major capex projects on the lumber side.
Yes, so with respect to your first question, Yes, we're still on track for the 5% a year year to year that may vary by a little bit but that is the trajectory still on track for that feeling good about the momentum we've got within our Capex and our organic growth programs.
In terms of the big projects really hold then obviously a big project.
It's on track the rest of it is really just a series of capital projects nothing of the hold in magnitude, but each of our mills as we said before has has a multiyear roadmap and so it's it's debottlenecking, it's driving improved reliability and it really cuts across.
All of the different machine centers merchandisers, So order staggers planers CDK is really each mill has capital projects that really just takeaway the constraints to let us grow volume so.
Nothing nothing big to call out other than Holden largely these are all projects that are being replicated that we've already done in some other mill, which is why we have such a high level of confidence in the in the organic growth story.
Okay and then just.
On the OSB side.
Once we're down eight 5% and 21 here. So just wondering if 22, we can expect to get closer to the 3 billion square foot capacity.
Yep, that's safe assumption.
Okay, and then just maybe just squeak in a last one just on capacity adds in 'twenty two overall industry, it's looking like about $2 75 billion.
Fee, which is about 4% what kind of pricing impact or do you think thats really going to impact the market in this year.
Yes.
Couple of observations I'd offer there first of all there's a lot of announced capacity that we have coming on over the next few years. We certainly think people are going to continue to invest in the U S. South is a great place to make lumber.
But that being said few things to keep in mind number one and we've certainly seen this to some extent.
The timeline for some of those projects may get extended to the to the extent you are not already in the queue for equipment.
We've seen the timeline for getting equipment pushed out a bit the labor to install some of this equipment pushed out a bit so not clear to me all of that actually will come to fruition in 2021.
Other thing I would say over a multiyear period to keep in mind I know youre, all very well familiar with this some of that new capacity that's coming in in the south is going to ultimately be offset by capacity coming out of other regions British Columbia in particular, and so net net across North America I'm not sure all of that is <unk>.
Going to really come to pass in 2022, but even if it does as we think about and our view is we are going to see year over year growth in residential construction. We think we're going to see maybe low single digit growth in repair and remodel.
So the market as a whole we feel pretty good about the demand signals. So even as we do see some of that new capacity being added on we're going to need that really to keep overall, the north American market in balance so.
I think that.
The capacity that we see coming online shouldnt have.
Material impact overall other than just to keep things balanced.
Thanks, Kevin Best of luck.
Alright, thank you.
Our next question is from Kurt Yinger with D. A Davidson. Please proceed with your question.
Great. Thanks, and good morning, everyone.
Just wanted to start off on western log realizations is there any way to maybe bucket how much of the kind of price improvement. That's anticipated in Q1 is kind of underlying price improvement versus maybe some mixed benefits as you move fully past salvage harvest.
Yes.
Couple of comments on western markets generally.
We have seen really strong demand in the western system, that's a comment both on domestic demand as well as export demand sitting.
Sitting here end of January I would say log inventories are generally at or slightly below normal levels.
And so we're feeling pretty good about the dynamic that we've got going on in the west.
Most of the realization improvement there is a little bit of mix, but most of it is really just driven off strong levels of demand and balancing that against the available supply and as you think about just to kind of dimension that for you as you think about the quarter over quarter EBITDA guidance.
We talked about being up significantly most of that is in the west and we're thinking probably in that $30 million to $40 million range in terms of kind of how that should look in the first quarter. So really setting up to have a strong quarter in the west.
Alright, Alright Thats helpful. Thank you and then just my second on Timberland M&A I mean, it seems like there has been a nice general uplift in deal activity, but curious what you're seeing in terms of return profiles relative.
Your own kind of near term cash yield targets.
Yes. There is no question there has been an uptick in activity on timberlands M&A I think last year, we probably came in somewhere in the $3 5 billion range in terms of total transactions. That's our estimate for where we're going to come in again as an industry in 2022, so definitely a pick up I think the.
Big differences that we've noticed is people are being a little bit more aggressive with their underwriting and discount rates for I would call. It maybe more challenged properties.
The underwriting for the high quality properties.
That's always been competitive that never really changed and that continues today so for.
For us as we think about our return profiles you got to be disciplined for us as we think about it when we look at deals and we look at a lot of deals.
We bid on a smaller number.
Just making sure that we think it's going to meet our return profile. We do have some advantages I think some of the analytics tools that Russell and his team are developing are helpful. In that respect the scale of the operational synergies some of the other things that we can bring to the table.
As we mentioned on our Investor day can help us boost our returns maybe a little bit more but again, it's it's always been a competitive market for high quality property and we anticipate that remaining the case and so you just have to be very smart about how you do timberland deals.
Got it okay, well I appreciate the color and good luck here in the new year.
Alright terrific.
Well I think that was our final question. So just wanted to thank everyone for joining us. This morning, and thank you for your continued interest in Weyerhaeuser have a great day.
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