Q1 2022 Weyerhaeuser Co Earnings Call
Greetings and welcome to the Weyerhaeuser first quarter 2022 earnings conference call.
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It is now my pleasure to introduce Andy Taylor Director of Investor Relations. Thank you. Mr. Taylor you may begin.
Thank you Rob good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's first quarter 2022 earnings. This call is being webcast at www Dot Weyerhaeuser dot com or.
Our earnings release and presentation materials can also be found on our website.
Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward looking statements as forward looking statements will be made during this conference call.
We will discuss non-GAAP financial measures and a reconciliation to 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, Andy.
Good morning, everyone and thank you for joining US today. This morning, Weyerhaeuser reported first quarter GAAP earnings of $771 million or $1.03 per diluted share on net sales of $3 $1 billion.
Excluding special items relating to our debt refinancing actions, we earned $978 million or $1.31 per diluted share.
Our employees once again delivered phenomenal operational and financial results in the quarter, notwithstanding persistent supply chain transportation and pandemic related disruptions there.
Their collective efforts helped the company achieve its strongest first quarter adjusted EBITDA at rack on record at $1.5 billion. This represents a 122% increase over the fourth quarter of 2021 .
Turning now to our first quarter business results I'll begin the discussion with timberlands on pages six through nine of our earnings slides.
Timberlands contributed $182 million to first quarter earnings adjusted EBITDA increased by $71 million compared to the fourth quarter.
In the west adjusted EBITDA increased by 77% compared to the fourth quarter.
Western domestic log markets were favorable through the first quarter driven by strong demand is no sought to capitalize on unseasonably high lumber prices as a result, our domestic sales realizations were significantly higher compared to the fourth quarter.
Overall log supply in the western system was plentiful during the quarter due to favorable weather conditions as well as increased volumes from other landowners in response to strong log pricing.
This drove log inventories at the mills to above target levels by the end of the quarter, particularly in Oregon.
Our fee harvest volumes were significantly higher compared to the fourth quarter and per unit log and haul costs were lower as we made the seasonal transition to lower elevation in lower cost harvest operations forestry.
And road costs were seasonally lower in the quarter.
Turning to our export markets.
In Japan demand for our logs remained strong in the first quarter high North American lumber prices combined with global logistics challenges, particularly with respect to port congestion in shipping container shortages continued to limit the availability of imported lumber into Japan.
These dynamics are driving strong demand for our customers locally produce lumber in Japan and increased demand for our imported locks.
As a result, our Japanese log sales realizations in the first quarter increased significantly compared to the fourth quarter sales volumes were slightly lower due to the timing of vessels.
The Russia, Ukraine conflict did not have a material impact on our log export business into Japan during the first quarter.
However, we do ultimately expect a reduction in Russian and European Wood supply into Japan, as a result of the conflict, which will likely bolster demand for our log exports into the Japanese market over time.
In China log inventories at the ports it remained elevated coming out of the lunar new year, and we're seeing lower take away as a result of ongoing pandemic related disruptions in the country.
Notwithstanding these headwinds and market demand for our western logs remained favorable in the quarter due largely to supply disruptions into China.
Imports of lumber and logs into China continue to be impacted by global logistical challenges port congestion and restrictions on imported Australian locks.
Imports were further constrained in the first quarter as Russia commenced its previously announced ban on log exports.
And later in the quarter European log supply was also disrupted by the Russia, Ukraine conflict as a result, our sales realizations for China export logs increased slightly in the quarter.
Our sales volumes to China, However decreased significantly as we intentionally shifted volume to the domestic market to support our domestic customers and capitalize on strong western log prices.
Moving to the south.
Southern Timberlands adjusted EBITDA was comparable to the fourth quarter.
Notwithstanding ample log supply and improving log inventories as the quarter progressed southern saw log markets remained favorable in the first quarter as mill sought to benefit from the strong lumber and panel pricing environment.
Fiber markets were also favorable as mills bolstered inventories from the lean levels experienced at the outset of the quarter.
As a result, our sales realizations increased slightly compared to the fourth quarter.
Our fee harvest volumes, and forestry and road costs were seasonally lower in the first quarter and per unit log and haul costs were moderately higher primarily for fuel related transportation costs.
Regarding our southern export business, our log exports to China remained temporarily paused as a result of recently adopted and fairly restrictive rules implemented by Chinese regulators to address potential phyto sanitary concerns on imported pine logs.
In response, we continue to redirect logs to domestic mills and the India export market during the first quarter.
We continue to maintain a constructive longer term outlook for our southern export business to China and other Asian markets.
In the north adjusted EBITDA increased by $1 million compared to the fourth quarter due to improved sales realizations across all products.
Fee harvest volumes were seasonally lower in the first quarter.
Turning to real estate energy and natural resources on pages 10 and 11.
Real estate knee and our contributed $81 million to first quarter earnings and $116 million to adjusted EBITDA.
First quarter, adjusted EBITDA was $67 million higher than the fourth quarter due to the timing of real estate transactions Sim.
Similar to the last few years, our real estate activities in 2022 are more heavily weighted toward the first half of the year.
Average price per acre decreased compared to the fourth quarter due to the mix of properties sold but remains elevated compared to historical levels. As we continue to benefit from strong demand for HBU properties, resulting in high value transactions with significant premiums to timber value.
Now for a few comments on our natural climate solutions business.
In March we announced an agreement with oxy low carbon ventures to pursue our first carbon capture and storage project.
This partnership combines more than 30000 acres of Weyerhaeuser is uniquely positioned subsurface ownership in Louisiana with Oxy has proven technical expertise in the management and sequestration of carbon dioxide.
It will take several years to bring this project into production and we expect that will come online in 2020 five or 'twenty 'twenty six.
This project represents an important milestone in our previously announced plan to grow our natural climate solutions business, we expect to announce additional carbon capture and storage agreements as we continue to advance discussions with high quality developers on portions of our southern U S acreage.
Moving now to wood products on pages 12 through 14.
Wood products contributed $1.2 billion to first quarter earnings adjusted EBITDA increased by $716 million compared to the fourth quarter of 138% improvement.
This represents the second highest quarterly adjusted EBITDA on record for our wood products business.
These are exceptional results considering the ongoing transportation and supply chain headwinds faced by our teams in the first quarter.
I want to specifically recognize our supply chain and logistics teams for their continued focus and resolve while navigating these challenges.
Starting with lumber and OSB markets benchmark lumber and OSB prices entered the quarter on an upward trajectory as demand for homebuilding in repair and remodel remained favorable and.
And supply constraints persisted due to supply transportation and labor related challenges in addition to winter weather disruptions.
This dynamic continued for most of the quarter driving lumber and OSB prices once again to near record high levels.
Demand softened somewhat late in the quarter as many buyers paused to assess downside risk with elevated price levels and to evaluate the potential impacts of rising mortgage rates on the housing market.
Lower than expected take away from home centers also impacted demand to some extent in the quarter.
Despite generally lean inventories heading into the spring building season buyers remain cautious through the end of the quarter.
With a reluctance to build meaningful inventory and a dynamic pricing environment as a result lumber and OSB prices peaked and started on a downward trajectory in March.
Adjusted EBITDA for our lumber business increased by $453 million compared to the fourth quarter of <unk>.
232% improvement.
Our average sales realizations increased by 76% in the first quarter, while the framing lumber composite pricing increased by 81%.
Production volumes increased moderately resulting from less planned downtime and weather related downtime.
Sales volumes were slightly lower driven by ongoing transportation challenges.
This dynamic resulted in an expansion of inventory levels during the quarter.
Log costs were significantly higher primarily for western logs.
Adjusted EBITDA for our OSB business increased by $216 million compared to the fourth quarter.
123% improvement.
Our average sales realizations increased by 61% in the first quarter, while the OSB composite pricing increased by 94%.
This relative difference was largely a result of extended order files that lag surging OSB prices and shipping delays due to transportation disruptions primarily in Canada.
Our production volumes improved slightly in the first quarter, resulting from less downtime for planned maintenance.
As a result sales volumes increased moderately compared to the fourth quarter, notwithstanding significant transportation headwinds in Canada in January and February .
Unit manufacturing costs were slightly higher in the quarter and fiber costs were significantly higher.
Engineered wood products, adjusted EBITDA increased by $22 million compared to the fourth quarter, surpassing last quarter's record by 19%.
Sales realizations improved in the first quarter and we benefited from previously announced price increases for solid section and I joists products.
This was partially offset by moderately higher raw material costs, primarily for OSB web stock in resin pre.
Production volumes were moderately lower for solid section and I joist products driven in large part by tight veneer supply and pandemic related staffing challenges early in the quarter as a result sales volumes were comparable to the fourth quarter.
In distribution adjusted EBITDA increased by $32 million compared to the fourth quarter, an 80% improvement as the business experienced strong demand and captured improved margins across all products.
Before turning the call over to Nancy I would like to comment briefly on an exciting growth opportunity within our southern timberlands business.
Earlier this month, we announced an agreement to acquire approximately 81000 acres of high quality timberlands in North and South Carolina for approximately $265 million.
This is a unique opportunity to enhance our portfolio with highly productive and well manage timberlands, which are located in some of the best coastal markets in the U S south and strategically positioned to deliver operational synergies with our existing timber and mill footprint.
This acquisition offers extremely attractive timberland attributes and is expected to deliver portfolio, leading cash flow and harvest tons per acre within our southern timberlands business. Additionally.
Additionally, we expect to capture incremental benefits from real estate and natural climate solutions opportunities overtime.
The transaction is expected to close later in the quarter and represents an exciting milestone in our multiyear strategy to grow the value of our timberland portfolio through disciplined investments so with that I'll turn the call over to Nancy to discuss some financial items and our second quarter outlook.
Thank you Devin and good morning, everyone I'll be covering key financial items, and first quarter financial performance before moving into our second quarter outlook.
I'll begin with key financial items, which are summarized on page 16, we.
We generated $957 million of cash from operations in the first quarter. This is an increase of over $460 million from the fourth quarter and is our highest first quarter operating cash flow on record.
We ended the quarter with approximately $1 $2 billion of cash and cash equivalents and total debt of $5 $1 billion.
At the end of February we initiated a series of transactions to further enhance our strong financial position by effectively refinancing $900 million of debt.
This included the issuance of $450 million of notes due in 2033 with a three and three 8% coupon and $450 million of notes due in 2052 with a 4% coupon. The net proceeds plus cash on hand were then used to close cash tender offers for 931.
In principle on notes with considerably higher rates.
We incurred a net after tax charge of $207 million related to premiums and Anna unamortized debt issuance costs and debt discounts in connection with the early debt repayments, which is included in our first quarter spend.
Results as a special item.
These actions enabled us to capitalize on favorable interest rates prior to the most recent increase by the fed resulting in a meaningful reduction in the weighted average coupon in our debt portfolio, while also smoothing and extending the weighted average maturity.
Overall, our annualized interest savings will be approximately $38 million.
Capital expenditures for the quarter were $70 million, which is typical in the first quarter.
We returned $121 million to shareholders through share repurchase activity.
These shares were repurchased at an average price of $37 87.
And as of quarter end, we had approximately $800 million of remaining capacity under our $1 billion share repurchase program.
We will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically. When we believe that will create shareholder value.
We also returned $134 million to shareholders through the payment of our quarterly base dividend, which was increased by five 9% to <unk> 18 per share during the quarter.
This is in line with our commitment to grow our sustainable base dividend by 5% annually through 2025.
Adjusted <unk> for the first quarter totaled $850 million as highlighted on page 18.
As a reminder, we will supplement our base dividends each year with an additional return of cash to achieve the targeted annual payout of 75% to 80% of adjusted F. A D.
As demonstrated in 2021, we have the flexibility in our framework to return this additional cash in the form of a supplemental dividend or a combination of a supplemental dividend and opportunistic share repurchase.
First quarter results for unallocated items are summarized on page 15.
Adjusted EBITDA for this segment decreased by $31 million compared to the fourth quarter. This decline.
And was primarily attributable to a $59 million noncash charge for the elimination of intersegment profit in inventory and LIFO in the first quarter due to the elevated levels of high value inventory.
Our seasonal inventory levels are reduced in the second quarter, we do expect to record a noncash benefit from the elimination of intersegment profit in inventory and LIFO.
Looking forward key outlook items for the second quarter I presented on page 19.
In our timberlands business, we expect second quarter earnings before special items, and adjusted EBITDA will be significantly lower than the first quarter, but still higher than any other quarter since the fourth quarter of 2018.
Turning to the Western Timberlands operations domestic log demand softened somewhat at the outset of the second quarter in response to ample log supply elevated mill inventory and reduce takeaway of finished products as lumber prices retreated from historically high level.
As a result, we expect our domestic sales realizations to be lower in the second quarter, but still substantially higher than any quarter in 2020 one.
Forestry and road costs are expected to be significantly higher as we enter the spring and summer months and per unit log and haul costs are also expected to increase.
We anticipate our fee harvest volumes will be comparable to the first quarter.
Moving to the export markets in Japan demand for our logs remained strong as imported lumber continues to be restricted by global shipping challenges and more recently in response to would flow disruptions, resulting from the conflict between Russia and Ukraine.
As a result, our Japanese sales volumes are expected to increase significantly compared to the first quarter.
We anticipate our second quarter sales realizations to be comparable to the strong levels experienced in the first quarter.
In China, despite elevated log inventories at the ports demand for our logs remains favorable as imports of lumber and logs from other countries continue to be constrained.
As a result, our sales realizations on log imports into China are expected to be slightly higher compared to the first quarter. We.
We anticipate our sales volumes to be significantly lower as we continue to flex logs to our domestic customers to capture the highest margin.
In the south despite the pullback in lumber and OSB pricing at the outset of the quarter and a seasonal increase in log supply.
A lot of demand remains stable as mills maintain elevated inventories to mitigate risks from ongoing transportation challenges.
As a result, we expect our sales realizations to be comparable comparable to the first quarter.
We anticipate our fee harvest volumes will be moderately higher as seasonal weather patterns transition to dryer conditions.
Similar to the West Forestry and road costs are expected to be significantly higher as we entered enter the spring and summer months, and we anticipate moderately higher per unit log and haul costs.
In the north due to product mix sales realizations are expected to be significantly higher than the first quarter, while fee harvest volumes are expected to be significantly lower as we enter the spring breakup season.
Turning to our real estate energy and natural resource segment.
Real estate markets remained strong heading into the second quarter and we continue to anticipate a consistent flow of HBU transactions with significant premium to timber value.
For the second quarter, we expect net earnings will be comparable to an adjusted EBITDA will be slightly higher than the second quarter of 2021 .
We expect an increase in acres sold and a higher basis year over year due to the mix of properties, we anticipate to sell.
For our wood products segment, we expect second quarter earnings and adjusted EBITDA will be higher than the first quarter. Excluding the effect of changes in average sales realizations for lumber and OSB.
Demand for our products remain favorable heading into the spring building season supported by strong new residential construction and professional repair and remodel activity.
As Devin mentioned supply continues to be constrained by transportation challenges and inventories through the channel remain lean.
Despite these dynamics benchmark pricing for lumber and oriented Strand Board entered the second quarter on a rapid downward trajectory as buyers continue to continue to assess downside risk of elevated price levels and we're reluctant to build inventories in this dynamic pricing environment.
I late April benchmark pricing for both products stabilized as buyers took steps to replenish inventories to prepare for the spring building season.
As shown on page 20 for lumber are current in quarter to date realizations are significantly lower than the first quarter average for OSB. Our current realizations are comparable and quarter to date realizations remain higher than the first quarter average due to the due to the length of our order file.
For our lumber business, we expect improved production volumes and moderately lower unit manufacturing costs in the second quarter.
Sales volumes are expected to improve significantly with increased production as well as higher seasonal inventory drawdown.
We anticipate moderately lower log costs compared to the first quarter a quarter primarily for western logs.
For our OSB business, we expect moderately higher sales volumes compared to the first quarter, resulting from higher production volumes and improving transportation networks, primarily in Canada.
Unit manufacturing costs are expected to be slightly lower fiber costs are expected to be comparable.
For engineered wood products business as we continue to capture the benefit of price increases announced in February we expect higher sales realizations for solid section and I joist product.
We anticipate this will be completely offset by significantly lower sales realizations for our pilot products.
Our sales and production volumes are expected to be significantly higher in the second quarter as veneer supply continues to improve.
We anticipate this will be partially offset by significantly higher raw material costs, primarily for OSB web stock.
And for our distribution business, we're expecting adjusted EBITDA to be significantly lower than the first quarter, primarily due to reduced commute commodity margin.
And with that I'll now turn the call back to Devin and look forward to your questions.
Thanks Nancy.
Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets first quarter housing starts averaged 1.75 million units on a seasonally adjusted basis, an improvement of 5% over the fourth quarter active.
Activity dipped slightly in January driven by winter weather and pandemic related labor challenges, but improved as the quarter progressed March housing starts totaled nearly 1.8 million units on a seasonally adjusted basis, the highest monthly level since 2006 housing permits in the first quarter averaged nearly one point.
9 million units on a seasonally adjusted basis, surpassing last quarter by 7% and searching to its highest quarterly average since before the great recession.
Although these results demonstrate strong underlying demand for new home construction the cycle time between starts and completions continues to be extended as homebuilders face ongoing supply chain disruptions labor availability challenges and rising material costs.
Additionally, we do expect increasing mortgage rates and higher inflation to have some impact on the housing market.
However, notwithstanding these headwinds our customers continue to see strong demand and remain optimistic for new home construction in 2022 and we remain constructive on near term and longer term housing demand fundamentals given favorable demographic trends are significantly under built housing stock are strong.
Labor market and elevated household balance sheets.
Turning to repair and remodel we continued to see favorable activity from large professional projects in the first quarter, representing a continuation of the strong demand signal. We saw from this segment in 2021.
Demand from the do it yourself segment soften modestly in the first quarter largely driven by concerns over the return of near record high lumber prices.
Overall, our long term outlook for repair and remodel continues to be favorable supported by an aging housing stock rising home equity and historically low supply of new and existing homes for sale.
In closing, we delivered our strongest first quarter financial performance on record and I'm incredibly proud of our employees for their continued dedication and resilience.
We continue to make meaningful progress towards a multiyear growth targets, we announced at our Investor Day last September and remain committed to serving our customers and delivering industry, leading performance across our operations. Our balance sheet is strong and with $850 million of adjusted F. A D generated in the first quarter.
2022 is off to a great start we believe the company is well positioned to deliver considerable long term value and superior returns for our shareholders with that I think we can go ahead and open it up 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.
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Yeah.
Our first question is from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone and congrats on a great quarter.
Thank you.
Yeah. My first question is obviously theres a lot of puts and takes in moving parts. When you think about housing and the lumber and OSB markets that are out there and I. Appreciate it a lot of that commentary that you gave around some of those shifts in terms of demand and different sort of dynamics in the quarter, but I guess, when we think about the builders and the.
Backlog that they're seeing and even the continued sales paces that have been coming through April how do you think about the potential to see some of this inventory starting to reverse itself as they try and get through those backlogs and what that could possibly mean for pricing as we go through the summer and maybe even into the early parts of the fall.
Yeah, No great question Susan.
Think first of all I'll, just say trying to predict pricing for lumber and OSB as always always difficult, but you know a few thoughts I think just to kind of put it in perspective, you know, we've certainly seen some volatility from a pricing standpoint for both lumber and OSB over the last six nine months are we you know we saw the run up over the.
Our first quarter and then it came back down a fair bit as we got through the end of March into April seems to have stabilized here over the last couple of weeks.
As we think about what's going to happen over the next several months you know a few things I think drive our thinking first of all I do think that the inventory levels across the channel are pretty lean and I think that's just largely a function of people being nervous about carrying inventory at the higher price levels. So heading into the spring building season, I think inventories are lower.
Than you would normally expect for this time of year and that's both with respect to lumber.
And OSB you know I would say with the one exception that maybe the inventories at mills in Canada are probably at or slightly above normal levels, just because of some transportation issues, but again across the system inventory levels are pretty low so on the supply side. You know I think we're you know we're going to get into the <unk>.
<unk>, where youre going to see production picking up transportation should start to improve a little bit in Canada with the rail.
But I think the demand side is going to continue to be strong. We certainly are seeing good strong demand from our homebuilder customers as they head into the spring building season, we can talk more about about housing in general but.
From our standpoint, we're expecting a good strong spring building season from a residential construction standpoint on the repair and remodel side. The pro segment continues to go really really well a lot of demand out of that segment and I think the do it yourself segment, even though we did see a little bit of a dip in the first quarter that seems to be stabilizing is.
Well as we get into the spring time period. So you know net net we're feeling pretty good about the spring and would expect the pricing environment to stay pretty strong.
Yeah. Okay. I appreciate all that Devin I know Theres a lot there and we'll see how it all comes together, but I. Appreciate the commentary my follow up question is you know it's exciting to hear the arrangement that you announced with oxy in the quarter.
As we think about you know the carbon.
Opportunities that are out there can you talk a little bit more about that potential opportunity and maybe how we should be thinking about some other announcements that could be coming down the line as you continue to invest in that.
Sure Yeah, we're really excited about it you know obviously this is our first carbon capture and storage our agreement that we've announced I think we've picked a really good partner with oxy low carbon ventures, which is a subsidiary of Occidental petroleum and this is really an opportunity to combine the unique position that we are in with so much.
Acreage subsurface rights and good geologic information and partner with a you know a firm that has a lot of experience technical expertise in the management and sequestration of C. O. Two so really excited about the project. It is going to take a few years to get everything put together you've got permitting you you've got <unk>.
Infrastructure build outs et cetera, but we think this is going to come online you know somewhere in the 2025 2026 time frame, we're not providing the economics behind the deal right now, but you know really we'll start to see the real economics flow. Once it goes online and we're putting C O two into the ground, but really excited about.
It we you know we're in active negotiations and discussions with a number of other partners throughout our southern ownership. So we'd expect to be announcing some additional agreements over the next 12 to 18 months.
Great that is that's exceptionally helpful I'm going to stick one more in which is good to see you buying back some stock in the quarter, obviously it sounds like things are.
Supportive as we think about the balance of this year can you talk about just your appetite to maybe continue within the repurchase activity. There, how we should be thinking about the opportunities for cash.
Yeah, Hi, Susan I'll I'll take that as.
As we said in the past, we do think that share repurchase is a good tool for returning capital to shareholders under the right circumstances.
Specifically, that's when we see it as the best option for shareholder value creation, we did actually purchased $121 million as you saw in Q1, and we will continue to look at share repurchase Opportunistically. You know that's why we increased the repurchase authorization to $1 billion. We wanted to have more flexibility that with flexibility on.
On price, but also on the ability to move quickly when we do see the opportunity. So we will continue to be assessing the share repurchase along with all the other options we have on capital allocation and as we do every quarter, we will report out our share repurchase activity each quarter.
Okay. Thank you very much for that and good luck with everything.
Thank you.
Thank you. Our next question is from George Staphos with Bank of America. Please proceed with your question.
Hi, everyone. Good morning. Thanks.
Thanks for all the details congratulation on the progress and also the the well timed refinancing activity.
Three questions I'll ask them.
123, just to make it efficient for you. So first off on inventories Devin you had mentioned.
Some elevated log inventories in Oregon.
Do you think that might have in the market if anything at all and are you seeing any signs that the Canadian inventory is finding its way into the market.
Secondly.
Could you maybe piggyback on Susan's question can you talk to us about the prospects for <unk>.
Accelerating the supplemental dividend if in fact, that's where we're at by the end of your obviously lots can change and doing one earlier as opposed to what has been your plan, which is to have a payable in the first quarter following the year.
And then lastly.
Can you update us on where you stand in terms of getting project audits done and credits issued with the carbon sequestration credit project up in May and thanks, guys and good luck on the quarter.
Yeah. Thanks, So maybe I'll take the question on inventories and in carbon and Nancy can cover the supplemental dividend question.
Respect to inch our inventories we did see some elevated log inventories are in Oregon. So you know all things considered I would expect that to put a little bit of of pressure on us on pricing in in the log market in the Pacific Northwest and that's reflected in our guidance, but you know I think the the overall store.
And then in the northwest is still pretty strong we've got good lumber prices and so the mills are running full out I think we're going to have some good export activity to Japan. So we're still expecting a very strong market in the Pacific Northwest just a little bit of a headwind down in Oregon is as mills worked through some of that that inventory.
With respect to the inventory at Canadian Mills, I can speak with respect to our mills, obviously not not so much with respect to our competitors you know for US we're seeing those come down over the course of Q2, we are seeing some slight improvements in rail in Canada and so that's that's certainly going to be helpful. As we work.
That through so I expect those to come down over the course of the second quarter as we progress into the deep deep for spring.
With respect to the carbon project up in Maine, It's coming along on plan. So as we mentioned last year, we listed that project on a voluntary market. We're in the process of third party third party validation. So that's going well so far and we would expect that to continue and be in a position to have the credits actually issued later this year.
Here and then we'll look to monetize those win when the price is right for carbon.
Yeah, and George I'll take the.
Dividends. So you know in terms of the interim dividend, we paid last year that was a one time exception.
Two our new dividend framework, we've always anticipated that the supplemental dividend is going to be paid out annually in Q1 for the prior fiscal year and again the primary reason for.
For that as you know is is to make sure. We're ensuring we're matching our variable dividend component to the cash flow, we're actually generating six out of kind of wait until we see through the whole year.
So we don't anticipate an interim dividend this year.
Fair enough makes sense, good luck and I'll turn it over thanks guys.
Thank you.
Thank you. Our next question comes from Mark Weintraub with Seaport Research Partners. Please proceed with your question.
Thank you.
Obviously, we're seeing amazing lumber OSB pricing.
I think we've seen a lot of evidence now pension again and the the wood baskets in the west when when we see strength.
In the south.
Or are you beginning to see in any of your basket.
Where drain is catching up to growth and how far away do you think we are from.
Potentially and it's a real inflection point for pricing and profitability and in the south.
Yeah, well you know Mark I think the answer is it's really dependent on the specific wood basket right in and so it's very regional in terms of the supply demand dynamic within each individual wood basket no. No question. There are some areas that with all the new capacity coming online you you're getting back.
You are more balanced dynamic you know you can look across spots on the Atlantic Coast North Carolina I think is a good example, you know there are some micro markets in Mississippi, Arkansas.
North Central Louisiana. So there there are spots, where youre seeing that that happened I do think still on balance, though when you look across the south as a whole it's still more heavily weighted to being oversupplied and so that's just you know as we've said, it's a long process and it's going in the right direction.
And I think we've seen.
Some of that over the last 12 to 18 months. When you look at southern saw log prices and we expect that trend to continue but I do think there are a number of spots where you still have a ways to go. So I would say you know, it's just going to continue to be slow steady improvement over time, but in the interim you know, we're really focused on generating value even at existing prices in <unk>.
So we.
We will be positioned through our execution, our ownership to participate as that continues to improve over time.
And I do appreciate you've been really consistent on this and it's maybe not a fair question.
Do you have a perspective on how long it might be as this new supply comes on in the south to when it's kind of a more broad based.
Balancing and tightening.
Okay, Frank Yeah, I mean, I think it's good it's going to happen over a number of years I mean, we've seen a lot of new capacity coming into the U S. South Yeah, I think the number I saw last from 2017 through all the stuff that's been announced since coming online over the next year or two you're talking nine to 10 billion board feet of additional capacity that's coming into the CIS.
[noise] them. So we'll see some of that coming on later this year I think importantly, we're most.
Most important most importantly for US is just where that capacity comes online and we've certainly seen a number of mills coming into wood baskets, where we have a lot of fee ownership. So I think it'll happen over a number of years and in some spots will improve faster than others, but we certainly see the you know the.
The trend heading in the right direction.
Thank you I appreciate the perspective.
Yep. Thank you.
Thank you. Our next question comes from Paul Quinn with RBC capital markets. Please proceed with your question.
Yeah, Thanks, very much morning, just.
Maybe start on the Timberland acquisition from Campbell group.
The price was reported at 3300 Bucks an acre wishes.
Pretty high relative to just put everything I've seen out there I'm just wondering how big that HBU component is.
Give us some color there so we can sort of understand that side of it.
Yeah. So just maybe a few comments here to put it in perspective, you know this this 81000 acres of timberlands really some of the best highest quality timberland has come to market in quite some time. It's you know really good stocking levels mature age class high percentage grade mix high percentage planted.
Our pine acreage, so really very very high quality AR market or timberlands come into market. So that's you know really for us. That's how we underwrote. This deal was really from a timber standpoint, and the $13 million a year of EBITDA that we were talking about over the next 10 years, that's really what we used to underwrite the deal was just.
Really the timber piece so the HBU, we always find HBU opportunities. When we do these kinds of transaction and I suspect that will be the case with this transaction as well similar with some of the natural climate solutions opportunities, they're sold or mitigation banking, we think there's some opportunities there as well, but we didn't.
Underwrite this deal just based on HBU is really based off of the timber portfolio. That's on the land base.
Okay, and then maybe just.
You referenced.
You expect logs log volumes to increase in the Japan.
Due to the Russian conflict.
So Q1 was pretty high just wondering how high Q2 is and then secondarily.
Europe shipped about 165 billion board feet of lumber into North America last year, how much do you think that is going to drop in 'twenty two as a result of the conflict.
Yeah. So you know a couple of things there for us as we think about the impacts from Russia, Ukraine. We obviously don't do any direct business are in either of those markets. But you noted two of the three potential impacted markets for us and it's really you know when we think about the the three different geographies, Japan is number one.
And we've talked about this before our customers compete with European Glu Lam going into the Japan market, we've seen even as we've gone into Q2, we've seen that volume dialed back a little bit which is an opportunity for our customers that are processing, our Pacific northwest, Doug fir logs to pick up market.
Sure and so we're going to do everything we can to support our customers as they try to build market share. So I think there will be some some opportunities to bolster our sales into Japan as a result of that and we're certainly looking to do that.
In Q2, you noted the second potential impacted geography, which is North America and I.
I think as we see the the Europeans essentially ban Russian wood coming into Europe . The European market is going to have to keep more of that fiber lumber in that domestic market to satisfy their needs, which should result in a reduction of European supply coming into the U S market.
I don't I still think with the the pricing environment that we have in the U S. You are going to see some level of European lumber imports into the U S, which I will note just as an aside is still a relatively small amount you know as we think about the overall market, but we will see some reduction in that European volume coming into the U S. The other market, where we could be impacted as.
Mina, obviously, we do have a business into China exporting logs I would expect the Russians to send more wood into China as other markets have been closed off.
So that'll be a little bit of a mixed bag, a little bit more Russian wood coming into China, probably a little less European wood going into that market I expect that's going to be kind of a net neutral for us but could be bumpy here for a for a bit.
Alright, that's all I had best of luck guys.
Alright, thank you.
Thank you. Our next question comes from Mark Wilde with Bank of Montreal. Please proceed with your question.
Yes, good morning, Devin good morning, Nancy.
Good morning, Mark.
I just wanted to come back on Paul's question on the North Carolina, South Carolina acquisition.
That you pointed to.
Harvest volumes in the first few years and the sort of six five to seven tons per acre per year, which is quite high relative to what I think most of us use for kind of sustained harvest can you give us some perspective on where that level is versus what you would expect on a car.
<unk> basis.
Yeah, I mean, so if you look at our southern ownership as a whole. It's you know, it's well south of that so you're usually looking kind of in the.
Three and a half to four tons per acre from a harvest standpoint. So this is quite a bit higher and that's really just a reflection of a couple of things first of all very high grade mix, particularly over the first decade or so.
Which drives a lot of that in a mature age class and so we're just going to see a lot more opportunity to monetize just given the age class.
And in stocking levels that we have on this ownership.
So is there any way to kind of take that and just think about sort of $13 million a year is sort of coming out of the chute your level of EBITDA off the land what kind of a more of a normalized trend would be.
You're talking in kind of the second and third decades.
Yeah, Yeah, I'm, just trying to think about it I mean, youre clearly you're getting some benefit in the early years because of the maturity.
Of the land. So I'm just trying to think about sort of what type of yield it implies on a more normalized basis.
Yeah. So you know without getting trying to get into predicting you know decades out into the future what I'd say Marty yeah, Yeah sure.
We're you know we're feeling really good about the cash flow profile over the first 10 years I mean that will obviously go down over time and it will I think go more in line with our historical.
Trends across the southern ownership as a whole, but the other thing I would note about that when we talk about that EBITDA. That's really just focus on our existing timberlands business and it really does not reflect.
I think as Paul alluded to HBU opportunities and other natural climate solutions opportunities, which we do think will be incremental to that overtime.
Okay. The second question I have is around the lumber business and just when I look at the data for last year, it's kind of striking that southern lumber capacity was up 900 million board feet.
Production was only up about $140 million. So it's.
You would think in the context of the highest prices ever.
That actually like operating rates would have gone up but operating months actually went down 400 basis points. So just trying to get your sense of what went on there was that like COVID-19 related labor issues and how much of a bounce back what we see in 'twenty two.
Yeah, I think it's primarily related to Covid disruptions, it's very difficult when you're in the midst of a pandemic to have sufficient labor to pick up shifts when things go wrong I mean in a normal environment, you're going to have weather issues youre going to have maintenance issues youre going to have.
All of the things that happened at a lumber mill.
You ordinarily have the opportunity to run a few extra shifts whether it's a saturday or a little over time to get that kind of back up to where you needed to be that's really been challenging in the environment that we've been over the last you know call. It 12 months to 18 months and I would say now just given the fact that labor availability is so tight across the <unk>.
Economy as a whole even as you've come out of Covid, where you're not still facing the same level of issues with corn teens, it's just still hard to get people and so I'd say generally speaking.
No. We're in an environment, where there's just not enough labor to pick up those extra shifts and when you have new people at a mill you know the other thing that maybe sometimes people forget is the folks that run the equipment at a mill are very skilled and knowledgeable and they having people that have been there know what theyre doing really.
Drives the efficiency and productivity of the mill and so when you have.
A higher turnover, you're having labor challenges in getting people in roles.
That has an impact as well so I think it's really it's COVID-19 and its labor Mark are the two things that are driving that.
Yeah. It just from a Weyerhaeuser perspective, do you expect any kind of whole year improvements year over year in terms of.
Your production capability production volumes.
We we do and Thats really you know a couple of things one on the lumber side. Obviously, that's part of our organic growth strategy. So that will continue to progress on pace and you know I would expect our production to be up year over year from a lumber standpoint and.
And even OSB in AWP, assuming that on the AWP side, we can continue to find sufficient veneer I would expect that to be at or slightly above last year as well.
Okay, just if I can slip another one in here on AWP, you've got a really great franchise, there Devin and it's a it's a product area that is growing. So can you just talk with us about any kind of potential investment opportunities to continue to grow that franchise.
Yeah, I mean, we really do the trust choice franchises is a great product. It has a lot of value in the market both because of the quality of the product, but also the the team in place to help support our customers. So you're absolutely right. It's a great product.
We are looking for opportunities to grow that organically through our capital programs, that's really where we're focused right now, but I do think EW Pea as a product is an area, where we've got a unique skill set and in a really.
Really key part to play in the market for growing that so we're looking at that nothing specific to announce today, Mark, but I think you're exactly right that's an opportunity for us over time.
Okay sounds good I'll turn it over thanks, Kevin.
Thank you.
Thank you. Our next question comes from Anthony Pettinari with Citi. Please proceed with your question.
Hi, good morning.
Good morning can you.
Can you talk a little bit more about kind of the current market for good quality industrial timberlands in the south and maybe specifically what you're seeing in terms of prices in the market, maybe appreciation compared to pre pandemic period.
Maybe level of sort of institutional interest youre seeing in timber ones and I guess, you know timber has historically been talked about as sort of a good inflation hedge or obviously seeing record inflation you know how do you see that hedge playing out.
Okay.
Yeah, well, there's no question there has been a lot of interest in timberlands over the last 12 24 months, we're seeing a lot of parties at the table for all of the deals that come to market.
So a lot of interest I think both from your traditional buyers are the you know the rights the T moes.
The private integrated companies, but we're also seeing some.
Some new entrants into this market in terms of some of the capital that's being raised around carbon and in ESG. So it is a it's a space where we're seeing a lot of interest I think you've seen that reflected in some of the deal values of late and so we are we are seeing the <unk>.
Overall buying community value timberlands, maybe at a higher level than they have even just over the last few years. So we're certainly seeing that you know to what extent is that people coming in based on timber being an inflation hedge little hard to say I mean, historically I think that has been true that timber has been a good inflows.
<unk> hedge and so certainly we we continue to believe that that's true over time and as you say this is a period where that will likely be tested given what's going on with inflation, but you know to your main question absolutely. There's a lot of interest in southern timberlands Western timberlands for that matter as well.
Okay. That's helpful. And then maybe just staying with timberlands I mean, you you made a couple of acquisitions last year.
Oregon in Alabama, but you also I think divested close to close to 300000 acres.
Should we be surprised to see you.
Pursue kind of strategic divestitures.
Adam with acquisitions like them in the Carolinas and do you see kind of a decent pipeline of these kind of I guess 50 to 100000 type acre.
Pickups like Oregon.
Oregon, Alabama the Carolinas.
Yeah, you know I'd say, Oregon was a unique opportunity to really do two deals together, but I think if you just step back and look at all of the divestitures and acquisitions that we've done over the last several years.
It really goes to our our main strategy of of optimizing and growing the value of our timber portfolio. So we have done a number of sizeable divestitures over the last several years.
Think to to some extent in our in the west and in the South. We've you know we've largely taken care of the big opportunities and so we're going to continue to look here and there to to optimize so you may see us sell smaller acreage here and there.
But overall I think we're certainly you know in in more of a growth mode. At this point, given kind of where we've positioned the portfolio.
Over the last several years in term.
Of the pipeline you know, there's we've started off the year pretty strong I think theres about a 1 billion and a half of acquisition.
The acquisitions that have happened thus far this year, we will see how the pipeline develops over the next several months.
Our best guess year sitting here in April are probably in the neighborhood of three to $3 5 billion of acquisitions is what we're expecting for the year. So we're active we look at all of the deals that come to market, but we're also talking to.
People all the time about trying to create deals as well. So we'll continue to be active in this space and continue.
Continue to look for opportunities to grow the value of our portfolio and in a disciplined way.
Okay. That's very helpful I'll turn it over.
Alright, thank you.
Yeah.
There are no further questions at this time I'd like to turn the floor back over to Devin stockfish for closing comments.
Alright, well. Thank you everyone for joining us. This morning. We appreciate your continued interest in Weyerhaeuser have a great day.
This concludes today's teleconference. You may disconnect your lines at this time and we thank you for your participation.
Oh Wow.
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