Q3 2022 Weyerhaeuser Co Earnings Call
Greetings and welcome to the Weyerhaeuser third quarter 2022 earnings conference call. At this time all participants are in a listen only mode. After the Speakers' remarks, there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone keypad.
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As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. Andy Taylor Vice President 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 third quarter 2022 earnings. This call is being webcast at www Dot Weyerhaeuser dotcom.
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 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 David <unk>, Chief Financial Officer, I will now turn the call over to Devin Stockfish. Thanks, Andy good.
Good morning, everyone and thank you for joining US yesterday, Weyerhaeuser reported third quarter GAAP earnings of $310 million or <unk> 42 cents per diluted share on net sales of $2 $3 billion.
Adjusted EBITDA totaled $583 million in the third quarter. This.
This is approximately 52% lower than the second quarter. It was largely driven by further softening in lumber and OSB pricing is cautious sentiment weighed on the near term housing and macroeconomic outlet.
Additionally, and to a lesser degree third quarter results were also impacted by the work stoppage in our Washington, and Oregon Wood products and Timberlands operations.
The work stoppage commenced on September 13th and impacted our four lumber mills in the northwest as well as a portion of our western Timberlands operations.
I'm pleased to report that as of last night, we've resolved the work stoppage and will begin resuming operations next week.
I wanted to acknowledge how important these jobs are to our employees their families and our communities and how difficult. The situation has been for all involved.
We appreciate everyone, who worked diligently over many months to come to an agreement that is fair and competitive for our employees and importantly that we believe is sustainable for our companies throughout the business cycle.
With the work stoppage resolved, we're focused on welcoming our employees back supporting our customers and returning to full operating capacity in the northwest as quickly as possible. We currently expect to ramp up to full operating posture over seven to 10 days after returning to work.
With that I'll now turn to our third quarter business results I'll begin the discussion with timberlands on pages five through eight of our earnings slides.
Timberlands contributed $107 million to third quarter earnings.
Adjusted EBITDA totaled $168 million, a 3 million dollar increase compared to the year ago quarter and.
Third quarter, EBITDA decreased by $51 million compared to the second quarter.
This was largely driven by lower sales volumes in the west resulting from in stock.
Stoppage late in the quarter as well as lower average realizations in the west partly due to less export volume being shipped in the quarter.
Turning to the western domestic market.
Despite lower lumber pricing log markets remained fairly stable in the third quarter as log demand was steady and log supply in certain areas was somewhat constrained by harvest and haul capacity.
Although weyerhaeuser did not experienced these challenges the impacts kept log markets tension for most of the quarter as a result, our third quarter domestic sales realizations were comparable to the second quarter.
Notwithstanding favorable weather conditions, our fee harvest in domestic sales volumes decreased compared to the second quarter. As a result of the work stoppage that commenced in mid September .
It's worth noting that our western log and haul activities are operated by a combination of weyerhaeuser employees and outside contractors as a result, a portion of our contract harvest and haul operations continued through the work stoppage.
Our forestry and road costs were seasonally higher compared to the second quarter and per unit log and haul costs were lower.
Turning to our export markets in Japan demand for our logs softened somewhat in the third quarter due to a number of factors, including an increase of European lumber imports into Japan.
Japanese log sales volumes decreased significantly compared to the second quarter due to the timing of shipments combined with a reduction in log export activity, resulting from the work stoppage sales.
Sales realizations were slightly lower in the quarter.
In China demand for our logs soften modestly in the third quarter due to the ongoing impacts from disruptions in the Chinese real estate market as well as pandemic related lockdowns.
Despite softer demand log inventories at Chinese ports declined steadily from the elevated levels reported earlier in the year as log supply headwinds persisted.
These include restrictions on Australian log imports Russia's band on log exports and a reduction in European would flow into China.
Average sales realizations for our China export logs decreased moderately compared to the second quarter and sales volumes were significantly lower as we continue to intentionally ship volume to the domestic market to capture better margin opportunities.
Our third quarter sales volumes to China were further impacted by a reduction in log export activity, resulting from the work stoppage.
Moving to the South Southern Timberlands, adjusted EBITDA was comparable to the second quarter and year ago quarter disc.
Despite adequate log supply and softening finished product pricing southern saw log and fiber markets remains stable for the majority of the third quarter as mills maintain steady demand to mitigate risks from ongoing supply chain challenges.
As a result, our sales realizations were comparable to the second quarter.
Fee harvest volumes were also comparable as weather conditions were wetter than expected in certain geographies and affected our harvest activity for a portion of the third quarter.
Forestry and road costs were seasonally higher and per unit log and haul costs were comparable to the second quarter.
On the export side, our log exports to China out of the U S. South remain paused due to ongoing rules imposed by Chinese regulators to address potential phyto sanitary concerns on imported pine logs as a result, we continue to redirect logs to domestic mills and the India market during the third quarter.
We continue to view this as a temporary headwind and maintain a positive longer term outlook for our southern export business to China and other Asian markets.
In the north adjusted EBITDA increased slightly compared to the second quarter due to significantly higher sales volumes, resulting from the seasonal increase in harvest activity that is typical in the third quarter.
Our sales realizations were comparable.
Turning to real estate energy and natural resources on pages nine and 10.
Real estate knee and our contributed $48 million to third quarter earnings and $60 million to adjusted EBITDA.
Third quarter, adjusted EBITDA was comparable to the year ago quarter, but $47 million lower than the second quarter, primarily due to a reduction in real estate acres sold partially offset by an increase in royalty income from our energy and natural resources business.
Similar to recent years, our 2022 real estate activity has been heavily weighted towards the first half of the year.
Although activity is moderating in response to broader macroeconomic uncertainty we continue to see steady demand for HBU properties as buyers continue to seek the safety of hard assets, resulting in high value transactions with significant premiums to timber value.
Regarding our natural climate solutions business, we continue to engage with high quality developers for renewable energy and carbon capture and storage opportunities across our acreage and.
And we're encouraged by the recent passage of the inflation reduction Act, which should drive incremental demand for these markets and further support our natural climate solutions growth strategy.
Additionally, we continued to advance our forests carbon pilot project in Maine and are well positioned for project approval over the next few months.
Moving to wood products on pages 11 through 13.
Wood products contributed $344 million to third quarter earnings and $395 million to adjusted EBITDA.
Third quarter, adjusted EBITDA was $517 million lower than the second quarter, largely driven by the decrease in lumber and OSB pricing during the quarter.
Starting with the lumber and OSB markets.
Benchmark lumber and OSB prices entered the third quarter, having stabilized from significant declines earlier in the year as buyers reentered the market to bolster lean inventories buyer.
Buyer sentiment improved slightly following a brief decline in mortgage rates and in response to solid June housing starts data.
This dynamic continued through most of July resulting in a steady increase in benchmark pricing for both products.
By early August buyer sentiment once again turned cautious resulting from rapidly rising mortgage rates housing affordability concerns and in response to unfavorable July housing starts data.
Buyers remain cautious through the end of the quarter, largely limiting orders to necessity purchases well.
While OSB prices stabilized in September lumber prices moved gradually lower throughout the end of the quarter.
Although for context, it's important to note that lumber and OSB prices each remained at healthy levels on a historical basis.
Adjusted EBITDA for our lumber business decreased by $271 million compared to the second quarter.
Our average sales realizations decreased by 28%, while the framing lumber composite pricing decreased by 30%.
Our sales and production volumes decreased moderately compared to the second quarter, largely driven by the impact of the work stoppage at our Washington, and Oregon Mills.
Unit manufacturing costs were higher during the quarter and log costs decreased moderately.
Adjusted EBITDA for our OSB business decreased by $231 million compared to the second quarter.
Our average sales realizations decreased by 41%, while the OSB composite pricing decreased by 44%.
Our sales and production volumes decreased slightly compared to the second quarter due to downtime for planned annual maintenance.
Third quarter sales volumes were further impacted by ongoing rail challenges in Canada.
Unit manufacturing costs were higher in the quarter and fiber costs were comparable.
Engineering wood products, adjusted EBITDA decreased by $7 million compared to the second quarter sales.
Sales realizations were higher for most products in the third quarter and we remain on allocation for most products throughout the quarter.
Sales and production volumes were lower for most products due to downtime for planned annual maintenance.
Sales volumes were further impacted by ongoing transportation challenges in Canada, and labor constraints at certain facilities.
Unit manufacturing costs were higher in the third quarter and raw material costs were significantly lower primarily for OSB web stock.
In distribution adjusted EBITDA decreased by $7 million compared to the second quarter, largely driven by lower sales volumes for AWP and specialty products.
Despite the quarter over quarter reduction this was the strongest third quarter. Adjusted EBITDA result on record for our distribution business with that I'll turn the call over to David to discuss some financial items and our fourth quarter outlook.
Thank you Devin and good morning, everyone. This morning, I will be covering key financial items in third quarter financial performance before moving into our fourth quarter outlook.
I'll begin with key financial items, which are summarized on page 15.
We generated approximately $560 million of cash from operations in the third quarter and nearly $2 $7 billion year to date we.
We ended the quarter with a strong liquidity position with approximately one $9 billion of cash and cash equivalents and total debt of just over $5 billion.
Capital expenditures for the quarter were $94 million, which is a typical level for the third quarter, we returned $133 million to shareholders through the payment of our quarterly base dividend and remain committed to growing this by 5% annually through 2025.
We also returned $145 million to shareholders through share repurchase activity and as of quarter end, we had $523 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.
Adjusted funds available for distribution for the third quarter totaled $468 million as highlighted on page 17, and we have generated approximately $2 $4 billion of adjusted F. A D year to date.
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. E 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 while our return of cash for fiscal year, 2020. One was achieved mostly through base and variable supplemental cash dividends or share repurchase activity. This year has been more active as a result, we anticipate share repurchase will represent a larger portion of our <unk>.
75% to 80% of adjusted F. A D cash return this year that said as a result of the strong cash generation throughout this year, we still expect a meaningful supplemental dividend to be paid in the first quarter of 2023.
Key outlook items for the fourth quarter are presented on page 18, as Devin mentioned, we will soon be returning to normal operating levels in our Washington, and Oregon lumber in timberlands businesses.
That said our fourth quarter outlook includes work stoppage impacts through October followed by a seven to 10 day ramp up period to return to full operating capacity.
In our timberlands business, we expect fourth quarter earnings and adjusted EBITDA will be significantly lower than the third quarter.
Turning to our western Timberlands operations domestic log demand softened at the outset of the fourth quarter, resulting from reduced takeaway of finished products and elevated log inventories at mills.
Regional log supply has improved from the prior quarter and is expected to remain ample for the majority of the fourth quarter, notwithstanding the adverse weather conditions or supply chain constraints. As a result, we expect our domestic log sales realizations to be significantly lower compared to the third quarter.
Our fee harvest in domestic sales volumes.
Are expected to be lower in the fourth quarter, largely driven by impacts of the work stoppage.
We now anticipate our full year harvest volumes in the west to be slightly lower than 2021.
This reduction in volumes from prior guidance represents a harvest deferral that we expect to capture over several quarters after returning to normal operations.
Per unit log and haul costs are expected to be lower in the fourth quarter.
Forestry and road costs are expected to be significantly lower due to the seasonal nature of these activities.
Moving to the export markets, we expect steady demand for our logs in the fourth quarter as Devin mentioned the work stoppage resulted in a temporary reduction in our log export activity. As a result, we expect lower export sales volumes compared to the third quarter. Additionally.
Additionally, we anticipate sales realizations for export logs to be lower in the fourth quarter.
In the South we expect log demand to remain steady in the fourth quarter as mills continued to maintain elevated inventories to mitigate risks from ongoing supply chain and logistics challenges as a result, we expect our sales realizations to be comparable to the third quarter.
The harvest volumes are expected to be slightly higher as weather conditions have improved from the prior quarter.
Because of wetter than expected weather conditions in the third quarter, we now anticipate our full year harvest volumes in the south to be slightly higher than 2021 compared to our prior outlook of moderately higher volumes, we expect slightly higher forestry and road costs in the fourth quarter and comparable per unit log and haul costs.
In the North Sea harvest volumes are expected to be moderately higher compared to the third quarter, we anticipate significantly lower sales realizations due to mix.
Turning to our real estate energy and natural resources segment, we expect fourth quarter earnings and adjusted EBITDA will be lower than the third quarter due to timing and mix of real estate sales and lower royalty income and our energy and natural resources business.
We continue to anticipate full year 2022, adjusted EBITDA of approximately $325 million and we now expect basis as a percentage of real estate sales to be approximately 35% to 40% for the full year.
For our wood products segment, we expect fourth quarter earnings and adjusted EBITDA will be lower than the third quarter. Excluding the effects of changes in average sales realizations for lumber and oriented Strand Board.
Following a reduction in pricing during the third quarter benchmark prices for lumber and OSB entered the fourth quarter showing signs of stabilization.
Buyers are maintaining inventories at or below target levels as sentiment remains cautious.
In October benchmark prices for lumber continued on a slight downward trajectory, but the majority of the month before stabilizing and increasing slightly.
Benchmark prices for OSB have remained fairly stable through October .
As shown on page 20 for both lumber and OSB are current in quarter to date realizations are moderately lower than the third quarter averages.
For our lumber business, we expect significantly lower log costs in the fourth quarter, partially offset by lower sales volumes, resulting from the work stoppage in our western Mills in October and we anticipate comparable unit manufacturing costs.
For oriented Strand Board business, we expect slightly higher sales volumes and significantly lower unit manufacturing costs, primarily due to less downtime for planned annual maintenance during the fourth quarter.
Fiber costs are expected to be comparable to the third quarter.
For our engineered wood products business, we expect lower sales volumes in the fourth quarter. We also expect lower sales realizations for most products compared to the third quarter with solid section and I joists pricing coming off record highs.
This will be partially offset by significantly lower raw material costs, primarily for OSB web stock as a result, we expect adjusted EBITDA to be lower in the fourth quarter, but still higher than any quarter in 2021.
For our distribution business, we are expecting adjusted EBITDA to be lower than the third quarter due to lower sales volumes and realizations for most products.
I'll now turn the call back to Devin and look forward to your questions.
Thanks, David.
Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets.
Over the last several months, we've continued to see softening in new residential construction activity from the peak reported in April , particularly in the single family segment.
There have been notable reductions in new and existing home sales and homebuilder sentiment has turned more negative.
Consequently, we expect near term housing outlook to remain less favorable compared to the last couple of years, largely driven by several ongoing headwinds, including a rapid increase in mortgage rates housing affordability challenges high inflation and growing concerns about the economy.
That all being said homebuilder backlogs should offer some additional support for building activity and wood products demand for the remainder of 2022 and into early 2023.
And longer term, we continue to have a favorable view on housing fundamentals given strong demographic trends are significantly under built housing stock a healthy labor market and solid household balance sheets.
Turning to repair and remodel despite softening in the housing market repair and remodel activity remained fairly stable in the third quarter and continued to be supported by steady demand from the professional segment.
Demand from the do it yourself segment has continued to come off the recent pandemic peaks returning to a more normalized pre pandemic demand level.
Although lower home sales activity ordinarily would be a drag on repair and remodel spending we may in fact see some incremental spend on repair and remodel projects as homeowners elect to invest in remodeling projects in their existing homes, if they're priced out of purchasing a new home in this more challenged mortgage rate environment.
This should provide near term support for additional repair and remodel activity, especially from the professional segment.
Further we remain optimistic on longer term fundamentals supporting the repair and remodel segment, including an aging housing stock and favorable home equity levels. We.
We expect these dynamics to support steady repair and remodel demand for the balance of 2022 and into next year with activity levels comparable to pre pandemic levels.
In closing, we delivered solid results across our businesses in the third quarter, despite increasing macroeconomic headwinds and I'm incredibly proud of the continued focus and resiliency demonstrated by our teams there.
Their collective efforts have generated year to date, adjusted EBITDA of $3 $3 billion and adjusted funds available for distribution of $2.4 billion.
Although near term market conditions have moderated we maintain a constructive longer term outlook for the demand fundamentals that support our businesses.
Looking forward our balance sheet is exceptionally strong we have a competitive cost structure and we are very well positioned to navigate through a full range of market conditions. We remain focused on serving our customers and driving long term value for our shareholders through an unmatched portfolio of assets industry leading.
<unk> performance and disciplined capital allocation.
Now before we move to questions I would like to briefly provide some details to help quantify the work stoppage impacts to our third quarter results and fourth quarter outlook I'm sure that would have been a question. So we'll just go ahead and cover that now.
Starting with timberlands. It is important to note that the decrease in volume. During this period is merely deferred not lost we will capture this deferred volume over the next year or so and in the meantime that volume will continue to grow on the stump.
Additionally, I would point out that in any given period, we have a base level of spend for items, such as forestry silviculture and roads that we maintained to ensure that we capture long term value. So we've continued to incur those costs. During the course of the work stoppage, which means our margins will be significantly lower during this period.
But margins will then increase above typical levels in the future period, when we ultimately harvests that volume take.
Taking all of that into consideration the work stoppage resulted in approximately 360000 tons of deferred volumes in the third quarter compared to our original plan.
This translated to an EBITDA impact of approximately $25 million, but again most of that will be recovered in future periods. When the deferred log volume is harvested next year.
Looking ahead to the fourth quarter, we expect western Timberlands EBITDA will decrease by approximately $50 million from the third quarter with approximately half of that decrease attributable to deferred volume from the work stoppage and the other half due to expected lower average sales realizations during the quarter due to general market conditions.
We expect approximately 500000 tons of deferred volumes in the fourth quarter, resulting from the work stoppage.
For wood products the work stoppage lowered production volumes by approximately 60 million board feet in the third quarter, and we expect around 170 million board feet of impact in the fourth quarter.
Given the more rapid pace and price erosion in lumber versus logs in the west, which compresses margins until log prices adjust accordingly, the lost lumber production in September and October hasn't had a material impact on EBITDA in the third or fourth quarters. So 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.
And confirmation tell them 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 Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone.
Good morning.
My first question Devin is you know you talked a little bit about some deflation in the input costs and wood products that you started to see in the quarter and it feels like that could continue into the end of the year.
We do think about the cost structure coming down and given what is going on in housing broadly can you talk about the ability to hold some of that price that you've seen in your AWP business over the last couple of years.
What that could mean for profitability as we think about going through 'twenty three.
Yeah sure Sue Yeah. So I mean, certainly we are going to see some <unk>.
Some of the input costs on the wood products side coming down and so you know in particular log costs in the west our OSB web stock for instance, we may see a little bit of relief on some of the fuel costs related to transportation. So.
I do expect we'll see some of that come down over time.
With respect to the lumber and OSB business, you know, that's really primarily a supply demand dynamic with the pricing. We can talk further about where we think that's going to go over time, but on the AWP specific I do think we'll be able to hold those prices reasonably well there is a as we saw during the last run up in <unk>.
In housing here over the last couple of years, there is a structural I think under supply.
Of E. W. P. I do think as we move forward there are some opportunities for us to take back some market share in the AWP space from open web. Some other alternative products that builders were forced to move to a when we were at the height of of building activity earlier this year. So I do.
Think will we'll be able to hold those prices are a little bit better as we move forward.
Okay. That's helpful and then.
Moving over to timberlands.
Talked about the fact that overall demand there remains pretty healthy can you just talk about how youre thinking of valuations as we go into next year and the supply demand dynamics as we think longer term about what is going on with timberlands and obviously the tie in there with natural climate solutions.
Sure well you know as we think about.
The timberlands market over the last 12 to 24 months, we have undoubtedly seen a lot of interest in the asset class I think that's clear just in terms of the number of bidders that we see on deals, but also the prices that folks are paying for timberlands deals.
We think about going forward I think there are a few things that come into play and as you mentioned one of those is the interest in the climate solutions piece I think that is driving increased interest in timberland assets.
Candidly I don't know that it folks are really fully underwriting all of those carbon and other alternative values at this point, but I do think it's a piece of the equation as people are trying to value those assets going forward. So I wouldn't expect prices to necessarily fall off of where they are.
We are continuing to see a lot of interest in timberland acquisitions and so we're.
We're expecting that to continue to be a very competitive market you know next year and going forward.
Particularly if we do see carbon prices trend, where we think they are over the next 357 years I think that will be a tailwind for timberland values going forward.
Okay, and then I'm going to squeeze one more in which is just you mentioned, obviously you stepped up the buyback activity. This year you still have some more room remaining on the current authorization.
Any thoughts on how youre thinking of continued buybacks given where the stock is trading relative to some of the other alternatives for capital.
Yeah, you bet sure I mean really our thoughts there havent changed substantially we think about share repurchase as a useful tool in the right circumstances to return cash to shareholders. So as always we start with that commitment to returning a significant amount to shareholders through the base and then we can suffer.
Meant that through the variable return in the form of share repurchase or in the supplemental dividends. So we'll continue to evaluate that.
Amongst all of our other options above that 75% to 80%. We can we can use that cash for investing in growth further debt paydown or additional share repurchase. So we will certainly consider share repurchase as as one of the opportunities available to us we have stepped up the volume of that over the course of the year. So certainly that in.
Vacates that we believe it's.
A useful way to do that so we'll continue to evaluate our opportunities there moving forward.
Okay. Thanks for all the color and good luck with everything.
Thank you.
Our next question comes from the lineup Anthony Pettinari with Citi. Please proceed with your question.
Hi, good morning.
Good morning.
Hey on the impact from the strike the deferred volumes that you discussed.
On the Timberland side is it is it accurate to say that the volumes that you lost in <unk> and <unk> of this year.
Will mostly be recovered in <unk> of next year or is it something that we could see more in the first half of the year or just wondering if theres any kind of finer point you can put on sort of the cadence of ultimately recovering those those volumes over the you know over the next year.
Sure Yeah, our plan would be to sprinkle that in across next year. So it wouldn't be specifically targeted to Q3 or Q4, we would just add that into the overall harvest plan for 2023 and will provide a little bit more specifics on.
The magnitude of that as we provide our full year guidance on on the earnings call in January .
Okay. That's helpful. And then just a lot of materials companies have talked about you know a large buildup of customer inventories that have become kind of an impediment and negatively impacted demand it might take a couple of quarters to work through I think on the log side, you said mill customers have ordered.
<unk>.
Pretty fully compensate for supply chain issues I'm, just if I got that right I'm. Just wondering do you see any risk of if supply chain eases.
Quickly that that kind of inventory build becomes maybe a bit of a headwind for demand into the end of the year or in early 'twenty three and then just maybe if you could.
Maybe contrast that with inventory situation in wood products, especially Walmart that would be helpful.
Yeah sure so on the log side I.
I'm not sure that's a real material risk here in the near term you know I suppose around the margins. If you saw the trucking capacity and logging capacity flowing back into the system, maybe some mills would be more comfortable carrying lower inventories, but to be to be Frank that seems highly unlikely to me in the knee.
Near term you know there is a real challenge around getting trucking and logging capacity certainly across the south but even to some extent in the west. So I suspect most mills are going to continue to carry a little bit heavier inventory levels to mitigate mitigate that risk. So I don't know that that's a big issue on the <unk>.
Timberland side on the wood product side again, I don't know that you know mills necessarily have high levels of inventory I can't obviously speak to our competitors but for us.
We're not carrying excess inventories finished goods inventories across our mill set right.
Right now so don't think it's a meaningful risk there. The other thing I would say on the wood product side is if you look across the channel.
In whole I think most folks, particularly dealers distributors are carrying relatively light inventories nobody's are particularly interested in carrying heavy inventories given all the uncertainty in the macro environment.
Okay. That's very helpful I'll turn it over.
Thank you.
Our next question is from George Staphos with Bank of America. Please proceed with your question.
Hey, Thanks for taking my question. Good morning, everybody. Thanks for the details aren't Oh can you hear me okay.
First question and you talked about this.
During Davies remarks.
Ability for the company to flex its capital return.
You know with the parameters and guardrails that you have around your policy and strategy.
Could you talk a bit about where you see the potential maybe to slow the regular dividend increase we know the goal is 5% per year over time.
Given what could be.
A bit of a cyclical pullback.
In your markets over the next year or at this juncture you feel that given what you know and recognizing it's a board decision.
At 5% growth seems pretty reasonable no matter, where we are in the cycle. How would you have us think about that.
Yeah, No. That's a great question you know I think first of all as you said that's ultimately a board decision. So you know obviously, we're not going to get out in front of the board on that but what I would say is you know when we put out that 5% per year target that was based on a lot of different modeling.
As you know the dividend the base dividend growth is largely going to be funded by the growth in our timberlands in real estate energy and natural resources business.
So as we think about it today, we've done several acquisitions on the timberland side, we've done a lot of work around the debt structure to reduce our interest costs. So I feel like we are doing what we need to do to continue to grow that base dividend by 5% per year, regardless of where we are in the business cycle.
Thanks, Kevin.
Next question that I had.
I mean.
Obviously, we're going again through a bit of a downturn directionally it wouldn't be a surprise, but nonetheless can you give us a bit more color in terms of what is happening with log realizations why they're declining on the west rack.
Recognizing that you know.
Weyerhaeuser doesn't dictate the market when the work stoppages that would differ.
Deferred and did.
Some of the harvest that would've been available in the markets and the logs that would've been available in the market. So help me understand why even with the stoppages and at least from your vantage point some supply constraints, we're seeing log pricing and realizations down in the west and kind of what's going on there.
Yeah, So really a couple of things going on in the West George So first of all with respect to the work stoppage two things to keep in mind, you know first of all nearly two thirds of our log and haul is done by contractors. So we did still have logs feeding into the market even during the work stoppage and.
The flip side is we also had four of the largest mills in the northwest that were idled during the work stoppage. So you know it also hit on the demand side. So net net not sure. It had a really significant impact one way or the other I think what's going on with realizations in the west is really more of a function of what's going on with lumber prices.
Mrs. The west is fundamentally a tension wood basket and I don't see that changing anytime in the foreseeable future what's going to drive log prices is going going to primarily be what's going on with domestic lumber prices and to some extent the export markets as well so as you've seen the law.
Lumber prices come down you just hit a ceiling on what mills are willing and able to pay for logs. So that's going to be the primary driver.
Thanks, David last one and I'll turn it over can you give us a bit more color in terms of.
Export markets, what we're seeing in terms of fourth quarter right now why you would be if you would be.
Positive on export again, particularly from the west.
And I think that we're going through global slowdown, China, obviously got into tissues and housing remains perhaps less able to tension. So you have this potential supply.
What's your outlook for export out of the west realizations and what's happening right now. Thank you guys and good luck in the quarter.
Yeah, sure well I'll take that really in two different parts. So I'll start with Japan. You know there are some headwinds in Japan as I mentioned, there's a a fair amount of European Glu land that went into the Japanese market here in Q3 into early Q4, that's a direct competitor with our customers and the Doug fir beams that they.
Lie to the market, so a little bit of a headwind there and obviously you know with what the yen is doing relative to the dollar that's an additional cost headwind for our customers that all being said I do think we have plenty of opportunity to move volume to Japan with the work stoppage certainly there their log decks have been a little bit deploy.
<unk> and so we've got some volume that we need to get into that market.
To keep them up and running realizations those are going to those are going to flow up and down depending on what's going on in the domestic market, usually get a premium to domestic but those two are correlated so as we see the domestic market realization soften you youre going to see a similar move with Japanese realizations.
On the China side, you know we have intentionally this year been flexing volume to the domestic market to capture better premiums as the pricing softens in the West I think we do have opportunity to move more volume into China, notwithstanding all the issues in China with real estate and Lockdowns et cetera, we still have solid demand for.
Our cut from our customers for the Doug fir logs. So we can we believe move some increased volumes over to China, and those realizations will likely be comparable to domestic.
Thank you Devin and good luck.
Thank you.
Our next question is from Mike Roslyn with <unk> Securities. Please proceed with your question.
Hi, Devin maybe.
For taking my questions.
Thank you good morning, Mike.
Morning, just a quick one on guidance for timber prices in the U S. So you.
You mentioned that you're expecting flat in U S. South timber pricing is that a deliberate or stumpage basis.
What I'm trying to get at is I'm trying to get a sense of what's happening to underlying timber prices themselves.
<unk> cel and others have noted declining stumpage prices over the last two quarters and that's following a number of a number of quarters in years, where you.
So much has gone up so I'm just trying to get a sense of your guidance relative to what your guidance relative to I guess stumpage pricing.
Yeah. So we guide on a delivered basis. So our model is overwhelmingly delivered as opposed to selling stumpage.
And Youre absolutely right there has been a little bit of a disconnect in terms of the direction of pricing and delivered versus stumpage.
I think that's really largely a function of in many geographies finding logging and hauling contractors has been challenging and so I think that's put a little bit more pressure on the stumpage market as opposed to the delivered market and you know I do think that our delivered model is always a.
Competitive advantage it gives us the ability to really drive efficiencies throughout the supply chain la call et cetera. In this market I think that's even more so and we're I think probably picking up a little bit more margin opportunity with the delivered model versus stumpage.
Got you I appreciate the clarification, but it'd be fair to say with bonefish coming down obviously that pressure.
On the little piece of it at some point as well, particularly if you noted that hull and harvest costs will be coming down so I think yes.
What do you think's driving the.
As companies decline in stumpage pricing a function of what we're seeing in the overall housing market and some looseness in wood products and then the other.
Do you think that ultimately plays out through two delivered pricing as well.
Yeah, So if you're thinking about the south in particular ultimately from a mill standpoint, what they care about is what's the cost to get it to the mill and so as we bring delivered a delivered model to our customers.
We think we can get that price.
Higher than they can get it through stumpage, because we can deliver more efficiencies through the supply chain are scale and the expertise that we have at the local level to drive log and haul costs down relative to competition. I think is what allows us to keep that delivered pricing a little higher than where you'd find stumpage pricing in <unk>.
A direction.
I don't know that log and haul.
Rates are going to be going down I do think there's a lot of competition for that so it's really again I think a competitive advantage for us the scale and expertise that we bring to the log and haul space with our contractor base to keep those prices are lower than you know what others can.
Get when they're going out and doing stumpage deals, that's what's going to allow us to keep more of that that delivered price and drive that to the bottom line.
Got it makes sense and just one quick final question just on order files last quarter, you mentioned that with respect to OSB or all of the normal where lumber and the AWP wasn't allocation.
Given what's transpired over the last couple of months, what really stand out.
Yeah in lumber and OSB were still in the normal range is it generally ranges one to two weeks in an ordinary environment on AWP were still on allocation in spots I think you're starting to see some open market purchases become available as we've seen a little <unk>.
Softening in in the single family space, but but still on allocation in spots.
Got you good luck for the balance of the year.
Alright, thank you.
Our next question is from Mark <unk> with Bank of Montreal. Please proceed with your question.
Good morning, Devin Daily Andy.
Morning, Mark.
And I just want to say in opening.
A $395 million quarter in wood products is quite remarkable when you look back historically.
So we're down a lot, but it's a it's still a rather remarkable level I think by any standards my questions. The first on the timberland side can you just remind us in the west.
What your ability is to kind of flex just year to year, depending on market conditions. I know you want to continue to generate cash to cover that base dividend you want to have some stability in terms of your your contractors and keeping them employed.
But what is your ability to kind of dial up and dial down depending on where the log market is.
Yeah, Mark I would say in general you know, 5% to 10% is really the most you can go one way or the other.
In the west Unlike in the South where you know building roads is not overly complicated the regulatory process for getting a unit laid out.
Is is not terribly time consuming in the west there's a lot more that goes into it and so we generally try to have four to five quarters worth of of roads built. So we have some level of flexibility to flex up or down but beyond that you do start to run into some constraints both from an <unk>.
Available unit standpoint, but also.
The contracting capacity is theres, a limit to a particularly on a.
Cable logging in and some of the towers and so there are some limits in terms of how much you can flex up and on the downside. Obviously, you can always flex down as much as you want but as a practical matter you do need to make sure that you're keeping your contract workforce are available so that they're there when you need them coming out.
Whatever dip so as a practical matter of 5% to 10% is really the Max you're gonna go year over year or any particular period.
Okay and then the other question I had is just you know you produce lumber up in D. C. You produce lumber in the Pacific Northwest.
Lumber kind of across the book So I wondered if you could just give us a sense.
You know how you see kind of regional profitability at the moment and also what you see kind of happening to those costs because low costs are coming down in D. C and they are coming down in the Pacific northwest and it looks like that's probably going to carry into the first quarter.
Yeah, that's right and I think you know as you say mark there are different cost structures, depending on the region.
No doubt D. C is the most challenged from a cost standpoint, we are seeing a little bit of relief on the log side. You know October 1st log prices came down I expect they'll come down a little bit further in Q1 of next year.
But nevertheless, it's still a higher cost region to manufacturer for a variety of reasons, but not the least of which is it's just the available timber supply in D. C is challenged and so I do think even as log prices come down in D. C. It's gonna be frankly, a challenging place.
To make money now we've only got one mill in NBC, It's our Princeton mill. It is a top quartile if not top decile cost structure mail. So I think that will give us.
Maybe a little bit more latitude to drive profitability in a tougher market, but it's going to be challenging in B C. I think that's clearly the case.
And in the northwest, we will see log prices adjust down our mills are not going to pay more for logs and they can still be profitable I do think the northwest is you know it's going to be tough for some folks to make money in a more challenged lumber environment. You know the last time, we saw a dip in 2019 I think the costs have gone up.
Since then so that floor is probably higher than it was back you know back in that last little dip in 2019, and it really just goes back to the point, we've been making to be successful in this business. You've had you have to have a good cost structure and that's been you know really the focus of our strategy for a long time. So we've got.
Some low cost mills, some very efficient mills across our Pacific northwest So well.
We'll be able to drive profitability I think regardless of where we are in the cycle, just because our cost position relative to others in the industry. The south is a different story as you know Mark I you know just the cost structure. There is a it's a step change lower than those other two regions. So.
Most producers the vast majority of producers should be able to.
To drive a profit you know in the south regardless of where we are from a lumber pricing standpoint.
Okay. That's helpful. Thanks, Doug and good luck in the fourth quarter and next year.
Yeah, Thanks, Mark and thanks for pointing out just the historical context I do think it's a really important point to make even though prices have come down a lot.
At any time over the last decade pre pandemic, we would've been very very pleased with the pricing that we're getting across the products.
Our next question is from Mark Weintraub with Seaport Research Partners. Please proceed with your question.
Devin you had talked about in your real estate business kind of the appetite for hard assets in and you also kind of alluded to in timberland markets were certainly seeing that as well and carbon being a factor as well.
Given the types of valuations that are being put on some of these more recent southern deals that are coming to market. What's your best assessment of what a typical southern acre might be going for.
Now versus what it was two years ago five years ago or whatever timeline, you think is appropriate to use.
Yeah, Mark and you know and you've been around the industry for a long time. So you'll appreciate this answer I mean, it's it's hard to give a value on a typical acre because they they vary so much depending on stocking.
Depending on percentage planted pine versus markets et cetera. So it's hard to give you a specific dollar value, but what I will say and I think you can see this in the deals that have been done over the last 12 to 18 months, we've definitely seen the values of timberlands going up you know we've seen.
Certainly some deals that are going north of $2000 an acre that a few years ago, where you would have said, maybe we're 1700 dollar an acre deals we've seen some mid 2000 high 2000 kind of deals lately that you know a few years ago would've been closer to that too. So we've search.
<unk> seen some real I think price appreciation in the value of timberland deals, particularly I would say quality deals when you see good high quality timberlands deals come to market those are getting very very strong valuations. These days.
And is there any.
Anything strategically that this can enable you to do or.
How does this.
<unk>.
<unk>.
Our capital allocation, obviously share repurchases as part of this perhaps but anything else that.
This dynamic where we were in trich.
Tricky times from a fundamental perspective in certain respects, but timberland valuations in private markets seem to be extremely robust how is that driving behavior on your part.
Yeah, Mark I, you know I think at a high level I'm not sure. It fundamentally changes how we think about things you know we have been actively managing the portfolio and that is on the sell side and the buy side or a number of years.
We are always looking for opportunities to improve the portfolio and so you know.
When we have a buyer that is willing to pay us substantially more than we think the asset is worth then you know we're happy to do those deals on the sell side and that cash can be used or any of the capital allocation priorities that we have you know whether that's additional timberland acquisitions share repo repo debt pay down all of those things.
So you know to the extent that this gives us an opportunity to create some capital to redeploy in other other areas that certainly are an opportunity for us I will say just as a baseline. Our view is that in general timberland values are going to go up over time and there are a variety.
We have reasons, why we think that whether.
Whether it's you know our our view on log prices over time, but you know really as much as anything on on all of the alternative values that you can drive across timberland ownership.
And so that also goes into the consideration as we think about the longer term price appreciation of some of these assets.
Great. Thank you Devin.
Thanks.
Our next question is from Paul Quinn with RBC capital markets. Please proceed with your question.
Yeah, Thanks, very much good morning, guys.
Good morning, maybe just.
Maybe just starting your natural climate solutions, you mentioned the forests carbon pilot project and approvals over the next.
A couple of months, what does that involve them.
And can you quantify any kind of potential economic upside from that.
Yeah, you know them.
The economics PA. This first project is really a it's a smaller pilot project. The economics are not going to be material. The purpose of this first one was really to build out the internal expertise. So that we don't have to contracted out and we get to keep more of the economics ourselves. So that's that's really the prime.
Mary purpose of this first one up in Maine the.
The process is pretty involved we're running that through the American carbon registry.
And it involves a series of submissions third party reviews feedback from those third party reviews changes to the submission so it's.
It's a process that takes a number of months and we've been working that through over the course of this year, but I do think we've gained some really good insights on how to make this process more streamlined and quicker both with our own internal work, but also with the third party reviewers and the submissions and so I'm pleased with how.
It's going in I think it really is going to set us up to start scaling this to start putting more and bigger projects through the pipeline.
Okay, Great and then on wood products, I mean, Mark pointed out the $3 95, and adjusted EBITDA, but I note that over half of that comes from.
From AWP and distribution, which is typically late cycle, how sustainable is that momentum that youre seeing in AWP and why are you guiding for volumes lower in Q4.
Yeah. So I mean, the guide is really as much as anything just a reflection of both kind of where we are seasonally but also overall, it's just a bit of softening in the housing market. So.
Maybe there's some upside there we'll see.
But generally speaking uwp is very much a product that goes into single family residential and so as we think about how sustainable that is over time again.
There's a limit to how much E. W. P is out there we've gone through a period, where there just was not enough to cover the level of housing.
During that period, we did see a number of builders that had to convert over to open web or even lumber and other products to meet their building needs.
As the housing slows a bit which you know I think realistically, we do expect that to happen there'll be some opportunities for us to try to convert some of that you know alternative back into AWP.
It's just not a product where there is a an over abundance of supply and so I think that will help US you know hold both prices, but importantly market share and be able to serve our customers.
Even if we're in a softer housing.
Okay, and then just a.
Slipping a bonus question just on OSB got caught significantly lower going forward just wondering why that is.
Can you say that again I kind of missed the last part there.
Sorry on your guidance for OSB costs.
<unk> lower than the manufacturing side, and just wondering what that pertains to.
Yes, it's primarily OSB so the web stock input costs as we've seen OSB prices go down most of the OSB that goes into our AWP product.
It does come from our internal mills and it's on a lag.
Yes, sorry, Devin I confused you I'm talking about the OSB segment itself.
Refractory Kosovo with B, you've got that going down in Q4, and just wondering one yes.
Yes, sorry, sorry, Paul Yeah, so for OSB, specifically, that's just because we have.
Less annual maintenance Q3, we had a number of mills that took their annual maintenance shut down and we don't have that in Q4.
Okay that clarifies it thanks, a lot best of luck Yep. Thanks, Paul.
Our final question is from Kurt Yinger with D. A Davidson. Please proceed with your question.
Great. Thanks, and good morning, everyone.
Just one quick one for me on the Timberland side.
Pricing environment has been pretty favorable over the last two years, but theres also been some pretty meaningful increases on the cost side as well.
As you look into 2023 are there any areas you expect to see some relief or I guess buckets, where you think you can take cost out there.
Yeah on the timberlands side I would say that the biggest driver overall has been fuel costs that is something that plays in both on the haul side, but also on the logging side. So that's had a real impact from a cost standpoint to the extent that we see fuel costs come down over the next year to 18 months that.
Certainly will.
B are a positive for us on the cost side.
Beyond that we've got a whole host of initiatives that are focused on driving down costs, whether it's we've got a transportation initiative.
To drive higher loaded mile. We've got a number of automation mechanization.
Ah projects going on across timberlands to try to reduce overall labor costs. So we're always focused on that but I would say in the near term probably the the.
The biggest opportunity from a magnitude standpoint is around fuel costs.
Got it that makes sense appreciate the color and good luck here in Q4.
We have reached the end of the question and answer session I would like to turn the floor back over to Devin stockfish for closing comments.
Alright, well. Thank you again, everyone for joining us today and thank you for your continued interest in Weyerhaeuser have a nice day. Thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.