Q2 2023 Weyerhaeuser Company Earnings Call
Greetings and welcome to the Weyerhaeuser second quarter 2023 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 this session you will need to press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host 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 second quarter 2023 earnings. This call is being webcast at www Dot Weyerhaeuser Dot com our earnings release and presentation materials can also be found on our website.
Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward looking statements as forward looking statements will be made during this conference call. We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website on the call. This morning are Devin stockfish.
<unk>, Chief Executive Officer, and David Walt Chief Financial Officer, I will now turn the call over to Devin Stockfish.
Andy Good morning, everyone and thank you for joining US yesterday, Weyerhaeuser reported second quarter GAAP earnings of $230 million or 31 cents per diluted share on net sales of $2 billion. Excluding special items, we earned $238 million or 32 cents per diluted.
Sure.
Adjusted EBITDA totaled $469 million in the second quarter.
This is a 19% increase from the first quarter. It was largely driven by an increase in wood products commodity pricing and strong AWP sales volumes now.
Notwithstanding elevated mortgage rates, we've been encouraged by resilient demand for new homes, this year, which provided a nice tailwind for our wood products business in the second quarter.
We delivered solid results in the quarter and I'd like to thank our teams for their collective efforts and focus on safety operational excellence and continuing to serve our customers.
Before moving into our business results I'd like to comment briefly on a timberland transaction, we completed earlier this month.
As we reported yesterday, we acquired 22000 acres of high quality timberlands in Mississippi for approximately $60 million.
This acquisition is comprised of highly productive timberlands strategically located to deliver immediate synergies with existing weyerhaeuser timber and mill operations.
With the mature age class and well stocked timber inventory, we expect these timberlands to generate strong cash yields.
Additionally, the acquisition offers incremental real estate and natural climate solutions opportunities in the future.
This transaction is a great example of our ongoing efforts to enhance our portfolio with high quality well managed timberlands to generate solid returns for our shareholders.
As highlighted on page 22 of our earnings slides, we continue to make great progress against our target to grow our timberlands portfolio through $1 billion of disciplined investments between 2020, two and 2025 to date, we've deployed approximately $360 million against this target, including the recent Mississippi.
<unk> action and the acquisitions in the Carolinas, and Washington, which were completed in 2022.
Turning now to our second quarter business results, starting with timberlands on pages six through nine of our earnings slides.
Timberlands contributed $104 million second quarter earnings adjusted EBITDA was $172 million or $16 million decrease compared to the first quarter.
This was largely driven by lower average sales realizations for export logs in the west.
Turning to the western domestic market favorable weather conditions during the quarter supported increased log supply across the region.
Log demand improved as mills returned to more normalized operating levels in response to strengthening lumber prices and later in the quarter took precautionary measures to bolster log inventories ahead of wildfire season.
These dynamics kept log prices fairly stable during the second quarter and as a result, our average domestic sales realizations were comparable to the first quarter.
Our fee harvest volumes were slightly higher than the first quarter as a result of favorable operating conditions.
Domestic sales volumes were significantly higher as we intentionally shifted logs to the domestic customers to capture higher margin opportunities.
Per unit log and haul costs improved in the second quarter, and Forestry and road costs were seasonally higher.
Moving to our western export business in.
In Japan log markets continued to soften in the second quarter in response to elevated inventories of European lumber imports as well as lower consumption driven by reduced post and beam housing activity.
As a result, our average sales realizations for export volumes to Japan were lower compared to the first quarter and our sales volumes were comparable.
As we look forward, we expect European lumber inventories in Japan to normalize in the coming months, which should increase demand for our Douglas fir logs into the Japanese market later in the year.
In China log market soften in the second quarter in response to an influx of log supply from New Zealand combined with a reduction in log takeaway at the ports as a result, our average sales realizations for export volumes to China were lower compared to the first quarter. Our sales volumes were significantly lower as we intentionally.
Next logs to the domestic market.
Turning to the south.
Adjusted EBITDA for southern Timberlands was $79 million, a slight reduction compared to the first quarter.
Southern saw log markets remained fairly balanced in the second quarter as log supply improved with drier conditions and mills bolstered log inventories following weather related challenges in the first quarter.
In contrast, southern fiber market soften in response to elevated inventories of log and finished goods at mills as well as lower overall demand for pulp and paper end markets and products.
Given favorable operating conditions are thinning activity increased in the second quarter, resulting in a higher mix of fiber logs as a result, our average sales realizations were slightly lower compared to the first quarter and our fee harvest volumes were comparable.
Per unit log and haul costs were slightly lower primarily due to lower fuel prices and forestry and road costs were seasonally higher.
In the north adjusted EBITDA decreased by $4 million compared to the first quarter due to significantly lower sales volumes associated with seasonal Sprague spring breakup conditions.
Turning now to real estate energy and natural resources on pages 10 and 11.
Real estate and Ian are contributed $52 million to second quarter earnings adjusted EBITDA was $70 million and $19 million decrease compared to the first quarter, largely driven by the timing and mix of properties sold.
Average price per acre increased significantly in the second quarter and remains elevated compared to historical levels.
We continue to benefit from healthy demand for HBU properties, resulting in high value transactions with significant premiums to timber value.
I'll now make a few comments on our natural climate solutions business we.
We continue to make progress on our forest carbon pilot project and me in the second quarter. We completed the third party audit process and submitted the project to the American carbon registry for final approval. Once approved we expect an initial issuance of approximately 30000 credits in year, one and we're currently developing two additional projects.
<unk> in the U S south.
We remain focused on positioning our credits to capture the highest value possible in the marketplace.
Moving to wood products on pages 12 through 14.
Wood products generated $218 million of earnings in the second quarter and $270 million of adjusted EBITDA set.
Second quarter EBITDA was an 82% improvement from the first quarter, largely driven by an increase in lumber and OSB sales realizations and strong sales volumes for engineered wood products.
Starting with lumber adjusted EBITDA was $51 million in the second quarter, a $43 million increase over the prior quarter and largely driven by improved sales realizations bench.
Benchmark pricing for lumber held fairly stable in April and May as sentiment remained cautious buyers.
Buyers, mostly limited orders to necessity purchases despite lean inventories.
By mid June overall sentiment and benchmark pricing improved in response to stronger housing activity.
Perceived risk to supply from Canadian wildfires and announced mill Curtailments also bolstered buying activity in June .
For the quarter the framing lumber composite was comparable to the first quarter, while our average sales realizations increased by 6% with the relative outperformance driven by our regional mix and product mix.
Our sales volumes were moderately higher compared to the first quarter as our northwest Mills returned to more normalized operating levels.
Log costs were slightly lower primarily for western logs and unit manufacturing costs were slightly higher during the quarter.
Adjusted EBITDA for OSB increased by $15 million compared to the first quarter, primarily due to the increase in commodity pricing slightly offset by higher unit manufacturing costs related to planned and unplanned downtime.
Benchmark pricing for OSB entered the second quarter on an upward trajectory largely driven by lean inventories and steady demand from new home construction activity.
As the quarter progressed buyer sentiment and benchmark pricing continued to improve as Canadian wildfires disrupted supply and in response to improving residential construction activity.
As a result, the OSB composite pricing increased by 21% compared to the first quarter, our average sales realizations increased by 11%.
This relative difference was largely due to our extended order files, which result in a lag effect for OSB realizations are production and sales volumes were moderately lower than the second quarter and unit manufacturing costs were moderately higher due to planned downtime for annual maintenance and a temporary period of unplanned downtime related.
<expletive> wildfire activity near one of our facilities in Alberta.
Fiber costs improved slightly during the quarter.
Engineered wood products, adjusted EBITDA increased by $62 million or 76% compared to the first quarter.
This result is directly tied to improving demand for AWP products, which are primarily used in single family homebuilding applications. As a result, our production and sales volumes were significantly higher for most products in the second quarter and unit manufacturing costs improved significantly for solid section and I joist products.
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That said our average sales realizations were lower for most products as supply and demand continued to rebalance across the broader AWP market.
It's worth noting that our current AWP prices remain above pre pandemic levels.
Raw material costs decreased for all products in the second quarter.
In distribution adjusted EBITDA increased by $12 million compared to the first quarter, a 55% improvement as the business benefited from strong E. W. P sales volumes in the second quarter.
With that I'll turn the call over to David to discuss some financial items and our third quarter outlook.
Thank you Devin and good morning, everyone I will be covering key financial items in second quarter financial performance before moving into our third quarter outlook I'll begin with key financial items, which are summarized on page 16.
We generated $496 million of cash from operations in the second quarter and ended the period with approximately $1.8 billion of cash cash equivalents and short term investments total debt at quarter end was approximately $5 $8 billion.
In May we took advantage of attractive capital market conditions and issued $750 million of debt due in 2026 at a coupon of 475%.
This debt issuance pre funded the majority of our 2023 maturities and due to the shape of the yield curve, we were able to reinvest these cash proceeds in the interim at interest rates in excess of the bond coupon.
As a result of this transaction our full year 2023 interest expense will increase by $10 million to approximately $280 million.
That said this increase will be more than offset by the interest income earned on invested issuance proceeds.
In mid July we used a portion of the debt issuance proceeds to repay our $118 million seven and an 8th% note at maturity and we intend to use the remainder of issuance proceeds towards our December 2023 maturity.
Capital expenditures for the quarter were $81 million.
We returned $139 million to shareholders through the payment of our quarterly base dividend, which was increased in the first quarter by 5.6% to 19 <unk> per share.
In addition, we returned $50 million to shareholders through share repurchase activity in the second quarter.
These shares were repurchased at an average price of $29.59 and as of quarter end, we had completed approximately $710 million of repurchase under our $1 billion authorization.
Looking forward, we will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically. When we believe it will create shareholder value.
As highlighted on page 18, adjusted funds available for distribution for the second quarter totaled $415 million and we have generated $470 million of adjusted F. A D year to date looking.
Looking forward key outlook items for the third quarter are presented on page 19.
In our timberlands business, we expect third quarter earnings and adjusted EBITDA will be approximately $25 million lower than the second quarter of 2023.
Turning to our western Timberlands operations domestic log demand was steady at the outset of the third quarter in response to improved pricing and takeaway of lumber and as mills continue to build inventories ahead of wildfire season.
That said absent fire related disruptions in the region log supply is expected to remain ample as the quarter progresses, largely driven by a seasonal influx of logs from non traditional timber owners.
As a result, our domestic sales realizations are expected to be moderately lower compared to the second quarter.
As is typical during the warmer and drier months, we've transitioned in a higher elevation operations, which generally have lower productivity as a result, our fee harvest volumes will be moderately lower than the third quarter.
Forestry and road costs are expected to be seasonally higher as we do a significant amount of this work during the summer months and per unit log and haul costs are expected to be lower partly due to a decrease in fuel prices.
Moving to the export markets, starting with Japan, as Devin mentioned elevated inventories of European lumber imports and reduced consumption continue to weigh on the Japanese log market.
That said, we anticipate our Japanese sales volumes will increase compared to the second quarter due to the timing of vessels.
And we expect our sales realizations to be comparable.
And China elevated log imports from New Zealand and reduced log consumption continue to have an impact on the Chinese log market. We expect these conditions to persist through the third quarter.
As a result, our sales realizations into China are expected to be lower compared to the second quarter and we anticipate our sales volumes will be significantly lower as we flex logs to domestic customers to capture higher margin opportunities.
In the South we expect SOG saw log markets to moderate somewhat in the third quarter and fiber markets to soften further this is being driven by a seasonal increase in log supply elevated mill inventories and softening demand, particularly for pulp and paper products that said takeaway for our logs is expected to remain steady.
Our delivered programs across the region.
Our fee harvest volumes are expected to be comparable to the second quarter and will include a higher mix of fiber logs as increased thinning activity continues.
With a higher percentage of fiber logs, we expect our sales realizations to be slightly lower compared to the second quarter.
Per unit log and haul costs are expected to be comparable and forestry and road costs are expected to be seasonally higher.
In the north our fee harvest volumes are expected to be significantly higher compared to the second quarter as we have fully transitioned from spring breakup conditions and our sales realizations are expected to be moderately lower due to mix.
Turning to our real estate energy and natural resources segment.
Demand for our real estate properties remains steady and we continue to anticipate a consistent flow of HBU transactions with significant premiums to timber value for.
For the third quarter, we expect earnings will be slightly higher and adjusted EBITDA will be approximately $20 million higher than the second quarter of 2023 due to the timing and mix of real estate sales.
For the full year, we continue to anticipate adjusted EBITDA of approximately $300 million for the segment and now expect basis as a percentage of real estate sales to be 35% to 40% for the year.
For our wood products segment benchmark prices for lumber and OSB entered the third quarter on an upward trajectory supported by improving demand relatively lean inventories and the prospects of supply disruptions. Following an early start to wildfire season in Canada.
As shown on page 21, our current in quarter to date average sales realizations for lumber and OSB are well above the second quarter averages.
Assuming this pricing dynamic remains intact for the balance of the third quarter, we expect our wood products financial results to be significantly higher compared to the second quarter of 2023.
That said, excluding the effect of changes in average sales realizations for lumber and OSB, We anticipate third quarter earnings and adjusted EBITDA will be slightly lower than last quarter.
For our lumber business, we expect moderately higher production and sales volumes in the third quarter and slightly lower unit manufacturing costs Logcap.
Log costs are expected to be moderately lower compared to the second quarter.
For oriented Strand Board business, we expect production and sales volumes to be comparable to the second quarter.
Unit manufacturing costs are expected to be slightly higher and fiber costs are expected to be comparable.
Turning to our engineered wood products business as Devin mentioned, we continue to see improving demand for AWP products and this has extended our order activity well into the third quarter.
As a result, we expect our sales volumes to increase slightly compared to the second quarter.
Notwithstanding this dynamic we anticipate slightly lower sales realizations as supply and demand continued to rebalance in certain markets.
That said third quarter AWP prices are expected to remain substantially above pre pandemic levels and will continue to adjust in response to demand signals from the homebuilding segment, which is seen more strength of late particularly for single family construction.
Raw material costs are expected to be higher compared to the second quarter, primarily for OSB web stock.
For our distribution business, we expect adjusted EBITDA to be comparable to the second quarter with that 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.
Our view on the housing market has become incrementally more positive over the last several months supported by improvements in homebuilder sentiment and increase in new home sales and an uptick in single family starts.
Despite elevated mortgage rates, we continue to see resilient demand from the homebuilding segment, largely driven by the historically low inventory of existing homes, a strong labor market and solid household balance sheets.
That being said there continues to be a degree of uncertainty around the trajectory of mortgage rates and the broader U S economy. As a result, we still expect housing starts in 2023 to be lower than the last couple of years, but again, our outlook has become more positive as the year's progressed and there may be incremental upside if mortgage rates move.
Down from the high 6% range and longer term, we remain quite optimistic on housing fundamentals supported by favorable demographic trends and is significantly under built housing stock.
Turning to the repair and remodel market.
Activity strengthened slightly in the second quarter and has held up well year to date largely supported by solid demand from the professional segment <unk>.
Demand from the do it yourself segment was steady in the second quarter is largely normalized pre pandemic levels near term, we expect stable demand from this segment as prospective homebuyers may choose to remodel in lieu of purchasing a new home and a higher mortgage rate environment and longer term, we continue to believe the repair and remodel market.
It will be an important demand driver for our businesses supported by strong home equity levels and an aging housing stock.
In closing our teams delivered solid operational and financial results in the second quarter in.
In addition, we continue to make meaningful progress against the multi year targets, we set out in 2021 through strategic timberland acquisitions, and the advancement of our forest carbon business. Looking ahead. We are encouraged by recent improvements in the housing market and maintain a favorable long term outlook for the demand fundamentals that will drive.
For our businesses, we remain focused on operational excellence and innovation driving industry, leading margins and supporting our customers and with our strong financial position, our unmatched portfolio of assets and disciplined approach to capital allocation, we are well positioned to drive long term value 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, a confirmation tailwind to Kate Your line is in the question queue. You May press star two if you'd like to withdraw your question.
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Our first question comes from George Staphos with Bank of America. Please proceed with your question.
Thank you everyone. Good morning, thanks for the details.
Good morning, let's start off Hey, How're, you doing Kevin I wanted to start off on SG&A and I guess relatedly, all the things youre doing to manage costs.
Your cost matter or at least from our vantage point has been commendable again year to date SG&A really hasn't moved much.
Are there any cost pressures, though that as you're looking out to 'twenty four 'twenty five that youll need to manage against that or maybe building and we will see a little bit more movement to the upside there.
In future years, what do you what do you think about that.
Yeah, I mean first of all I do know I say, thanks for the recognition George as you know this is work that we've been doing day in day out for a number of years to stay focused on cost and you know it's a it's a never ending journey to keep keep control on costs and particularly over the last few years with all of the.
Nation Aerie pressures you know I think in terms of what we're doing on a day to day basis. It's just incorporate it into our planning and our operations to daily focus on keeping our costs down.
You know I think we are seeing from an overall inflationary standpoint.
Not specific to SG&A, but just overall, we are seeing some of our cost pressures starting to you wane, a little bit fuel energy resin waxes things of that nature.
But on the SG&A front labor costs, you know those are sticky and those inflationary pressures are something that we continue to have to manage in terms of you know that the primary focus areas over the next several years you know I think it's largely more of the same I think labor costs will continue to be something that we'll have to manage closely but beyond that.
That I think it's you know a lot of the same things that we've been doing over the last several years I don't know David would you like to add anything to that sure. Devin you know I would just point out that this goes back to everything we've been doing for a number of years on Opex and as we look forward our focus on Opex and continuing into innovation and everything we're working on every day, we expect that to be a.
A lever for us over time to continue to manage costs and drive those down into the future.
Okay. Thank you.
Two a.
Following that I'll turn it over very quickly. So given you know what's been a nice pickup in demand over the course of the year in wood products recognizing it was wasn't so strong earlier in the year.
Our timber prices in the south for saw logs, where you would've expected them given that backdrop now why aren't we seeing more lift recognizing again, it's a it's a market by market very local market, but our timber prices in the south for saw logs were you would've expected given the backdrop.
Why or why not and then can you give us a bit more color in terms of the normalization. The factors that you're seeing in supply demand and AWP, particularly and trust choice and why we're not seeing more of a lift higher given the favorable single family outlook. Thank you guys.
Sure.
Well I'll start with the saw log question in the South and you know I think we've seen over the last several years. Some some uplift on saw log pricing and you know we've been talking about this for a long time, a lot of new capacity coming into the south and certainly what we've seen in those geographies, where we've had new capacity or <unk>.
Spanish capacity, we have seen those markets tension and we've seen upward pressure on pricing I think this year. There are a few things going on you know for the first half of the year I think saw log prices held up pretty well at least in the markets that we participate in a I think unlike the fiber logs, which you've seen a little bit more press.
Or just because of what's going on in the pulp and paper industry. The saw log market has held up pretty well I think there is a nuance going on there with respect to the availability of transportation one of the things that we saw over the last couple of years was just a real shortage of trucking capacity and I think that that put a little bit of an uplift.
On pricing just as as mills, particularly strong lumber markets, we're making sure that they had adequate log decks as that trucking capacity has loosened a little bit I think some of that pressure has come off you know as we think about where we are in the year, it's not atypical to see a little downward pressure on log prices just because in the summer months.
And the dry or whether you have more supply hitting the market. So that's the dynamic at play I do think over time and again just going back to my point earlier is we see capacity continuing to come in to you. The region. You are going to see continued pressure intention ing across the south So I think the trajectory is still.
No what we had expected and certainly I think we're optimistic over the next several years as these mills continue to come into the region that Youll see continued upward price pressure youll have up in ups and down seasonally like we always do but the overall trajectory I think still looks positive.
With respect to your question around E. W. P.
If you if you really want to understand what's going on today you have to look back a couple of quarters and just think about the trajectory of what's happened as we got into late last year and early 2023.
We had a fair bit of Destocking going on so you combine that with the the lower residential construction activity and it really put the AWP market you know in a softer place earlier in this year and so that was really the story in Q1 is as you remember we did dial back our production.
E. W. P to address that I think we have a pretty good customer base, we have a strong product and so as that market started to recover.
There was good demand for our products and we certainly saw that over the course of Q2 moving into Q3, but the reality is in Q1 and Q2, just as those markets rebalanced, we had to take pricing action as everyone else did just to make sure that we were competitive in each individual market theres generally a time lag.
In terms of those pricing actions, whether you're raising prices are lowering prices and so some of what you're seeing in Q3 is just the lag effect of pricing actions that we had to take earlier in the year I would say on balance the market is recovering nicely. Our order files are back to the place where they're fairly extended.
We're even on allocation for a few products at this point so the market is stabilizing but each individual market has its own dynamics and will make pricing action where necessary to make sure. We're competitive but I think directionally, we feel pretty good about where EW P is and the trends that we've seen lately.
Thank you Devin.
Great.
Our next question is from Kurt Yinger with D. A Davidson. Please proceed with your question.
Great. Thanks, and good morning, everyone.
Good morning.
I know it wasn't a huge impact for you guys in the quarter, but can you just talk about some of the derivative impacts from the wildfires up in Canada and in terms of just operating your facilities, there logistics and transportation and the role that is perhaps played in some of the pricing strength that we've seen in <unk>.
Two to three months.
Sure well I'll give you an update on our operations, specifically and then mention more or less the impact that it had on pricing in the market. So you know in terms of the impact to US we had two of our three mills in Alberta that were impacted we had a lumber mill and our OSB mill that both had to take about two weeks.
Downtime each as the fires caused evacuations in those local communities and so the net impact to us from a financial standpoint was was relatively minor sub $4 million for the quarter.
I think the bigger impact, though as you mentioned was just with all of the fire activity. It did cause some concern around supply.
Particularly I think on the lumber side and I suspect that was part of what drove some of the pricing activity to the upside in lumber as we got into June and early parts of July So I think that the real impact was on the overall lumber market and just kind of the concerns around supply availability with.
The fires.
I would say from a transportation standpoint, it did obviously have some impact, but I would say not much not material.
Yeah.
Got it Okay. That's helpful. And then just two quick ones first.
Could you talk about what you're hearing and seeing in terms of European lumber imports into the U S kind of for the back half of the year.
As well as on the timberland side.
Pipeline of opportunities that you see in and.
Just kind of your outlook in terms of potential additional bolt on or larger scale transactions going forward.
Sure.
Well with respect to European lumber, we certainly saw a higher than normal amount of volume coming in late last year early part of this year.
Ordinarily I would say European lumber volumes don't have a meaningful impact on the market I do believe earlier in the year with the amount of volume that was coming and particularly on the east coast. It probably did have some impact on the supply demand dynamic and probably push pricing down just a bit we've seen the.
Volumes of imports really starting to wane here over the last several months, which makes sense as the lumber prices have come down it's less economically viable for some of that would come to the U S. So our expectation is we will see lower volumes I think youll still have some degree of European volume.
Going into the market as many of those producers want to maintain that supply chain and give them the ability to flex depending on what's going on here versus in Europe , but I suspect it will be a lower volume coming in for the back half of the year.
As we think about the M&A market on the Timberland side, you know as you probably have noticed it's been lighter this year than it has been over the last few years.
I think last year, you probably saw in the neighborhood of $5 billion of transaction activity.
We're certainly trending much lower than that this year.
And that's really I think largely a function of aid probably some pull forward from last year, a pretty heavy year I think there's probably a piece of this to you that as the market is trying to figure out how to price carbon and ESG our options in this space, perhaps some are holding out.
With the view that prices are going to continue to go up so.
So we'll see what the back half looks.
It looks like but we're as you know we're expecting it to be a lighter year. This year than it has we're always in the market that being said as you saw with the Mississippi transaction.
We will continue to look at every deal that comes to market. We will continue to have conversations with parties to see if we can do.
Do deals outside of the auction process, it's a competitive market, but you know.
I think there will be properties, where we're very well suited to you to to make those acquisitions and deliver returns for our shareholders.
Okay. Thanks for the color Devin and good luck here in Q3 guys.
Thank you.
Thank you. Our next question comes from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Thank you good morning, everyone.
Good morning, good morning Sue.
My first question is.
Kevin can you talk just a bit about the production levels and the inventory that you're seeing at the mills just across the lumber.
Builders are gearing up and adding that starts on the ground. How are you thinking about overall lumber inventory out there and maybe what could that mean for your ability to hit that 5% annual growth target that you set out there.
Yeah. So you know the first part of the question in terms of inventories I'd say on balance in the lumber space inventories are on the lean side.
Not not nearly as lean as OSB, but I'd say leaner than normal I think what's going on right. Now is there is adequate supply coming on and so people are feeling more comfortable with those lean inventories and as you know typically the August timeframe is a period, where you see a little bit of.
[noise] pullback in demand, particularly on the R&R side, just because of the heat of the summer you know people are less inclined to build a deck. If it's 110 degrees outside so I think you have some normal seasonal a demand pull back just on the R&R side, but in terms of what that that leaner.
Mentor. He looks like is you know as you get into the fall if buyers continue to carry lean inventories and certainly our inventories at the mills are on the lean side as well.
If you get into the fall when that R&R activity picks up and you have strong single family homebuilding.
We've seen what what happens there, particularly if you have some sort of supply shock, maybe from fire season or or some other some other thing happening you know that can really push pricing up fairly quickly and we saw that even just in in June with the fire activity in BC and what that can do to pricing. So yeah, I think it all depends on.
You know, if we see repair and remodel activity pick back up in the in the fall as we normally do in the builders continue to build which is what we're expecting.
That could be a nice setup for fall pricing in lumber in terms of our ability to meet the 5% you know theyre going to be puts and takes every year, what we're doing is where.
We're doing the work with building the capacity so the capex projects the improvements in reliability et cetera that we need to do to hit that target you know last year, obviously, we were down a little bit because of the strikes in the northwest. This year, we did dial back production a little bit just because lumber.
Demand had slack into little particularly in the northwest and in BC. So.
We'll see what the ultimate production number is for the year, but ultimately we're doing the work from a capacity and an operations standpoint to support that 5% per year.
Okay. That's very helpful color and then I guess you do you think about some of the dynamics that are going on in lumber market from both a supply and demand perspective.
You think about where pricing can go as we think about the back half of this year and probably even the first half of next year, given what the builders are talking to and looking to add on the ground and maybe how is that different from what happened in the last few years that could either put a floor or ceiling in terms of the upside potential around the pricing.
Yeah, I mean, I'll I'll I'll offer the caveat that lumber pricing is very very hard to predict as we've seen over the last several years you know I would say if we look back over the pandemic era I don't know that I would necessarily look at thousand dollar lumber prices as being something we're going to see very often that was a result.
Just a number of factors coming together at the same time all of the supply chain disruptions et cetera. So I'm not sure. That's how you should be thinking about things as we think about where lumber prices are going to go in the fall. It's really a function of you know a what's going to happen on the supply side and I think we're going to continue to see puts and takes there with the additions in the south.
The capacity coming out of British Columbia.
That dynamic I think is going to continue to play out and then it's just really a function of what happens with homebuilding and repair and remodel. Our view is you know the homebuilders have done a remarkable job of.
Managing and navigating an environment with higher mortgage rates they seem to be pretty optimistic in the conversations that we're having with them. So my expectation is the back half of the year, even with high 6% mortgage rates or even 7% mortgage rates is that we're still going to see strong single family building, which will be supportive and then it's the question of of.
Our R&R and you know we've seen pretty strong demand out of that segment, just as a data point.
Year over year, our second quarter into the home improvement warehouse market was actually up. So you know we we continue to expect that to be a strong market and as the treaters come back in in the fall I would expect that we're going to see reasonably strong lumber prices and then again it'll just depend on you know are there upside surprises on on building.
Or are there supply shocks that can cause that price a price ceiling to go up.
Yeah, Okay I appreciate all the thoughts Kevin Thank you and good luck with everything.
Alright, thank you.
Thank you. Our next question comes from Mark Weintraub with Seaport Research Partners. Please proceed with your question.
Thank you.
So.
Thanks for all the details on lumber and walking us through your thought process on how pricing might evolve.
If we think about OSB I guess the first question I have is if you you gave on that slide that I think the current prices are like $70 higher as of July one the way when you look at it.
But I think you also referenced that you've got your order files are are what three or four weeks I believe.
And so if we were to kind of assess real time pricing in OSB.
What does that mean can you give us a sense as to what you would expect your prices to be given what were you already know three to four weeks out once that once.
The real time prices are what you would be calling your current prices.
Yeah, I mean without specifically, giving the number what I can tell you is directionally. Our order files are actually five to six weeks out so they're they're fairly extended as you noted Mark you know what that means for US is that there is a lag to the current pricing and so while what you see quarter to date in the in the earnings.
Package is lower than current that that will catch up over time. So there will be a several week lag on the upside and you know.
The flip side of that is there's also a several week lag on the downside. So we ultimately get it. It's just a timing question and you know for US as we think about the quarter you know theres a fair amount of leverage there as it's $8 million of EBITDA per quarter for every $10 increase so theres a fairly significant upside and I think just given the.
Length of the order files are that's going to translate.
Late into a pretty strong quarter for OSB for us.
Okay, and then recognizing that you know prices can move from where they are but I mean, so if I can I looked back.
Five weeks or so and look at the increase that we've had and expect that to cause that's over $100 plus.
To expect that to.
Translate into your prices in and then and then they'll go wherever prices real time go as we go forward is that a reasonable way to look at it.
Yeah, that's generally right.
Okay.
And then you kind of had you'd mentioned that you.
You felt in lumber that may be we can see some improvement in the fall it et cetera, but it sounded like you're reasonably cautious over the summer, but correct me if I, if I interpreted that correctly.
How do you feel on OSB did you see the dynamics differently and if so why.
Yeah, I do different just because there's not a lot of OSB available and I think what you're seeing right now with the pricing dynamic is.
Most buyers went into the summer with very little inventory.
And as you've seen that building activity pick up the.
The demand it ended up being higher than people expected and when they're going out and trying to buy open market OSB, there's just none there and so.
That's going to take a little while to figure itself out osp's not as reliant on the R&R market. So it's a little bit more focused on the single family construction, which has continued to be pretty strong so absent.
You know a material pullback on the housing side. It would seem to me that we're going to see pretty tight a tight market there for OSB, which should mean you should have strong OSB pricing into the fall.
Okay Super and just one last one.
I know there are lots of concerns on fire season weeks or a couple of months ago.
I am not hearing as much about it and certainly not in in your comments recognizing there is uncertainty.
Things calm down Earth, I think feeling like it's not going to be is as dangerous situation. This year, just a quick update.
Yeah. So you know in the northwest it's it's been a relatively mild wildfire season to date I always caution people, though it really starts to become an issue typically in August and the early part of September So we're not necessarily in the heat of the wildfire season, yet in the northwest obviously in <unk>.
Canada, it's been a it's been a really bad year. So far there has been some rain in Alberta, So while we still have fire activity going on and I think that's calmed a little bit in northern B C. I think the fire activity has started to pick up a little bit. So as you think about some of the key regions for Us Washington, Oregon, British Columbia.
I think that story will play out over the course of August but to your point at this juncture in the northwest fire season hasn't been that bad.
Okay. Appreciate the color. Thank you.
Yep. Thank you.
Thank you. Our next question comes from Anthony Pettinari with Citi. Please proceed with your question.
Hi, good morning.
Alright.
Just following up on the Mississippi deal I think it transacted at kind of somewhat of a premium system comps that we've seen in the state I think you talked about it being well stocked and maybe having some synergies with existing operations I'm. Just wondering if you could maybe touch on I guess, the the real estate knee and our opportunities.
We mentioned in the in the press release.
And maybe more broadly I think you are the largest landowner in Mississippi I can you just talk about that sort of Mississippi, Louisiana, Arkansas market in terms of anything.
Anything that you're particularly excited about or concerned about maybe in the next few years.
Yeah sure. So you know it's a it's a really nice acquisition for US a couple of things I would highlight as you noted really a good mature age class a high percentage of saw log mix and importantly, there's two pieces of it theres a northern piece in the southern piece each of them are really close so short haul.
Distances to lumber mills that we have in Mississippi. So some really nice synergies there yeah, I think from a comp standpoint, just for frame of reference one of our large competitors did a deal in Mississippi recently, you know 2700, an acre. So you know it's pretty pretty in line with with what we've seen for the higher quality.
<unk> and that Mississippi region, we are the largest landowner in Mississippi by a fair margin I think you know the the positive news from our Mississippi standpoint is you know, we're seeing a fair bit of new capacity coming in there from a saw mill standpoint.
We've got the pellet mills that are coming in and building new mills in Mississippi. So it's a it's a market while it's been less tension perhaps in some of the other markets and this is true for Louisiana, and Arkansas by the way I do think that's where a lot of the new capacity is coming in and with the work that Russell and his team are doing are working.
Real hard to make sure that we can influence where some of that capacity is coming in so that it's placed in a in a in a region, where we benefit from a timberland standpoint can drive synergies for those customers. So I think we feel pretty good about the trajectory of all three of those markets.
My my instinct tiers that over the next several years, you're going to see some of the biggest price growth in those markets is that new capacity comes comes into place.
Okay, that's very helpful.
And then just switching to climate solutions I think you mentioned two carbon projects underway in the South you know given the experience you've gained with the main pilot I mean is it possible to say how long it might take for those to southern projects to maybe ultimately start issuing credits.
One or two years or maybe maybe longer or shorter and then you know I kind of thought that the main project was chosen because economics in the in the northern region or maybe less compelling than in the southern region I don't know if.
If that's the case or if that's changed but is there any sort of change in view where.
Carbon projects are getting more feasible or more attractive and you're moving them to the south or maybe these are special regions within the South I don't know if you can comment there.
Sure well I think first of all with the main project and you know that's why we call. It a pilot project is there were learnings that we acquired through that process and I think we've been able to take the learnings from from that main project and apply that to those two projects in the south. So my expectation is those projects are going to move dramatic.
<unk> faster than the main project and we could have those issued as soon as later this year early next year. So a much faster and again I think we've taken a lot of the learnings from that initial project, which was the whole point.
In building out that group and the expertise so that we can start to scale. This business in terms of the regional decision, making for where carbon projects go Youre absolutely right. We started in Maine, because the economics there are more supportive, but as you think about a portfolio of 7 million acres across the south there are going to be certain parcels in.
You know certain tracks that are less economically beneficial than others and so are there going to be places, where the economics for carbon even in the near term I still makes sense in the south and you know just to be clear, we're only gonna do carbon projects, where we think the economics and doing carbon will be the economic.
Or do in timber and so.
Part of that is the quality of the land base, but part of that is where we think our carbon prices are trending and what we've seen here of late is for improved forest management carbon projects that are of high quality. There. They are generating strong pricing and that's our expectation when we bring these credits to market.
Okay. That's very helpful I'll turn it over.
Alright, 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, guys. Just just wanted to follow up on this natural climate solutions and the carbon our optionality that you've got if you could and I appreciate the extra color on that 30000 credits that you're expecting your one what's the size of the main project that.
The scope of it that you are that you put forward and then what's the size of the two projects that you've got in the U S South.
Yeah. So we're not providing the specific acreage really for a couple of reasons. Paul first is as we think about how we're managing these carbon projects. We're not just taking those acres out of production, we're going to continue to generate timber revenues from those acres. In addition to carbon so.
It's a little we you know we feel like it's a little.
Hard to put that in context, just by throwing acres out there. So we were not going to be providing acreages.
These products will will ultimately provide the number of credits in the revenues that we're generating from the credits and that's how we'll.
We'll dimension that going forward.
Okay, well just try to scale. It for my side, then that 30000 little credits is that equating to somewhere in the five to $600000 rent.
Well it depends on what you think pricing is going to be you know 30000.
Yeah mid Twenty's as kind of a good way to think about it in terms of what we've seen lately and you know.
I think the quality of the credits, we're bringing to market are really going to be at the top of the of the range. So that's how we're thinking about it.
Okay and then just lastly, just a is this a 100% addition to to your cash flow or is there an impact when you put these projects.
Carbon projects forward I E is there an impact on harvest in the air.
Yeah, there will be some now obviously, we're picking we're picking areas, which you know have have economics, where where where that supported by the you know the carbon but but ultimately if you're if you're going to get carbon credits you are giving up some degree of volume and so we're gonna pick regions where that.
Margin is the lowest in where you know that offset makes the most sense, but yes, there will be some offsetting impact to timber revenues, where we do carbon projects.
Alright, It makes absolutely best of luck. Thanks, Alright.
Alright, thank you.
Thank you. Our next question comes from Katahdin Ouattara with BMO capital markets. Please proceed with your question.
Oh, Thank you and good morning.
Last question then when you talk about you.
Now the auto files, and OSB, which are quite extended right. Now can you give us some sense of what the order files are like an engineered wood and in lumber and how they compare.
For this time of the year versus historical average.
Yeah lumber price lumber order files are pretty normal I mean, that's in a couple of week timeframe one to two weeks, which is pretty typical particularly for this time of year. The AWP order files or are extended you know depending on the product.
Out even beyond OSB. So there they are back to a place where they're they're fairly lengthy the order files.
Gotcha and then.
So coming back to wildfires.
Are your mills in Alberta backup I.
I heard you say that yard some downtime I talked with females added back up running.
Kind of fully or are there. Some you know some restrictions whether related to the log backs or anything else there.
No those mills are both back up running full no no ongoing issues. There. The downtime was really just when the fire got closer to the community. There evacuation order so everybody had to leave town, but as soon as those evacuation orders were lifted we were back at the mills and they're both back up running full.
Got it okay. That's all from my side. Good luck. Thank you.
Alright. Thank you thanks Kim.
Our next question is from Mike Roslyn with Truest Securities. Please proceed with your question.
Thank you Devin Baby N V and care for taking my questions very good quarter.
Thank you.
Just on AWP.
Can you talk about any regional differences that you've seen on AWP demand I would call the west being more impacted like some months ago from slower market conditions inclement weather. So have you seen a weapon in the on the west more than myself.
Figure out how that demand improvement has been.
Broken out by region.
Yeah, I mean, California in particular earlier in the year and late last year was was struggling and that was if you recall just a result of wave after wave of storms hitting that market. So you really saw building activity slow quite a bit as we got deeper into the spring and early summer the California market picked up quite a bit and you can.
See that most.
Mostly in the Douglas fir lumber sales that we've got going.
And of that California market that really saw an uptick is that building activity increased you know I'd say, they're always regional differences you know, California, I think has been picking up Texas is always a strong market.
The south has generally been pretty strong and I think all of those trends are holding you know when you think about what's going on with AWP. You know, there's there's obviously two pieces of that though there's the demand and how much buildings going on and then there's also the supply that's going into each individual region and you know our experience is every every local.
Market has its own competitive dynamic and so it's always balancing making sure that you're serving your customers are trying to make sure your margins feel good but also Megan.
Making sure that you're holding market share against competitors, who all want the same business. So that dynamic plays out in every every region every day, but I'd say on balance again.
The AWP market certainly has stabilized and as you can see with our order files extending out.
We feel pretty good about that trajectory I mean, there always be some ups and downs on pricing, but directionally, we feel pretty good about where our AWP is going.
Thank you for that.
Following up I mean, it's kind of interesting when you look at your.
The sequential improvement in lumber versus DWP lumber.
About 5% sequentially in terms of volumes, but AWP about 63% quarter over quarter.
Can you help us frame, what's what's really driving the difference and it was all due to just the fact that he is more single family related maybe lumber has got that R&R component or is there anything else driving the difference between that between lumber demand and you have people using it.
Yeah, I mean, when you look at our sales volumes, it's really more of a function that we you know we had scaled down our AWP production earlier in the year because of what was going on and just the dynamic with with so many buyers destocking. So the big volume increase in AWP I mean, obviously, it's it's it's related to the fact that there is.
A pickup in homebuilding activity, but the delta between the improvements in volume in AWP and the improvements in volume in lumber is just at AWP was operating at 60% capacity for the first quarter.
Whereas lumber wasn't down nearly as much but that was an intentional decision on our part just to match supply with demand.
Got you and one final question before turning it over just the operating rate in AWP and <unk>.
Yeah. It was in the mid seventies mid to or low to mid seventies, and so we think it'll be up just a little bit in Q3.
Got it thanks, very much and good luck in the second half.
Alright, thank you.
There are no further questions at this time I'd like to turn the floor back over to Devin stockfish for closing comments.
Alright terrific well thanks, everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser have a great day.
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