Weyerhaeuser Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 28, 2021

Key Takeaways

  • Q3 GAAP earnings of $482 million ($0.64 per share) and year-to-date adjusted EBITDA of $3.4 billion reflect record earnings and cash flow despite pandemic, weather, and supply chain challenges.
  • Wood Products segment earnings and adjusted EBITDA fell by approximately 60% quarter-over-quarter as lumber (-61%) and OSB (-43%) price declines, severe weather events, and COVID-related staffing disruptions weighed on production and margins.
  • Engineered Wood Products posted a 43% increase in adjusted EBITDA—its highest ever—driven by price gains and operational improvements despite elevated raw material costs.
  • Generated $659 million in Q3 operating cash flow (a record YTD $2.7 billion), returned $382 million in base dividends plus a $375 million interim supplemental dividend, and authorized a new $1 billion share repurchase program.
  • Management remains bullish on long-term U.S. housing and repair/remodel demand—supported by underbuilding, demographics, and home equity growth—which underpins outlook for continued Timberlands and Wood Products growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Weyerhaeuser Q3 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

And 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, Chief Executive Officer and Nancy Lowy, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Speaker 1

Great. Thanks, Andy. Good morning, everyone, and thank you for joining us today. This morning, Weyerhaeuser reported 3rd quarter GAAP earnings of $482,000,000 or $0.64 per diluted share on net sales of $2,300,000,000 Excluding a special item with a net after tax benefit $32,000,000 we earned $450,000,000 or $0.60 per diluted share. In the 3rd quarter, We delivered strong results across each of our businesses despite weather related disruptions, the ongoing COVID-nineteen pandemic And continued supply chain challenges.

Speaker 1

Our teams did an exceptional job navigating these headwinds and I'm incredibly proud of their collective efforts and focus On safely operating our businesses and continuing to serve our customers, truly great execution across the entire supply chain in a difficult environment, which has resulted in record earnings and cash flow in 2021. Year to date, We've generated more than $3,400,000,000 of adjusted EBITDA and $2,400,000,000 of adjusted funds available for distribution. Turning now to our Q3 business results. I'll begin the discussion with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands earnings increased by $20,000,000 in the quarter, which included a $32,000,000 gain on the previously announced sale of our North Cascades Timberlands.

Speaker 1

Adjusted EBITDA decreased by $15,000,000 compared to the 2nd quarter. In the West, adjusted EBITDA decreased by $13,000,000 compared to the 2nd quarter. Western domestic log markets started the quarter in a favorable position despite weakening lumber prices and ample log supply. Demand remains elevated as mills continue to bolster log inventories during the peak of wildfire season, but weakened somewhat in September as a number of producers COVID related disruptions and finished lever inventories increased above normal levels. Despite these headwinds, Our Q3 domestic sales realizations were comparable to the Q2, driven by strong domestic log prices in July August.

Speaker 1

Salvage operations resulting from the 2020 Oregon wildfires continued in the Q3. The teams have done an outstanding job in managing these salvage efforts over the last year. To date, we've completed approximately 80% of our planned salvage harvest and expect to conclude most of this work by year end. As expected, during the warmer and drier months in the summer, We transitioned to higher elevation and higher cost operations. Additionally, although we experienced very minimal wildfire damage to our timberlands, Active fires and dry conditions across the region resulted in restrictions on our harvest activity in the quarter, particularly in Oregon.

Speaker 1

As a result, our fee harvest and domestic sales volumes were modestly lower in the Q3 and per unit log and haul costs were higher. Turning to our export markets. In Japan, demand for our logs remained strong in the Q3. Lumber imports from Europe into Japan continue to be and robust demand for our logs. As a result, our Japanese log sales realizations increased moderately compared to the 2nd quarter And sales volumes were comparable.

Speaker 1

In China, demand for our logs remained favorable in the quarter despite seasonally lower consumption, COVID impacts to construction activity and other supply chain disruptions. Imports of lumber and logs into China continue to be constrained by global shipping container availability as well as the ban on Australian logs. As a result, sales realizations for our China export logs increased moderately compared to the Q2, but were more than offset by higher ocean freight rates. Sales volumes to China were comparable to the 2nd quarter. Moving to the South.

Speaker 1

Southern Timberlands adjusted EBITDA was comparable to the Q2. Southern sawlog and fiber markets Continued to strengthen as log supply was constrained and mill inventories remain lean resulting from ongoing wet conditions and significant weather events. As a result, our sales realizations were slightly higher than the Q2. Fee harvest and sales volumes increased slightly in the 3rd quarter, but fell below our planned activity level as a result of persistent wet weather and operational disruptions from Hurricane Ida. Per unit log and haul costs increased slightly in the quarter as did forestry and road costs.

Speaker 1

On the export side, We continue to see growing demand for our Southern logs. Our export log pricing increased substantially in the 3rd quarter, The volumes were lower than Q2 as we continue to face challenges associated with container availability and increased freight rates. In the North, adjusted EBITDA decreased slightly compared to the Q2. Sales volumes were significantly higher coming out of spring breakup conditions, Those sales realizations were lower due to mix. Turning to Real Estate, Energy and Natural Resources on pages 1011.

Speaker 1

Real Estate and E and R contributed $45,000,000 to 3rd quarter earnings and $60,000,000 to adjusted EBITDA. 3rd quarter adjusted EBITDA was $31,000,000 lower than the 2nd quarter due to timing of transactions, but comparable to the year ago quarter. Similar to last year, our 2021 real estate sales activity has been heavily weighted toward the first half of the year. 3rd quarter earnings more than doubled compared to the Q3 of 2020 due to the mix of properties sold. We continue to capitalize on strong demand for HBU properties, resulting in high value transactions with significant premiums to timber value.

Speaker 1

Moving to Wood Products, pages 12 through 14. Wood Products earnings and adjusted EBITDA decreased by approximately 60% compared to the prior quarter as lumber and OSB pricing declined substantially from record levels earlier in the year before stabilizing later in the quarter. Additionally, weather events in the U. S. South, including Hurricane Ida, resulted in temporary downtime and lost production in our lumber business And together with COVID related staffing disruptions, further exacerbated transportation challenges in the region.

Speaker 1

Despite these headwinds, our teams performed well and delivered strong results. Our EWP business established a new quarterly EBITDA record in the quarter and the overall Wood Products segment has achieved year to date adjusted EBITDA of more than $2,800,000,000 Lumber markets began the Q3 with elevated home center and treater inventory levels due to softening do it yourself repair and remodel activity. As a result, pricing continued its downward trajectory in July and for much of August. The market began to strengthen later in the quarter As home centers and treaters work through excess inventories and consumer spending shifted back to do it yourself repair and remodel activity after Labor Day. When combined with solid demand from new home construction and professional repair and remodel activity, each of which remained healthy throughout the Q3, These dynamics caused pricing to stabilize in late August and increase gradually through September.

Speaker 1

Adjusted EBITDA for our lumber business Decreased $686,000,000 compared to the 2nd quarter. Our sales realizations decreased by 52% in the 3rd quarter, While the framing lumber composite pricing decreased by 61%, our sales volumes increased moderately in the 3rd quarter And log costs increased slightly, primarily for Canadian logs. The OSB market weakened significantly at the outset of the 3rd quarter With the softening of do it yourself repair and remodel activity, this dynamic drove lower sales activity and higher inventories at the home centers. As a result, we experienced a rapid decline in pricing from the peak record prices that we reached in July. Pricing then stabilized above the historical average in August as demand from strong new home construction activity continued And the market faced supply constraints resulting from ongoing resin availability and transportation challenges.

Speaker 1

This dynamic Along with late quarter improvement and do it yourself repair and remodel demand drove prices gradually higher through September. Adjusted EBITDA for our OSB business decreased by $128,000,000 compared to the 2nd quarter. Our sales realizations decreased by 24% in the 3rd quarter, while the OSB composite pricing decreased by 43%. This relative outperformance was largely a result of our higher percentage of premium OSB products. Our sales and production volumes improved modestly in the 3rd quarter due to less downtime for planned maintenance.

Speaker 1

Unit manufacturing costs increased slightly, primarily for resin costs. Engineered Wood Products adjusted EBITDA increased $23,000,000 compared to the 2nd quarter, a 43% improvement. Sales realizations improved significantly across most products and we continue to benefit from previously announced price increases for solid section and I joist products. This was partially offset by higher raw material costs for OSB Webstock, resin and veneer. Sales and production volumes were moderately lower for most products as a result of planned annual maintenance during the quarter.

Speaker 1

In distribution, adjusted EBITDA decreased by $53,000,000 compared to the 2nd quarter. Despite lower sales volumes for most products and delivered $22,000,000 of adjusted EBITDA in the 3rd quarter. With that, I will turn the call over to Nancy to discuss some financial items and our 4th quarter outlook.

Speaker 2

Thank you, Devin, and good morning, everyone. I'll begin with our key financial items, which are summarized on Page 16. We generated $659,000,000 of cash from operations in the 3rd quarter, bringing our year to date total to nearly $2,700,000,000 our highest year to date operating cash flows on record. Adjusted funds available for distribution or adjusted FAD For year to date, Q3 2021 totaled over $2,400,000,000 as highlighted on Page 17. Year to date, we have returned $382,000,000 to our shareholders through the payment of our quarterly base dividend, and we will supplement the base dividend each year with an additional return of cash to achieve the targeted 75% to 80% of adjusted FAD.

Speaker 2

For this year, we intend to achieve this entirely through a variable supplemental cash dividend. Though in future years, we may also utilize opportunistic share repurchase for a portion of this cash return. The supplemental dividend will normally be paid in the Q1 of each year based on prior year cash flow. However, as a result of the Record year to date performance, we accelerated a portion of the supplemental dividend by returning $375,000,000 to our shareholders through our previously announced $0.50 per share interim supplemental dividend earlier this month. We look forward to returning the remaining portion of the supplemental dividend with a significant payment in Q1 2022.

Speaker 2

During the Q3, we also returned $26,000,000 to shareholders through share repurchases. Further, as previously announced, we authorized a new $1,000,000,000 share repurchase program. And as always, we'll look to repurchase shares opportunistically under circumstances when we believe it will create shareholder value. Turning to the balance sheet. We ended the quarter with approximately $2,300,000,000 of cash and just under $5,300,000,000 of debt.

Speaker 2

Subsequent to quarter end, we repaid our $150,000,000 or 9 percent note at maturity, which brings our debt balance to $5,100,000,000 After this repayment, we have no additional maturities until 2023. Looking forward, key outlook items for the 4th quarter are presented on Page 18. In our Timberlands business, we expect 4th quarter earnings and adjusted EBITDA will be comparable to the 3rd quarter. Turning to our Western Timberland operations. Although domestic log inventories ended the 3rd quarter higher than normal, Takeaway of finished lumber and log demand have improved following a brief pullback in September.

Speaker 2

We anticipate this dynamic continuing for most of the 4th quarter. As a result, we expect our domestic sales realizations to improve from the lower levels experienced in September. For the Q4, we anticipate our average domestic sales realizations to be moderately lower than the elevated third quarter levels. As Devin discussed, we have made great progress within our salvage operations in Oregon and expect our salvage volumes to decrease in the 4th quarter. As a result, we expect 4th quarter fee harvest volumes to be moderately higher with lower per unit log and haul costs.

Speaker 2

Moving to the export markets. In Japan, log demand remains favorable. We anticipate our 4th quarter sales realizations to be comparable to the elevated 3rd quarter levels, partially offset by moderately lower sales volumes due to the timing of vessels. In China, despite elevated log inventories at the ports, Demand for our logs is expected to remain favorable as construction activity increases seasonally and imports of lumber and logs continue to be constrained from other countries. We expect our 4th quarter sales volumes to be higher than the 3rd quarter, partially offset by slightly lower sales realizations.

Speaker 2

Elevated freight costs and labor to load ships continue to be headwinds. In the South, weather conditions improved at the outset of the 4th quarter. As a result, we anticipate slightly higher fee harvest volumes compared to the Q3. Log demand continues to be favorable as mills work to bolster lean inventories, resulting from persistent wet conditions and reduced log supply. As a result, we anticipate slightly higher sales realizations during the Q4.

Speaker 2

We expect this will be offset by slightly higher per unit log and haul costs as well as moderately higher forestry and road costs as a portion of our planned activities in the 3rd quarter were deferred due to weather disruptions. As a result of persistent wet conditions in 2021 and significant weather events in the Q3, We now expect full year Southern fee harvest volumes to be comparable to 2020. In the North, sales realizations are expected to be slightly lower due to mix And fee harvest volumes are also expected to be slightly lower compared to the Q3. Turning to our Real Estate Energy and Natural Resources segment. 4th quarter earnings and adjusted EBITDA will be significantly lower than Q3 due to timing of transactions.

Speaker 2

We continue to predict full year 2021 adjusted EBITDA will be approximately $290,000,000 and we now expect basis as a percentage of real estate sales to be approximately 25% to 30% for the full year. For our Wood Products segment, New residential construction activity remains strong and demand from the repair and remodel segment continues to strengthen following the improvement in do it yourself activity in September. This dynamic should continue for most of the quarter before weakening seasonally into winter. Excluding the effect of changes in average sales realizations for lumber and oriented strand board, we expect 4th quarter earnings and adjusted EBITDA will be higher than the 3rd quarter. For lumber, production volumes are expected to be comparable to the Q3.

Speaker 2

However, our sales volumes are expected to be modestly lower, resulting from the inventory drawdown we experienced in the Q3. We anticipate this will be offset by slightly lower log costs and improved unit manufacturing costs. As shown on Page 19, our current and quarter to date realizations for lumber are slightly higher than the 3rd quarter average. For oriented strand board, we anticipate moderately higher sales volumes and improved unit manufacturing costs, primarily due to less downtime for planned maintenance during the Q4. We expect this will be partially offset by moderately higher fiber costs.

Speaker 2

As shown on Page 19, our current and quarter to date realizations for oriented strand board are significantly lower than the 3rd quarter average, but still elevated compared to historical standards. For Engineered Wood Products, we expect sales realizations for solid section and I joist products will be comparable, While realizations for plywood will be lower, we anticipate this will be more than offset by significantly lower raw material costs, primarily for OSB Webstock. For our distribution business, we are expecting higher adjusted EBITDA in the 4th quarter, primarily due to improved I'll wrap up with a couple of additional items or comments on our total Company financial items. We now anticipate our full year outlook for capital expenditures to be slightly below our previous guidance of $460,000,000 As a result of supply chain and contract labor constraints with $15,000,000 to $25,000,000 potentially at risk. Turning to taxes, the $90,000,000 tax refund associated with our 2018 pension contribution was approved during the Q2.

Speaker 2

However, we are still awaiting the refund. We expect to receive it by the end of Q4 2021. Excluding this refund, we now anticipate our full year cash Now I'll turn the call back to Devin and look forward to your questions.

Speaker 1

Thanks, Nancy. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Notwithstanding a slight decrease from the prior quarter, U. S. Housing activity remained strong in the Q3 with total housing starts and permits averaging around 1,600,000 units

Speaker 3

on a

Speaker 1

seasonally adjusted basis. Although housing starts in 2021 continue at a strong pace, the cycle time between starts and completions has extended as homebuilders continue to experience supply chain and labor availability challenges. Despite these headwinds, Our customers tell us they continue to expect strong demand for new home construction for the balance of 2021. The latest new home sales number released earlier this week Further reinforces our positive view on the current state of the housing market. With favorable long term demand fundamentals, Including a decade of underbuilding, favorable demographics, we continue to have a bullish outlook on U.

Speaker 1

S. Housing activity well into the future. Turning to repair and remodel. We've continued to see strength in large professional projects over the course of 2021 and expect that to continue for the balance of the year and into 2022. And while we did see some softening in the smaller do it yourself segment during the summer, Demand has improved significantly coming out of Labor Day and we've continued to see strong demand from the repair and remodel segment through October.

Speaker 1

Overall, we continue to have a favorable long term outlook for repair and remodel activity, supported by numerous demand drivers, including an aging housing stock, Rising home equity and low interest rates. Finally, we hope you had the opportunity to participate in our virtual Investor Day on September 22nd, where we outlined a series of multi year strategic growth targets, including growing our Timberlands portfolio, growing our new Natural Climate Solutions business And organically growing our lumber business. We also announced several capital allocation actions and enhanced our ESG leadership by releasing our carbon record and announcing new greenhouse gas emission reduction targets. Our strategy as we outlined at Investor Day is simple. We intend to grow the value of our portfolio, improve our cash flows, build on our competitive advantage in the marketplace And solidify Weyerhaeuser as a premier ESG investment opportunity.

Speaker 1

These actions will ensure that we drive superior returns for our investors, including returning meaningful amounts of cash to shareholders through a growing base dividend, a variable supplemental dividend and opportunistic share repurchases, all while continuing to invest in our businesses and maintain an appropriate capital structure. We're excited about the future of Weyerhaeuser And we're well positioned to capitalize on strong macro trends driving continued growth and demand for our products and new opportunities for our businesses. Before turning to questions, I would like to take this opportunity to recognize and thank Beth Balm for her of our Investor Relations team over the last several years. We're greatly appreciative of Beth's contributions to our IR function and look forward to our next opportunity at the company. With best transition, Andy Taylor has assumed the lead role of our Investor Relations program.

Speaker 1

Andy joined Weyerhaeuser in October of last year after an 18 year career in the energy industry, where he served in numerous leadership roles including Investor Relations. He's been a great addition to the Weyerhaeuser team and we're really excited to have him taking on this new role. So now I'd like to open up the floor for questions.

Speaker 4

Thank you. We will now be conducting a question and answer Our first question comes from Susan Maklari with Goldman Sachs. Please proceed with your question.

Speaker 5

Good morning, everyone. Good morning. My first question is around any color you can give us on inventories in the channel, Given all the moves that we saw during the quarter in terms of pricing as well as the demand environment, how much do you think the industry worked through and where your inventory And how does maybe that compare to the broader industry?

Speaker 1

Yes. And Susan, I assume you're talking about Wood Products inventory?

Speaker 5

Yes. Yes.

Speaker 1

Sure. Yes. So I think at present, as we think about inventories across the channel, I would categorize Generally speaking for lumber and OSB as anywhere from normal to perhaps a bit lean in certain areas. I think With respect to the treaters and to some extent the home improvement warehouses, they're more or less in normal inventory levels for this time of So I don't think there's a whole lot of inventory there. And that's generally the case for us as well.

Speaker 1

We're sort of normal to perhaps a little light in certain spots In terms of Wood Products.

Speaker 5

Okay. That's helpful. And then, as a follow-up, obviously, there's been a lot of puts and takes as it relates to the Supply chain, especially in the quarter. Can you just give us maybe a bit more color on any highlights areas where you're really sort of seeing some headwinds there? And then also the implications as we think about resins and some of the inputs to things like OSB or some of your other products like EWP and What any kind of read throughs from there?

Speaker 1

Yes. I'd say at a high level, there have been a lot of Challenges from a supply chain standpoint. And that really cuts across really all aspects of the supply chain. The big one that I think it's been a challenge for everyone has been on the transportation side and that's trucking particularly in the U. S.

Speaker 1

South. It's been a real challenge. That bleeds over into rail in many instances all the way to the export side and finding Shipping containers. So really anything having to do with transportation is a real challenge right now. As you think about other aspects of the supply chain, labor It is a challenge I think in many spots.

Speaker 1

You read a lot about that. I think it's impacting pretty much every industry. Ours is no different. So labor challenges and really to us that's made us a little bit Maybe more challenged in terms of running extra hours when we might otherwise have done so. So I think labor issues across the industry continue to be an issue.

Speaker 1

In terms of some of the inputs, resin, it hasn't really impacted our operations to date. But certainly, there is a tightness In terms of resin availability and I think that's impacted the industry as a whole. The other one I would call out really is veneer And that's been a challenge as well. So really, there are impacts across the entirety of the supply chain and I think that's really why we're So pleased with the work our team has done in navigating some of those challenges and delivering the results that we were able to deliver in Q3.

Speaker 5

Got you. Okay. Thank you. That's very helpful color and good luck.

Speaker 1

Thank you.

Speaker 4

Our next question is from George Staphos with Bank of America. Please proceed with your question.

Speaker 6

Thanks very much. Hi, everyone. Good morning. Thanks for all of

Speaker 4

you both.

Speaker 6

And congratulations to Beth and Andy. Andy looking forward to working with you in the future. So I guess the first question I had, when I look at wood, obviously and lumber EBITDA in particular, Obviously, you took it on the chin from a pricing standpoint, although you did a little bit better than the composites. But when I apply that to Your volumes actually EBITDA held up a little bit better than I would have expected. So what were you doing from a process and operations, a cost standpoint?

Speaker 6

Obviously, you've been working on this for the last Number of years that helped the performance in the quarter. And then I had a couple of follow ons.

Speaker 1

Yes. I think well, you really touched on it, George. And the reality is the OpEx work that we've been doing for a long time has been a core part of our strategy. That's really true in any environment, but I think particularly in an environment where we are seeing inflationary pressures, that work is just absolutely critical. And Kudos to the teams for all the work they're doing to again manage through some of those supply chain challenges, really try to battle some of the inflationary pressures And we're going to continue to do that.

Speaker 1

We didn't mention that on the script, but certainly we do plan to meet our $50,000,000 to $75,000,000 OpEx target for the year, which I'll just say, that's a really high hurdle given the inflationary environment that we're seeing. So It really just goes back to operational excellence, George, and really what we're doing on that front to make sure that we're driving costs out wherever we can and delivering Our customers.

Speaker 6

Devin, does that suggest you'll be at the upper end of that range or you don't really want to be that precise at this juncture on OpEx?

Speaker 1

Yes. I wouldn't want to be any more precise than just to say that we were confident that we'll be within that range.

Speaker 6

Okay. Understood. Yes. Second question for you and for Nancy. Obviously, we'll see what the Q4 brings, but so far it looks like Your guidance is for performance that's at least as good as was the case in the Q3.

Speaker 6

You gave us the guidance on CapEx for the year. And not making any adjustments for the tax refund, is it unfair to think of the potential Special dividend in the Q1, again, lots has to happen as being in the $1.70 range or perhaps higher when we do the math or How would you have us sort of guardrail it, if you will?

Speaker 2

Yes. Hi, George. This is Nancy. Adjusted FAD is cash from operations, less CapEx and significant non recurring items. So we will actually adjust The tax credit for that.

Speaker 2

And we don't provide guidance on adjusted FAD or the supplemental dividend and that's because our cash flow fluctuates With working capital changes and we can't predict the lumber and OSB prices. So, we do provide the adjusted FAD Each quarter as you saw and you'll know the payout is targeted at 75% to 80% of adjusted FAD and you'll see that Each quarter as we go here. And I think what we've shared today is that the remainder of the supplemental dividend that we see will be significant. That's about what we can say.

Speaker 6

Nancy, and I appreciate that, but if we hold pricing constant and we'll leave other stuff to the side, Would it be fair to say that your operating cash flow should be at least as good in 4Q versus 3Q? Are there some other things that we should be remembering in terms of, On a working capital, cash taxes, etcetera?

Speaker 2

Yes. Well, just remember the CapEx is a significant amount of our 4th quarter And that's because

Speaker 7

our CapEx I was excluding

Speaker 6

CapEx there. So on operating cash flow?

Speaker 1

Yes, George. I mean, when you build it up, right, so we're talking about comparable EBITDA from a Timberland standpoint. It is going to be lower for the real estate, but again, up to the $290,000,000 that we guided to. And then on the wood products side, as we said, we're thinking Absent lumber and OSB prices, which obviously we're not going to try to predict, it is going to be higher for the quarter. So when you build those up, I think you're not wrong about the operating cash flow, although like Nancy said, you have to build in the CapEx when you're trying to calculate the FAD.

Speaker 6

Yes, of course, of course. My last question, I'll turn it over. I assume it's just the supply chain and the lack of other markets being able to hit Asia, but if you could Give us a bit more color in terms of why the Southern Log exports were strong in the quarter. Thanks and good luck in the quarter.

Speaker 1

Yes, sure. And that's primarily going into the China and India markets, George, in terms of our Southern export. And it's really a combination of a few things. Number 1, particularly in China, there are some overall global supply chain issues. As you mentioned, shipping containers For European wood going into that market have been strained.

Speaker 1

There's also a ban on Australian logs. And so that's really opened up some opportunities for North American would. And we've really seen that demand spike up. And so that's true for China, but we've also seen the demand going into India Coming up, we've started shipping into Pakistan, Turkey as well. And so we're just seeing good strong global demand And from the Southern Yellow Pine standpoint, we think there's a really good Strong market for us going out into the future, particularly when we can start resolving some of these logistical challenges with shipping availability and container availability.

Speaker 6

Thank you, Devin.

Speaker 1

Yes. Thank you.

Speaker 4

Our next question

Speaker 8

I would have expected given what people have always told me about sort of how these price increases cadence in. I know you've got a lot of increases over the last year, but My understanding was that those typically phase in over a 3 or 4 quarter period.

Speaker 1

Yes, Mark. Well, you're absolutely right in terms of the timeline for how Those pricing increases typically take place. It is over a multi quarter period. I think the way to think about that though is that Just given the dynamics of what's been going on in the market both with respect to OSB pricing and some of the other input costs like resin, veneer, etcetera, We've had a number of price increases over the last year. And so they just sort of have layered on top of each other.

Speaker 1

And generally speaking, that's the answer is we're just in this quarter, we saw several of those price increases really start to take hold. We still have more coming in terms of the previously announced price increases. So Q4 and Q1, we'll see a little bit more. The only thing I would say on that front is, it's always dependent on particular regions and customers. And so we did see perhaps a little bit more in Q3 than you might otherwise think.

Speaker 1

But generally speaking, the answer is it's just a number of price increases over the last year that have Kind of layered on top of each other.

Speaker 8

Okay. And the second question I had was just around Southern log and timber pricing, because you're up a little bit, but not much. But In talking with kind of people around the trade, it seems like there's a little more of a pickup Going on, then you're showing or the Timbermark data is showing. And I'm just curious, do you sell forward such that if we had a pickup in the markets It was starting to occur. It would take a while to be fully reflected in your numbers because maybe you're selling forward 3 or 4 quarters?

Speaker 1

Yes. So certainly that's correct with respect to some of our volume that we sell in the South. So We sell through a variety of methods including spot prices, which obviously those are reflected real time. But we also do a lot of quarterly pricing, which will reflect the prior quarter indexes. And so to the extent you see a run up, there will be a lag In log pricing in the South.

Speaker 8

Okay. And then finally on this Southern Log Export Business, is there any case over the next, I don't know, 2 years, 3 years, It should actually put some dedicated freight in place. In the Pacific Northwest, you've got dedicated Bulk ships for log export business whereas I think in the South, we're basically stuffing logs in the shipping containers right now, which Has to be higher cost.

Speaker 1

Yes, Mark. Well, that's the goal. Ultimately, we'd like to build that program to the size where we can Transfer that over from the container shipping up to break bulk. So that's the goal. I think we're making some good progress.

Speaker 1

We were heading in that direction pre tariffs a few years ago when we had the trade dispute with China. That set us back a little bit. That was a bit of a headwind there with the size of the tariffs on Southern Yellow Pine. But as those have come off, we've really been building that program back up. We do see the demand in China for Southern yellow pine growing.

Speaker 1

I think we'll see some interesting dynamics here over the next few years, one with the export ban Of logs from Russia, I think that will be an interesting dynamic to follow. And then 2, we have seen elevated levels of European logs going into that market after the beetle infestation that we've seen there, our view is that volume is peaking Maybe over the next year or so and then should start to diminish over time. And again, I think that just opens up another opportunity for Southern Yellow Pine.

Speaker 8

And if you go to break bulk, Devin, can you give us an order of magnitude on what that does to kind of shipping costs?

Speaker 1

Yes. I think it would be hard for me to give that to you right off the top of my head, Mark. We can certainly follow-up. But there's no question that it's better economics if you can go to break bulk versus And that's true in any market conditions. But particularly right now, when you think of the inflationary pressures we've seen on containers, It would be even more so in today's environment.

Speaker 1

But no question about it, the economics are much better with break bulk versus container. Great.

Speaker 8

I'll turn it over. Thanks, Devin.

Speaker 1

Thanks, Mark.

Speaker 4

Our next question comes from Mark Weintraub with Seaport Global. Please proceed with your question.

Speaker 9

Thank you. Good morning.

Speaker 4

First, I

Speaker 9

wanted to just clarify a little bit the answer to George's question. Were you I thought I heard you saying and it sort of doesn't really make total sense to me that cash from operations in the 4th quarter Look like they're going to be higher than the Q3. And I just wanted to clarify if that is what you were saying, because I guess If lumber and OSB prices stayed where they are today, would that be the case or would they probably be Somewhat lower.

Speaker 7

I was

Speaker 9

a little confused by that exchange. Yes.

Speaker 1

So we were really just speaking to EBITDA Absent the impact of lumber and OSB sales, which are pricing, which we don't as you know, which we don't try to forecast.

Speaker 9

Right. But you have provided an indication of where they are quarter to date and where they are currently. So if we were to just assume Those types that type of pricing level, can you give us a sense or do you want to hold off from that?

Speaker 1

Well, but I think keep in mind, right, so if we think about quarter to date lumber pricing, they're up just a little bit, but OSB pricing still down quite a bit relative to Q3. So if you took today's pricing, then obviously it would be lower quarter over quarter.

Speaker 9

Okay, good. That's what I thought. Just wanted to clarify, I wasn't misunderstanding. But I guess another thing though on the OSB, we do you point out in the slide that there is a lag on the way that the pricing does show up. And so when you give that current number, is that reflective of what's in random length today or is that really reflective of what was in random Several weeks back, so that we've already sort of got this a built in ramp of some amount in the coming few weeks.

Speaker 1

Yes. There's always going to be a lag when we talk about our realizations relative to Random Length because the order files that we have on OSB That creates a lag effect. And particularly today, where we're talking a 3 to 5 week order file, you're going to see a comparable Lag in terms of pricing relative to what's going on with Random Lengths when we talk about our realizations.

Speaker 9

Okay. And then lastly, We've seen certainly noted your bullish comments that make a lot of sense to me on housing, etcetera, for next year and implications For the Wood Products business as well as your other businesses, what are you expecting for the balance of this Quarter, are we most likely going to see more normal seasonal patterns? Or do you think that there's enough Of that underlying strength that it could play out counter seasonally, do you have a strong view or it's sort of it's grayish at this point?

Speaker 1

Yes. So I'll tell you what we hear from our homebuilder customers, which is they're going to try to build as many homes as they can. So I think From the standpoint of the demand signal and what they're going to try to do, it's pedal the metal. Now the caveats to that are really twofold. 1, That largely depends on whether they can manage through the supply chain issues that they've had.

Speaker 1

So whether they can get windows and doors and paint, etcetera, I can tell you From our conversations that continues to be a struggle and there's no doubt that that's held back what we otherwise might have seen from a housing standpoint. So that issue is still out there and I think will be to some extent a governor. And the other big wildcard is just what goes on with weather. To the extent that you have mild weather, I think you're going to see probably as much homebuilding as you can possibly squeeze into Q4. If we start getting an early winter in the northern regions or you have a lot of rain or other weather events, obviously, that could impact it.

Speaker 1

But On balance, we're expecting a strong Q4 just given the level of demand that our customers are seeing in the market right now. And I think you can look at just the permitted not yet started number. You can look at the new home sales number that we just saw. There's just a lot of demand out there and the homebuilders are trying to meet that to the extent that they can get the products to do it and manage through the weather issues as we get deeper into the year.

Speaker 9

Thanks. That's super helpful. Last one quick just clarification. I think you mentioned in the EWP business That, you had higher OSB web costs in the Q3, which I guess puzzled me a little bit given that OSB prices were lower In the Q3 and Q2. So just wanted to understand that a bit more or maybe I missed that.

Speaker 1

Yes. Again, that just goes back to the lag. And when we talk about OSB sales To WebStar, when we talk about OSB cost for WebStar, remember that is almost exclusively coming from our own OSB business. And so that rolls on, I think, a 12 week kind of rolling average pricing dynamic. So You see that lag a little bit, but that will show up in Q4.

Speaker 9

Got it. Thanks very much.

Speaker 4

Our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question.

Speaker 3

Yes, thanks very much. Good morning, guys. Just maybe on Wood Products. Lumber shipments to date are up only 1 5%, which is quite a bit lower than sort of what you suggested that 5% on Investor Day. So I'm just wondering how confident you are in getting 5% over the next number of years per year.

Speaker 1

Yes. I would say we are highly confident. We would Frankly, we wouldn't have said it at Investor Day if we didn't have a high level of confidence. And as we think about how that's going to play out over the next several years, All of that is built up from individual mill level 5 year capital roadmaps. And so we have the projects identified, The vast majority of the projects that are going to make up that incremental production have already been completed at 1 mill or another.

Speaker 1

So it's We view it as relatively low risk to continue to execute across these projects that we've by and large already done somewhere else. So That's the long answer. The short answer is we're highly confident in that number.

Speaker 9

Okay. And then if I

Speaker 3

flip it over to OSB, you're down 8 point 7% year to date on shipments. Just wondering why that is?

Speaker 1

Yes. It's really just a reflection of some planned maintenance That happens during the year. And so when you look year over year, mills will have different quarters, different parts of the year where they'll have planned annual maintenance. And so that's just

Speaker 3

Okay. And then just lastly, just, I hate to harp on it, but I can't understand it. I mean, you've got record wood products Pricing this year, but your share performance to date is less than half your biggest REIT peer. So the question is why and how can you make up the difference?

Speaker 1

Yes. So I guess what I would say to that Paul is, 1st and foremost, we're always focused on driving value for our shareholders And we do that in a number of ways, managing our portfolio. We've done some transactions on the Timberland side that we think have increased value. We have a focus on OpEx and I think that showed up in how we've driven industry leading performance across our businesses. We've taken a number of actions of late to continue to work on the portfolio and improve our performance.

Speaker 1

We strengthened the balance by paying down over $1,000,000,000 of debt. I think our new base plus variable supplemental dividend structure is going to return significant amounts of cash And we've seen how that's played out this year with the interim supplemental we paid out in October, the sizable supplemental dividend we're going to pay out in Q1 2022. And so from my standpoint, as we continue to execute on The long term growth opportunities that we laid out at Investor Day and achieve those targets, There's no doubt in my mind that's going to make us a better and more valuable company. And I think as we continue to grow the company, improve our margins, return cash To shareholders, that value will ultimately be reflected in the stock price over time.

Speaker 7

All right. That's all I had. Best of luck.

Speaker 1

All right. Thank you.

Speaker 4

Our final question is from Kurt Winger with D. A. Davidson. Please proceed with your question.

Speaker 7

Great. Thanks and good morning everyone.

Speaker 1

Good morning.

Speaker 7

I just wanted to start off on the harvest side. In 2018 2019 you were in Ballpark of 38,000,000 tons last year kind of down to 33,000,000 with some of the restrictions and it looks like you'll kind of be around that same level this year. Could you just help us think about what a good baseline for the different regions is as we look ahead to 2022? And is there anything from a labor or supply chain perspective that you foresee being particularly challenging as you maybe look to ramp that up?

Speaker 1

Yes, sure. So without giving specific guidance on 2022 harvest levels, which we'll do when we report Q4 earnings, I will make a few comments by region and starting in the West. So as you think about the Western harvest levels relative to history, A few things to keep in mind. Number 1, when you think about the harvest levels in kind of 2015 through 2018 timeframe, To some extent, that was impacted by the Longview Timber acquisition that we did back in 2013. And as we said, that had some very mature timber that came along That acquisition.

Speaker 1

So our harvest levels were a bit elevated for several years after that acquisition as we worked that age class down to a more normalized level. So we always expected that to come down a bit over time. We had expected that to start going back up, but obviously in 2020, we had a pretty significant Fire season in Oregon and so that impacted the harvest levels both in 2020, but also in 2021 as we work through some of that salvage volume. But we would expect that Start going back up next year. In the South, we've had a few things going on last couple of years.

Speaker 1

Obviously, last year, we did defer Some harvest volume in the South, due to some market conditions and COVID, etcetera. We had planned to have that going back up by 10% this year, year over year. This has just been a really wet year in the South. A lot of weather events that has really Reduced our ability to get out and move wood in some of those weather events. And so we're able to catch some of that up, But I do think to the point you just made, one of the challenges that we have in fully catching that up is just some of the availability of contracting Loggers and trucking availability.

Speaker 1

So I would say on the margins that's probably hindered a little bit our ability Ramp up to make up for some of that lost production in kind of the wetter months here. But again, we do expect that to start going back up next year And we'll give more fulsome and clear guidance on harvest levels when we report for Q4.

Speaker 7

Got it. Okay. That's helpful. And then just on the lumber and OSB markets, as you look out over the next 12 to 18 months outside of New residential construction activity and repair and remodel demand levels, what are you thinking about in terms of key factors Kind of determining the direction of the markets.

Speaker 1

Yes. I mean, so you mentioned 2 of the big ones. What's going to happen with residential construction? What's going to happen We continue to see supply chain disruptions that can impact the availability of wood into the market, which obviously can have an impact on pricing. Labor availability, I would put in that mix to the extent that the industry can't find enough labor to run the mill school that can have an impact on overall And that can impact the market.

Speaker 1

I do think there are a few things that are also coming into play to some extent, one of which is Depending on what happens with the infrastructure bill, that I think could drive some incremental demand for wood both from a lumber standpoint, Plywood OSB, etcetera, to the extent that, that ultimately gets passed. And then just we do continue to see more and more momentum around wood based building, All buildings, mass timber, CLT, etcetera. So that could be another tailwind as well. So overall, I think we have a pretty optimistic view Of what things are going to look like in the Wood Products market over the next couple of years.

Speaker 7

Got it. Okay. Makes sense. And then just my last one on the southern log export business. With freight costs and pricing where they are, how do kind of the economics compare, I guess to keeping those logs in the domestic market.

Speaker 1

Yes. Well, we've seen a pretty dramatic run up in pricing on the And even when you take into consideration the increased transportation costs to get those logs to market, it still represents a pretty decent premium over what we would get in the domestic market. So it's advantageous for us to move as much as we can into the export market.

Speaker 7

Got it. Okay. Well, appreciate all the color and good luck here in Q4.

Speaker 1

Terrific. Thanks. Well, I believe that was our final question. So thank you to everyone for joining us this morning and thank you for your continued interest in Weyerhaeuser. Have a great day.

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