Weyerhaeuser Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 28, 2023

There are 12 speakers on the call.

Operator

Greetings, and welcome to Weyerhaeuser First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' remarks, there will be a question and answer A confirmation tone will indicate your line is in the question As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Andy Taylor, Vice President of Investor Relations.

Operator

Thank you, Mr. Taylor. You may now begin.

Speaker 1

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's Q1 2023 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website.

Speaker 1

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, Chief Executive Officer and Davey Wold, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Speaker 2

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported 1st quarter GAAP earnings of 151,000,000 or $0.21 per diluted share on net sales of $1,900,000 Adjusted EBITDA was $395,000,000 a 7% increase over the Q4 of 2022. These are solid results, and I am pleased with the operational and financial performance delivered by our team despite various market and weather related challenges throughout the quarter. Turning now to our Q1 business results.

Speaker 2

I'll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $120,000,000 to 1st quarter earnings. Adjusted EBITDA was $188,000,000 a 25% increase compared to the 4th quarter. In the West, adjusted EBITDA increased $33,000,000 compared to the 4th quarter, largely driven by increased sales volumes in domestic and Chinese markets and lower per unit log and haul costs. These favorable results were partially offset by lower sales realizations.

Speaker 2

Turning to the Western domestic market. Demand and pricing for domestic logs faced downward pressure at the start of the Q1. Mills reduced consumption in response to lower pricing and takeaway of finished products, and we're carrying elevated log inventories. As the quarter progressed, log consumption increased as end market demand improved, but log supply was constrained by consistent winter weather conditions. This dynamic drove log inventories to lower levels and caused log pricing to stabilize.

Speaker 2

For the quarter, Our average domestic sales realizations were significantly lower than the 4th quarter. Our fee harvest and domestic sales volume as well as per unit log and haul costs improved in the Q1 as we returned to full run rate operations following the work stoppage in the 4th quarter. 1st quarter harvest activity included a portion of the deferred volume resulting from the work stoppage and we remain on track to capture the majority of the deferred harvest volume in 20 23. Forest and road costs were also seasonally lower. Moving to our Western export business.

Speaker 2

Log markets in Japan continued to soften in the Q1 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 We're moderately lower compared to the Q4 and our sales volumes were comparable. In China, log inventories at the ports declined during the quarter And daily takeaway increased as construction activity improved following the Lunar New Year and in response to the recent lifting of pandemic related restrictions. As a result, log demand from our customers remained solid in the Q1. Our sales volumes increased significantly compared to the Q4, and we intentionally flexed additional volumes to China to take advantage of improving market conditions in the Q1.

Speaker 2

Our average sales realizations were slightly higher compared to the Q4, aided by improved Ocean freight rates and a favorable exchange rate. Turning to the South. Adjusted EBITDA for Southern Timberlands increased $4,000,000 compared to the 4th quarter. Despite reduced log consumption in response to lower finished product pricing and demand, Southern sawlog and fiber markets remained fairly balanced during the Q1 as log supply was constrained by wet weather conditions. As a result, our average sales realizations were comparable to the Q4.

Speaker 2

Our fee harvest volumes increased slightly despite the adverse weather conditions, Per unit log and haul costs were slightly lower in the Q1 and forestry and road costs were slightly higher. Adjusted EBITDA in the North was comparable to the 4th quarter. Turning to Real Estate, Energy and Natural Resources on Pages 1011. Real Estate and ENR contributed $53,000,000 to 1st quarter earnings and $89,000,000 to adjusted EBITDA. 1st quarter EBITDA was $43,000,000 higher than the 4th quarter, primarily due to a significant increase in real estate acres sold, partially offset by decrease in royalty income from our Energy and Natural Resources business.

Speaker 2

Similar to prior years, our real estate activities in 2023 or more heavily weighted towards the first half of the year. Average price per acre decreased compared to the 4th quarter due to the mix of properties sold, but remained elevated compared to historical levels as we continue to benefit from steady demand for HBU Properties. Despite broader macroeconomic headwinds, buyers continue to seek the safety of hard assets, resulting in high value transactions Moving to Wood Products on Pages 12 through 14. Wood Products generated $95,000,000 of earnings in the Q1 and $148,000,000 of adjusted EBITDA. 1st quarter adjusted EBITDA was a 25% reduction from the 4th quarter, largely driven by continued softening in Wood Products pricing.

Speaker 2

Regarding the lumber and OSB markets, benchmark prices for both products entered the Q1 showing signs of stabilization after receding in the back half of twenty twenty two. Pricing for both products increased slightly through early February In response to stronger than expected demand for housing and buyers replenishing lean inventories. The increase was more pronounced for lumber As supply concerns weighed on the market following a series of mill curtailment announcements, particularly in British Columbia. As the quarter progressed, overall buyer sentiment remained cautious as adverse weather impacted homebuilding in several regions and in response to ongoing concerns about inflation and the economy. Despite lead inventories, orders were limited to The prices for both products have trended higher as we've moved into the Q2.

Speaker 2

Adjusted EBITDA for our lumber business was comparable to the 4th quarter. Both the framing lumber composite pricing and our average sales realizations decreased 9% in the Q1. Our sales and production volumes increased significantly versus the 4th quarter, which was impacted by the work stoppage at our Northwest Mills. Reliability also improved across the system. With increased production in the quarter, unit manufacturing costs improved significantly.

Speaker 2

Log costs were comparable to the 4th quarter. OSB adjusted EBITDA decreased by $32,000,000 compared to the Q4, primarily due to the decrease in commodity pricing. Our average sales realizations decreased by 20% in the 1st quarter, largely in line with OSB composite pricing. Sales volumes were significantly higher as production volumes increased from less Planned downtime for annual maintenance and transportation networks improved following adverse weather conditions late in Q4. Unit manufacturing costs and fiber costs improved moderately during the quarter.

Speaker 2

Adjusted EBITDA for Engineered Wood Products decreased by $28,000,000 compared to the 4th quarter due to softening demand for EWP products. As a result, Our sales and production volumes and average sales realizations were lower for most products in the Q1. That said, we have seen a recent up comparable to the Q4 as higher volumes and lower operating costs were offset by a decrease in realizations for EWP and commodity products. With that, I'll turn the call over to Davey to discuss some financial items and our second quarter outlook.

Speaker 3

Thank you, Devin, and good morning, everyone. I'll be covering key financial items and 1st quarter financial performance before moving into our 2nd quarter outlook. I'll begin with key financial items, which are summarized on Page 16. We ended the quarter with approximately $800,000,000 of cash and cash equivalents And total debt of approximately $5,000,000,000 Our balance sheet, liquidity position and financial flexibility remain exceptionally strong, And we reinforced our flexibility in the Q1 by extending the maturity of our existing $1,500,000,000 revolving credit facility to 20.28. In the Q1, we generated $126,000,000 of cash from operations.

Speaker 3

It's worth noting that the Q1 is usually our lowest operating cash Slow quarter due to seasonal inventory and other working capital build. Capital expenditures for the quarter We're $71,000,000 which is a typical level for the Q1. We returned $139,000,000 to shareholders through the payment of our quarterly base dividend, which was increased by 5.6 percent to $0.19 per share during the quarter. This is in line with our commitment to grow our sustainable base dividend by 5% annually through 2025. During the quarter, we also returned $660,000,000 to shareholders through the payment of our supplemental dividend, which was associated with our 2022 financial results.

Speaker 3

We returned $35,000,000 shareholders through share repurchase activity in the Q1. These shares were repurchased at an average price of $31.25 And as of quarter end, we had completed nearly $660,000,000 of repurchase under our $1,000,000,000 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. 1st quarter results for our unallocated items are summarized on Page 15. Adjusted EBITDA for this segment decreased by $6,000,000 compared to the Q4.

Speaker 3

This decrease was primarily attributable to changes in intersegment profit elimination in LIFO as well as the absence of non recurring healthcare and workers' compensation items that were benefits in the 4th quarter. Looking forward, key outlook items for the Q2 are presented on Page 18. In our Timberlands business, we expect 2nd quarter earnings and adjusted EBITDA will be approximately $20,000,000 lower than the Q1 of 2023. Beginning with our Western Timberlands operations, domestic log markets were fairly tensioned at the outset of the second quarter, driven by improved pricing and takeaway of finished products, Leaner than normal log inventories and log supply constraints due to persistent winter weather conditions. As the quarter progresses, we expect further improvement in log demand and an increase in log supply as the weather improves seasonally.

Speaker 3

As a result, our domestic sales realizations are expected to remain fairly stable throughout the Q2. That said, we anticipate the quarterly average We'll be lower compared to the Q1 as log prices have fallen since the beginning of the year. We anticipate our fee harvest volumes will be moderately higher given Seasonally favorable operating conditions in the Q2. Forestry and road costs are expected to be significantly higher as we enter the spring summer months and per unit log and haul costs As Devin mentioned, elevated inventories of European lumber imports and reduced consumption continue to weigh on log demand We expect these conditions to persist through the Q2. As a result, our Japanese sales volumes and realizations are expected to be lower compared to the Q1.

Speaker 3

That said, we expect European lumber inventories to normalize as the year progresses, which should increase demand for our logs in the Japanese market. In the meantime, we are shifting a certain amount of logs to our internal mills to capitalize on domestic market conditions. In China, construction activity and log consumption continue to improve following the Lunar New Year and the lifting of pandemic related restrictions. That said, log imports from New Zealand have increased significantly following the disruption in the first This dynamic is likely to put downward pressure on log pricing until excess inventories are cleared. As a result, our sales realizations into China are expected to be slightly lower compared to the Q1.

Speaker 3

We anticipate our sales volumes will be Significantly lower as we direct logs to domestic customers to capture higher margin opportunities. In the South, we expect sawlog markets to remain fairly balanced in the Q2 as log supply improves with drier weather conditions and mills bolster inventories in response to weather related challenges in the Q1. Southern Fiber Markets are expected to soften as a result of end market demand and pricing. Despite improving weather conditions, our fee harvest volumes are expected to be comparable to the Q1, largely driven by a higher mix of fiber logs as thinning activity increases following wet weather conditions earlier in the year. With a higher percentage of fiber logs, We expect our sales realizations to be slightly lower compared to the Q1.

Speaker 3

Per unit log in haul costs are expected to decrease slightly as a result of lower fuel prices. And forestry and road costs are expected to increase seasonally. In the North, our sales realizations are expected to be slightly lower than the Q1 and fee harvest volumes are expected to be significantly lower as we enter the spring breakup season. Turning to our Real Estate, Energy and Natural Resources segment. As Devin mentioned, we are still seeing steady demand for our real estate properties, and we continue to expect a consistent flow of HBU transactions with significant premiums to timber value.

Speaker 3

For the 2nd quarter, We expect earnings will be comparable to and adjusted EBITDA will be approximately $20,000,000 lower than the Q1 of 2023 due to the timing and mix of real estate sales. For the full year, we continue to anticipate adjusted EBITDA of approximately $300,000,000 for the segment. For our Wood Products segment, we expect 2nd quarter earnings and adjusted EBITDA will be slightly higher than the Q1 of 2023, excluding the effect of changes in average sales realizations for lumber and OSB. Benchmark prices for both lumber and OSB have been fairly stable quarter to date, We are seeing signs of increased demand for wood products as we get further into the spring building season, while channel inventories remain lean. As shown on Page 19, our current and quarter to date average sales realizations for lumber are moderately higher than the Q1 average.

Speaker 3

For OSB, our current and quarter to date average sales realizations are slightly higher than the Q1 average. For our lumber business, we expect higher production and sales volumes in the 2nd quarter and moderately lower unit manufacturing costs As operating rates at our Northwest Mills return to a more normalized level, reliability improves across the system and inflationary pressures continue to ease. Log costs are expected to be moderately lower compared to the Q1, primarily for Western and Southern logs. For our oriented strand board business, sales volumes are expected to be comparable to the Q1. We expect slightly lower production volumes and moderately higher unit manufacturing costs due to more planned downtime for annual maintenance in the Q2.

Speaker 3

Fiber costs are expected to be slightly lower. Turning to our Engineered Wood Products business. As Devin mentioned, we have seen an uptick in order activity quarter to date, and we expect steady demand as the quarter As a result, we anticipate significantly higher sales volumes for most products compared to the Q1. That said, sales realizations are expected to be moderately lower as supply and demand continue to rebalance across the broader EWP market. We anticipate moderately lower raw material costs for most products, including for OSB Webstock.

Speaker 3

For our distribution business, we expect adjusted EBITDA to be slightly higher compared to the Q1 due to improved sales volumes. With that, I'll now turn the call back to Devin and look forward to your questions.

Speaker 2

Thanks, Davey. Before wrapping up this morning, I'll make a few comments on the housing Parent Remodel Markets. Our view on the housing market is largely unchanged, and we still anticipate a somewhat more challenging backdrop in 2023 compared to the last couple of years. We've clearly seen some softening from the peak levels of 2022 as homebuyer sentiment remains cautious. That being said, there have been some positive signs lately that the housing market is holding up better than we anticipated at the beginning of the year.

Speaker 2

Specifically, we've seen improvements in homebuilder sentiment, an increase in new home sales and an uptick in single family starts over the last couple of months. Additionally, the labor market and household balance sheets are generally in good shape and inventory of existing homes for sale remains well below historical levels. Putting this all together, we continue to believe that underlying housing demand is solid. As we saw

Operator

in the

Speaker 2

Q1, there are buyers willing to step back into the market in response to lower mortgage rates and homebuilder incentives. Ultimately, we'll need to see further rate reductions combined with a stable to improving U. S. Economy before the housing market fully returns to the levels of the past few years. However, notwithstanding any near term headwinds, we continue to maintain a positive and constructive longer term view on housing fundamentals, supported by strong demand, favorable demographic trends and a significantly underbuilt housing stock.

Speaker 2

Turning to repair and remodel, where activity remained fairly stable in the Q1 and continued to be supported by steady demand from the Professional segment. Demand from the do it yourself segment has largely normalized to pre pandemic levels. Looking forward, we expect customer demand Lower commodity building product prices may also support repair and remodel activity in the near term. And in any event, we continue to have a bullish longer term outlook for In closing, We delivered solid operational and financial performance in the Q1. We remain as focused as ever on operational excellence and supporting our customers to drive industry leading margins.

Speaker 2

In addition, we remain committed to returning cash to shareholders. During the quarter, we increased our base dividend by 5.6 And returned more than $830,000,000 to shareholders through base and supplemental dividend payments as well as share repurchase activity. Looking forward, we remain constructive on the longer term demand fundamentals that will drive growth for our business, notwithstanding the current macroeconomic headwinds. Our financial position is exceptionally strong, and we are focused on delivering superior operating performance across our unmatched portfolio of assets as well as enhancing shareholder value through disciplined capital allocation. So with that, I think we can go ahead and open it up for questions.

Operator

Thank you. We will now be conducting a question and answer Our first question comes from Anthony Pettinari with Citi. Please proceed with your question.

Speaker 4

Good morning.

Speaker 5

Good morning, Anthony.

Speaker 6

Devin, as you look at Southern log prices, are you seeing any regional trends worth Calling out. And I guess specifically, over the past few years as Southern Log prices have seen some strength, I think we saw maybe stronger price appreciation in some of these coastal regions versus inland regions. Now that log prices appear to be kind of moderating a bit, I'm wondering, are you seeing those coastal regions holding price better Or alternately, are they maybe giving up kind of more of the gains that they've had and maybe acting with a little bit more volatility? I don't know if there's any trend that you would call out. I'm just kind of curious what you're seeing and maybe how your portfolio is positioned there?

Speaker 2

Yes, Anthony. Good question. As we think about the southern sawlog pricing dynamic, as you say, there are Certainly regional differences and we've seen that play out over a number of years. As you mentioned, the Atlantic Coast And we think about that from North Carolina really all the way down through Florida and Georgia. Certainly been a stronger market.

Speaker 2

I think there are a couple of things at play there. To some extent, the sawlog market is also impacted by the pulpwood markets on the coastal region. As you think about a lot of these mills and where they source logs, if you're next to the ocean, your sourcing radius is only about 180 degrees versus 3 And so that tightens up some of those markets, and I think that bleeds into sawlogs. And certainly, I think that's been one of the drivers of lay for why you've Seeing those prices tick up. We'll see if with a little softening in the fiber markets, if that Wayne's a little bit more.

Speaker 2

But I think more broadly, as you mentioned, we have seen some capacity coming into South and certainly that's benefited us in some of the markets where we have large fee holdings. You think Mississippi, Southern Arkansas, some spots Louisiana, what we have seen is this new capacity comes into a particular wood basket, we see an uplift on saw log prices and we expect that to just continue to be the case as more capacity comes into that region. And I think the other thing at play of late has been and This is particularly true, I'd say, over the last 18 or so months. There's just been a bit of a constraint on log and haul capacity. And I think that's another driver for why you've seen a little bit of an uptick in sawlog prices just as Mills wanted to maintain inventory, so they didn't lose out on the high lumber price opportunity.

Speaker 2

I would say that the haul capacity has probably gotten a little bit better here as we've gotten into 2023. But over the long term, I continue to think you're going to have constraints on both log and haul capacity across The South just as labor will continue to be an issue. So the net net is we are seeing regional differences. Will we see the Atlantic Coast Come down a little bit more perhaps, but on balance, we still feel pretty optimistic about the trajectory of Southern sawlog prices in the years to come.

Speaker 6

Okay. That's super helpful. And then just on Natural Climate Solutions, I don't know if there's any kind of update you can give us In terms of level of interest and engagement and maybe how you're tracking towards that $100,000,000 EBITDA target for 2025 Or if there's any kind of specific projects or work streams that you feel like are moving faster or slower than expected?

Speaker 2

Yes. I think the good news is there just continues to be an increasing level of interest across really all parts of that Natural Climate Solutions business. That's true with renewables, solar, wind, a lot of interest and activity there. It's true with mitigation banking. We've seen certainly a lot of interest in Carbon capture and storage in the forest carbon market.

Speaker 2

So I think we're as optimistic as ever about the trajectory of growth Over time with that business, and that's really, like I say, true across every component of that Natural Climate Solutions business. I think the trick continues to be managing the timeline to get these projects to fruition. And that's Fortunately, the case across each of those different businesses, whether it's the permitting and getting tied into the grid across the renewable Sector or just the time line to get forest carbon projects through the process of a third party audit. And I think that's going to continue to get better over time as more resources go into the system. But it's really a question Timing more than magnitude, but we're really optimistic about the long term opportunities across really each of those businesses within Natural Climate

Operator

Our next question is from Ketan Mamtora with BMO Capital Markets. Please proceed with your question.

Speaker 5

Thank you. Good morning, Devin and Davey.

Speaker 2

Good morning. Good morning.

Speaker 5

First question just related to To Anthony's earlier question, Devin, any update on the main carbon offset project? How that's coming along? And When do you anticipate, kind of sort of incremental information around that?

Speaker 2

Yes. So I feel like we're right at the goal line. We've had all of our materials and responses into the 3rd party auditor for quite some time. I think one of the things that we've come to appreciate in this space is that there are not enough third party auditors really To manage the magnitude of carbon credits that are coming to market, I do think that's something that will be resolved over time. But that's really been the bottleneck for us as we've tried to move that through to the end game.

Speaker 2

I think we should have something here shortly and we would anticipate In the very near future, getting those credits issued and then hopefully start selling those for us carbon credits. But I would say also, We've also learned some things through the process that I think should help us scale this program going forward. So, more to come on that hopefully in the very near future.

Speaker 5

Got it. And Devin, when you say very near future, I would still Assume that to be kind of 2023, is that fair?

Speaker 2

Absolutely.

Speaker 5

Got it. And then just switching to capital I'm curious kind of your approach towards share repurchases, especially in the context of broader capital allocation. In a year like 2023 where cash generation will be kind of hit by lower book product prices, Obviously, you guys have laid out the base and the supplemental portion. I'm just curious kind of How do you approach share repurchases here?

Speaker 3

Yes, sure. Thanks. I mean, we have as we've said for a while now, we believe share repurchase This is a useful tool in the right circumstances. And certainly, we're fortunate to have a number of capital allocation levers, including M and A, investing in our business, and adjustments to our capital structure. So the current share price, share repurchase is an attractive lever, But we're constantly weighing that in light of all the alternatives in the overall backdrop.

Speaker 3

And we've been quite active repurchasing shares since we announced our increase to our authority In fall 2021, making our way through about 2 thirds of that $1,000,000,000 authorization, including about $550,000,000 last year. So As we moved into 2023, the process really remains the same. But to your point, with the cash return framework, The amount of cash committed to be returned to shareholders is going to flex up or down year to year based on the amount of adjusted FAD generated. So in light of the economic environment, we saw to start the year with the relative choppiness in housing. It's important to be disciplined and balanced As we deploy our cash over time, weighing all the market conditions and those available levers and ultimately allocating the cash in a way that creates the most value for shareholders.

Speaker 3

So In summary, I'd say the evaluation process remains consistent. We'll continue to assess share repurchases along with all the other capital allocation options and report out Activity quarterly.

Speaker 5

Got it. That's helpful perspective. I'll turn it over. Good luck. Thank you.

Speaker 5

Thank you.

Operator

Our next question is from Susan Maklari with Goldman Sachs. Please proceed with your question.

Speaker 7

Thank you. Good morning, everyone.

Speaker 2

Good morning, Sue. Good morning.

Speaker 7

Our first question is on the DIY segment of the Of the R and R market. Devin, I know you gave some comments there on the activity that you're seeing. But as we get into the spring, what's the tone from your customers And how are you thinking about the spring playing out?

Speaker 2

Yes. On balance, we've seen pretty solid demand. I would say, Just for context, Q1 is always a little bit softer from the DIY segment just because people aren't Doing R and R projects in the northern regions this time of year. I would say in the south, we've actually seen the activity up A little bit year over year as we feed into the big box retailers. It's been a little lagging in the West, I would say year to date, but that's starting to pick up.

Speaker 2

So on balance, we're still expecting a very solid year from the DIY segment. I don't think it's going to be at the same levels that we saw during the peak of the pandemic, but certainly very strong relative to pre Pandemic levels.

Speaker 7

Okay. That's helpful. And then looking at the EBITDA margin in lumber and OSB, it was really impressive given what you're seeing from a pricing perspective. And it does seem like it reflects some of the benefits of the productivity initiatives That you have put in place in the last couple of years. How are you thinking about the production costs going forward just given the various puts and takes There.

Speaker 7

And with that, is there any update generally on OpEx 2.0? Any thoughts on how you're progressing against The $175,000,000 $200,000,000 target for 2025?

Speaker 2

Sure. Well, at a high level, I think the benefits of this OpEx Program that we've been undertaking for a number of years are really reflected in the Q1 numbers, as you said, In a very challenging market, we were still able to deliver positive margins across all of our businesses. And I think just from a relative operating That's really, really served us well and has been a core part of our operating strategy for quite some time. We are progressing, I think, quite well to that $175,000,000 to $250,000,000 target. And I would say I'm particularly pleased with the progress we made last year.

Speaker 2

We generated $40,000,000 of OpEx in an environment where we saw Historically, high levels of inflation, and so that was quite a headwind to navigate through. I think this year, as we see Some of the turnover starting to go back to maybe a more normal level and inflation comes down, I feel very good about the tailwinds that we'll have from an OpEx standpoint. I think it's just a real testament to the teams that we All across the organization that are staying focused on improving how we operate every day, trying to innovate everywhere we can and serving our customers to make sure that we're not just maintaining industry level industry leading margins, but we're growing that over time. So really pleased with the efforts there.

Speaker 7

And any thoughts just on those production costs for lumber and OSB as we get into the spring?

Speaker 2

Sure. Well, I think as we look across the key cost elements of each of those businesses, The labor piece has remained elevated. I don't think it's increasing at the clip that we've seen over the last Several years, but it still remains at an elevated level. But besides labor, I would say on balance, we are seeing Some progress in having that inflationary pressure kind of back off a bit, whether it's fuel, energy, Resins, really across the board, we've seen some of the fiber costs come down. So we are seeing some of those inflationary pressures start to wane, and I think that will

Operator

Our next question is from Kurt Yinger with D. A. Davidson. Please proceed with your question.

Speaker 8

Great. Thanks and good morning everyone.

Speaker 2

Good morning. I just

Speaker 8

wanted to start out on the EWP business. I mean it's been a really nice Source of stability kind of in spite of volatility in commodity markets, realizations there held in better than we expected. It looks like You're expecting some additional pressure in Q2, but could you talk about how you're thinking about profitability there over the next couple of quarters? And Maybe give a little bit more color on what you're seeing on the volume side after, maybe some destocking issues the last couple of quarters?

Speaker 2

Well, I think not surprisingly given that EWP's primary market is single family construction, We did see softening in EWP demand as we got into Q4 last year and that really flowed through into Q1. As you say, I think to a large extent, as the housing market softened last fall, The inventory levels across the channel probably built up a little bit more than expected, and we certainly saw in Q1 many of our customers Had to work through some existing inventory. And so we adjusted our operating posture down to more to be more reflective of the demand environment. And that I think together with just a little bit of softening on the price side is really what you saw reflected In the Q1 EBITDA numbers for EWP. But again, as we step back and look at this business from a high level, We're still at pricing that's well above historical levels, pre pandemic levels.

Speaker 2

And I think as we get deeper into the spring, we've Seeing our order files start to build, certainly, I think what we've seen going on recently with single family construction in particular, Starting to get a little bit more optimistic about how that's going to be playing out in the months to come. So we're going to be increasing our production In Q2, as Davey mentioned, not still not up to the levels that we're running full out, but Certainly above where we were in Q4 and Q1, and I think that will continue to trend in the right direction as we get deeper into the year assuming that Housing continues with this momentum. So we feel really good about the business. It's a quality product. We have great service and I think Really a lot of customer loyalty.

Speaker 2

And so we'll continue to serve our customers. And as single family housing continues to recover, That business will be in really good shape for us going forward.

Speaker 8

Got it. Makes sense. And then just second On Southern Log pricing, I guess, as you look over the next year, do you think we're kind of in a situation where Maybe you see kind of a slow bleed and realizations absent a real inflection in demand or From where you sit today, any kind of confidence in the idea that things could really level out, in the near term at all?

Speaker 2

I think our view is that it's going to stay fairly stable for most of this year absent a material change in market dynamics. That's certainly our view from a sawlog perspective. I think there's probably a little risk with respect to fiber logs, just given End markets in the pulp and paper space have softened a bit, and so there may be a little softening here until that Stabilizes and firms up. But for the sawlog prices, our view is it's going to stay pretty consistent over the course of this year. And then as the market improves overall going forward, a lot of the same drivers for that log price appreciation we've seen over the last couple of years Should kick back into gear and we still feel pretty optimistic long term that we'll see that gradual price increase Across the sawlog portfolio.

Speaker 8

Got it. Okay. Appreciate all the detail, Devin, and good luck here in Q2, guys.

Operator

All right.

Speaker 2

Thank you. Thanks, Kurt.

Operator

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

Speaker 9

Yes. Thanks very much. Good morning, guys. Just following up on this real estate energy natural resource with respect to the Natural Climate Solutions. Looking for the extra color on the carbon project, but where are we at with the you signed 2 deals on the carbon storage, Wondering how that permitting is going for those companies that you're involved with?

Speaker 2

Yes. I think it's progressing as expected. As we said before, there's a fair amount of work to do between signing the deal and actual first injection. You've got to prove out the data, which has been underway, and that's progressing well, the permitting and ultimately building out the infrastructure. But I think from a time line standpoint, things are progressing as expected, and we continue to believe we'll see first injection in late 2025 We're into 2026, but I think a big part of why we chose those two partners is they're both very well equipped to manage through the process and the timeline.

Speaker 2

So we think it's progressing on plan.

Speaker 10

Okay. Thanks for that.

Speaker 9

And then just switching over to Wood Products. If I look at 2023 whole year, what are we tracking for lumber volumes? Is this Last year was down. Are we going to go back to 'twenty one levels and especially on the OSB side as well? It looks like you're tracking at record levels for 'twenty three.

Speaker 2

Yes. For lumber, we'll definitely be up year over year. Sitting here today, it's probably kind of a mid single digit, High single digit percentage wise improvement year over year. And remember last year, there were some things going on around The strike in the Pacific Northwest and frankly with some of the labor issues, probably the production was down as a All right.

Speaker 5

That's all I had. Best of luck.

Speaker 2

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

Operator

Our next question is from Mark Weintraub with Seaport Research Partners. Please proceed with your question.

Speaker 11

Thank you. Real quick on the OSB pricing, you show current up $5 versus the 1Q average. And by my math, when I look at the random lens pricing, it's more like 45 or 50. And is that just because What you're showing is really where prices were 3 or 4 weeks ago given your order files? Or is there something else that might be going on that would depress the type of uptick You would expect to see in OSB pricing?

Speaker 2

No, you hit on it exactly, Mark. It's just a function of when you have a 3 to 5 week order file, It takes time for the current prices that are reflected in random links to flow through to realization. So there's a lag on the way up, But then there's also a lag on the way down. So it nets out to be the same. It's just a timing issue.

Operator

Got it. Okay. And then On

Speaker 11

the question on the U. S. South, a couple of questions on the timber markets and where they may be going. Of course, you don't just grow trees, you also Consume logs and making lumber. So I was hoping to get a sense as to what your net position On sawlogs might be and if there's a difference regionally, if you're net more long In the Carolinas or the Atlantic Coast versus in some of the Mississippi, Arkansas, Louisiana baskets, that would be super helpful.

Speaker 2

Yes. That's a really good question, Mark. I think from our standpoint, we have 7,000,000 acres across really all of the major markets Across the South, unparalleled diversification. I think generally speaking, we have peer leading scale In every market, so I think as we move forward in a world where we think sawlogs are going up, I think we're really well Position going forward. And as you know, there's just been a lot of new capacity coming into the South.

Speaker 2

And I think and we've seen this in markets Where new capacities come in, that's pushed up sawlog prices. So as we think about how does that impact our business as a whole going forward, I think it's positive. First on the Timberland side, we are a net seller of logs. So on balance, we generally sell Between 40% to 50% of our grade fee logs in the south to our internal mills. So that means the remainder of Logs go to 3rd party customers.

Speaker 2

So higher sawlog prices in the south will have a net benefit to Weyerhaeuser on those 3rd party logs. Now obviously, higher log prices also have an impact on Wood Products Manufacturing as that's a key input cost. But I think again, the integrated model that we have is going to help us in that respect. So the manufacturing side is those sawlog prices increase over time, Those logistics and efficiency benefits that our manufacturing operations enjoy today on the fee timber that we supply is going to become even more important And maintaining industry leading margins. And you can just look to the Pacific Northwest for an example of that.

Speaker 2

So I think on balance, we feel very good about that. Obviously, there are regional differences, but I would say outside of the Southeast, we have manufacturing operations in Every other wood basket. So most of those dynamics will play out very similarly. And I think all in, if you want to look at Log prices and where they're going, I think with our business to scale the integrated nature, We're going to be the premier investment vehicle to leverage increasing Southern sawlog prices into the future.

Speaker 11

Okay. That's super helpful. Just one follow-up. You mentioned that you use about 40%, 50% of your logs go to your own mills. Do you buy much from the outside for your sawmills?

Speaker 2

We do. So Generally speaking, our internal mills are going to get 50% of their logs from our fee timber and then they will buy the remaining 50 Percent from 3rd parties.

Speaker 11

Okay. So you're kind of moderately net long. Is that a fair if I just do that If I do the math in my head, it would suggest you're moderately net long sawtimber in the U. S. South.

Speaker 11

Is that fair?

Speaker 2

Correct.

Speaker 4

Yes.

Operator

Okay. Super. Thank you. Our next question is from Buck Horne with Raymond James. Please proceed with your question.

Speaker 4

Hey, thanks. Good morning. Quick question on the lumber markets and just kind of one of the wildcards that's kind of Probably effective prices this year. I'm just wondering if you could help us characterize what's happening with the European wood import They have either hit domestically and or impacting international markets. Do you see a peak of Some of that European wood out there, how long will it take to work through some of that inventory that's hitting the domestic market?

Speaker 2

We certainly have seen an uptick in particularly the European lumber hitting the U. S. Market and I'll speak to Japan here in just a moment as well. I I think that's a function really of a couple of different things. First, if you look back over the last couple of years, clearly the lumber pricing dynamic in the U.

Speaker 2

S. Made it a Very attractive place to send wood. And so even overcoming the logistics and transportation costs, it was a margin positive move to get lumber from Europe into the U. S. Market.

Speaker 2

Even as lumber prices have come down in the U. S, I think To some extent, it's still probably the best margin opportunity for some lumber because the European demand has really come down with All of the dynamics that are going on there. And so I think you're going to see European imports come down a little bit In 2023, probably not dramatically, however, until you start to see the European economy and European demand pick up. We did see in Japan a pretty significant slug of lumber hitting that market at the end of 2022 and as Davey mentioned, that has put a little bit of pressure on the Japanese market for our customers In our log deliveries, we have started to see the European volume coming into Japan wane, and so we expect that That's inventory of European lumber to work down here in the second quarter, and we should be back into a more normalized Position as we get into the Q3. I think over the long term though, but the reality is With the beetle infestation issue that they've had in Central Europe, that volume is rapidly becoming less viable.

Speaker 2

I think as the Russian imports of lumber into Europe, assuming that those don't come back in a material way in the near future, The overall dynamic is going to be the Europeans will have to keep more lumber in Europe in a normalized circumstance. And So I think this is a short term issue that will resolve itself in the not too distant future.

Speaker 4

Very helpful color. I appreciate that. And then shifting to you mentioned capacity that's come into the U. S. South in terms of mill production.

Speaker 4

Can you help us maybe characterize in terms of like how quickly some of that capacity is coming online in the U. S. South? Is the growth rate that you're seeing faster? Are we bringing in more lumber capacity in the U.

Speaker 4

S. South and we're, I guess replacing that's being curtailed in Canada or how do you see that dynamic in terms of what's being added domestically versus what's coming out of Canada?

Speaker 2

Yes. There's certainly been a lot of new capacity coming into the South, but we've also seen a lot of capacity coming out of BC. I suspect there will be more to come. If you just step back and look at the overall amount of new lumber capacity into the U. S, it's really not a significant amount over Last several years.

Speaker 2

And we're continuing to see new mills come in and new announcements, although that's probably slowed just a little bit over the last 6 to 9 months What's going on in the broader economy. But I think a good way to think about it is you're going to see 1,000,000,000, 1,500,000,000 board feet come into the South more or less every year for the next little bit. But I think you're going to see a comparable amount Come out of British Columbia just given what's going on and the dynamic there. So net North American lumber additions, I'm not sure it's going to be all that much really.

Speaker 4

Very helpful. Appreciate that. Thanks, guys.

Speaker 2

Yes. Thank you. Thanks, Pankaj.

Operator

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

Speaker 10

Hi, guys. Thank you. Thanks for getting me in late. Just a couple of quick questions here. Number 1, Devin, David, can you remind us or call out What the headwind factors, the strikes, the weather, what that might have taken away from Q4 and Perhaps aided operations, specifically in Wood Products during the Q1?

Speaker 10

And similarly, were there any things that Specifically or particularly went well for you on operations within the Wood segment during the Q1 because Performance there was well ahead of our forecast even with the decline in realizations. 2nd question I had, all my other ones have Can you remind us what you're seeing in terms of log inventories in China at the ports? I seem to remember That inventory has remained pretty elevated, but the outlook seems to be relatively stable to construct it from your vantage point. So I just want to see what the interplay is between inventories at the ports and what you're seeing. Thanks so much and good luck in the quarter.

Speaker 2

Yes, George. So maybe I'll take China first And then comment briefly on the lumber piece. From a China standpoint, the latest Published numbers from an inventory standpoint in China were down. However, what we saw on the ground in April is A number of ships that were coming over from New Zealand with wood that had been delayed post cyclone. And so I think the inventories In the next published number are going to be up a bit.

Speaker 2

And I think we've also seen some very low quality European logs in that market that they're trying to get rid of More or less at fire sale prices. And so I think here in the very near term, it's just going to be a little bit softer environment as they work through some of that inventory. That being said, the takeaway has really started to pick up here as we've come out of the Lunar New Year. I think as we get out past this period of working through some of this inventory to support at the moment, we're feeling pretty good about the back half of The year in China and think that will be a nice flex opportunity for us out of the Pacific Northwest. On the lumber side, and Davey may have the Specific numbers in terms of the Q4 impact, but I would say beyond the strike impact, the one thing I would point out is just as we Get into an environment where, as I mentioned earlier, turnover is starting to lessen a little bit more stability.

Speaker 2

We've got the transportation networks that are starting to get a little bit more, I would say, healthy. And so on balance, the business just ran better Overall in Q1, and I think that's really, again, a testament to the work that our teams are doing in what's still a relatively challenging environment.

Speaker 3

Yes. George, I'd just call out the impact in Q4 would have been pretty negligible based on where margins were at that point in time of the work I mean, we had a marginal amount of costs associated that may have offset those marginal Piece of additional income there, so not really much there. I'd just call out just another great example of the work we've done over time on our cost structure and the OpEx performance of Teamed delivered a great quarter in challenging market conditions.

Speaker 10

So, Dave, on a going forward basis, obviously, there's going to be seasonality. But if we hold pricing constant, this is pretty much a good baseline for operations and for our own margin forecast on a going forward basis. Would that be fair?

Speaker 3

Yes, I'd say so. As Devin referenced earlier, we've seen some easing on the inflationary side With the labor piece still kind of being persistently strong, but across the board in terms of the other costs, we're seeing some nice signs of easing there. So I think this would be a reasonable baseline moving forward.

Speaker 10

Understood. Very good performance. Thanks guys. Good luck in the quarter. Thanks, George.

Operator

There are no further questions at this time. I would like to turn the floor back over to Devin Stockfish for closing comments.

Speaker 2

Okay. Well, thanks to everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser. Have a great day.

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Earnings Conference Call
Weyerhaeuser Q1 2023
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