Weyerhaeuser Company (NYSE:WY) Q2 2023 Earnings Call Transcript

Weyerhaeuser Company (NYSE:WY) Q2 2023 Earnings Call Transcript July 28, 2023

Operator: Greetings, and welcome to the Weyerhaeuser Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Taylor, Vice President of Investor Relations. Thank you, Mr. Taylor. You may begin.

Andy Taylor: Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's second quarter 2023 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements. As forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer; and Davie Wold, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Devin Stockfish: Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported second quarter GAAP earnings of $230 million or $0.31 per diluted share on net sales of $2 billion. Excluding special items, we earned $238 million or $0.32 per diluted share. Adjusted EBITDA totaled $469 million in the second quarter. This is a 19% increase from the first quarter and was largely driven by an increase in wood products commodity pricing and strong EWP sales volumes. Notwithstanding elevated mortgage rates, we've been encouraged by resilient demand for new homes this year, which provided a nice tailwind for our Wood Products business in the second quarter. We delivered solid results in the quarter, and I'd like to thank our teams for their collective efforts and focus on safety, operational excellence, and continuing to serve our customers.

Before moving into our business results, I'd like to comment briefly on a Timberlands transaction we completed earlier this month. As we reported yesterday, we acquired 22,000 acres of high quality Timberlands in Mississippi for approximately $60 million. This acquisition is comprised of highly productive timberlands strategically located to deliver immediate synergies with existing Weyerhaeuser timber and mill operations. With a mature age class and well stock timber inventory, we expect these timberlands to generate strong cash yields. Additionally, the acquisition offers incremental real estate and natural climate solution opportunities in the future. This transaction is a great example of our ongoing efforts to enhance our portfolio with high quality, well managed timberlands that generate solid returns for our shareholders.

As highlighted on Page 22 of our earnings slides, we continue to make great progress against our target to grow our timberlands portfolio through $1 billion of disciplined investments between 2022 and 2025. To date, we've deployed approximately $360 million against this target, including the recent Mississippi transaction and the acquisitions in the Carolinas and Washington, which were completed in 2022. Turning now to our second quarter business results, starting with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $104 million to second quarter earnings. Adjusted EBITDA was $172 million, a $16 million decrease compared to the first quarter. This was largely driven by lower average sales realizations for export logs in the west.

Turning to the western domestic market. Favorable weather conditions during the quarter supported increased log supply across the region. Log demand improved as mills returned to more normalized operating levels in response to strengthening lumber prices and later in the quarter, took precautionary measures to bolster log inventories ahead of wildfire season. These dynamics kept log prices fairly stable during the second quarter. And as a result, our average domestic sales realizations were comparable to the first quarter. Our fee harvest volumes were slightly higher than the first quarter as a result of favorable operating conditions. Domestic sales volumes were significantly higher as we intentionally shifted logs to the domestic customers to capture higher margin opportunities.

Per unit log and haul costs improved in the second quarter and forestry and road costs were seasonally higher. Moving to our Western Export business. In Japan, log markets continued to soften in the second quarter in response to elevated inventories of European lumber imports as well as lower consumption driven by reduced post-and-beam housing activity. As a result, our average sales realizations for export volumes to Japan were lower compared to the first quarter, and our sales volumes were comparable. As we look forward, we expect European lumber inventories in Japan to normalize in the coming months, which should increase demand for our Douglas Spur logs into the Japanese market later in the year. In China, log markets softened in the second quarter in response to an influx of log supply from New Zealand combined with the reduction in log takeaway at the ports.

As a result, our average sales realizations for export volumes to China were lower compared to the first quarter. Our sales volumes were significantly lower as we intentionally flex logs to the domestic market. Turning to the south. Adjusted EBITDA for Southern Timberlands was $79 million, a slight reduction compared to the first quarter. Southern sawlog markets remained fairly balanced in the second quarter as log supply improved with drier conditions and mills bolstered log inventories following weather-related challenges in the first quarter. In contrast, Southern fiber markets softened in response to elevated inventories of logs and finished goods at mills as well as lower overall demand for pulp and paper end market, in products. Given favorable operating conditions, our thinning activity increased in the second quarter, resulting in a higher mix of fiber locks.

As a result, our average sales realizations were slightly lower compared to the first quarter, and our fee harvest volumes were comparable. Per unit log and haul costs were slightly lower, primarily due to lower fuel prices and forestry and road costs were seasonably higher. In the North, adjusted EBITDA decreased by $4 million compared to the first quarter due to significantly lower sales volumes associated with seasonal spring breakup conditions. Turning now to real estate, energy and natural resources on Pages 10 and 11. Real estate and ENR contributed $52 million to second quarter earnings. Adjusted EBITDA was $70 million, a $19 million decrease compared to the first quarter, largely driven by the timing and mix of properties sold. Average price per acre increased significantly in the second quarter and remains elevated compared to historical levels.

We continue to benefit from healthy demand for HBU properties, resulting in high value transactions with significant premiums to timber value. I'll now make a few comments on our Natural Climate Solutions business. We continue to make progress on our forest carbon pilot project in May. In the second quarter, we completed the third-party audit process and submitted the project to the American Carbon Registry for final approval. Once approved, we expect an initial issuance of approximately 30,000 credits in year one, and we're currently developing two additional projects in the U.S. South. We remain focused on positioning our credits to capture the highest value possible in the marketplace. Moving to Wood Products on Pages 12 through 14. Wood Products generated $218 million of earnings in the second quarter and $270 million of adjusted EBITDA.

Second quarter EBITDA was an 82% improvement from the first quarter largely driven by an increase in lumber and OSB sales realizations and strong sales volumes for engineered wood products. Starting with lumber. Adjusted EBITDA was $51 million in the second quarter, a $43 million increase over the prior quarter and largely driven by improved sales realizations. Benchmark pricing for lumber held fairly stable in April and May as sentiment remained cautious. Buyers mostly limited orders to necessity purchases despite lean inventories. By mid-June, overall sentiment and benchmark pricing improved in response to stronger housing activity, perceived risks to supply from Canadian wildfires and announced mill curtailments also bolstered buying activity in June.

For the quarter, the framing lumber composite was comparable to the first quarter while our average sales realizations increased by 6% with the relative outperformance driven by our regional mix and product mix. Our sales volumes were moderately higher compared to the first quarter as our Northwest mills returned to more normalized operating levels. Log costs were slightly lower, primarily for Western logs and unit manufacturing costs were slightly higher during the quarter. Adjusted EBITDA for OSB increased by $15 million compared to the first quarter, primarily due to the increase in commodity pricing, slightly offset by higher unit manufacturing costs related to planned and unplanned downtime. Benchmark pricing for OSB entered the second quarter on an upward trajectory, largely driven by lean inventories and steady demand from new home construction activity.

As the quarter progressed, buyer sentiment and benchmark pricing continued to improve as Canadian wildfires disrupted supply and in response to improving residential construction activity. As a result, the OSB composite pricing increased by 21% compared to the first quarter. Our average sales realizations increased by 11%. This relative difference was largely due to our extended order files, which result in a lag effect for OSB realizations. Our production and sales volumes were moderately lower in the second quarter and unit manufacturing costs were moderately higher due to planned downtime for annual maintenance and a temporary period of unplanned downtime related to wildfire activity near one of our facilities in Alberta. Fiber costs improved slightly during the quarter.

Engineered Wood Products adjusted EBITDA increased by $62 million or 76% compared to the first quarter. This result is directly tied to improving demand for EWP products which are primarily used in single-family home building applications. As a result, our production and sales volumes were significantly higher for most products in the second quarter and unit manufacturing costs improved significantly for solid section and I-joist products. That said, our average sales realizations were lower for most products as supply and demand continue to rebalance across the broader EWP market. It's worth noting that our current EWP prices remain above pre-pandemic levels. Raw material costs decreased for all products in the second quarter. In Distribution, adjusted EBITDA increased by $12 million compared to the first quarter, a 55% improvement as the business benefited from strong EWP sales volumes in the second quarter.

With that, I'll turn the call over to Davie to discuss some financial items and our third quarter outlook.

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David Wold: Thank you, Devin, and good morning, everyone. I will be covering key financial items and second quarter financial performance before moving into our third quarter outlook. I'll begin with key financial items, which are summarized on Page 16. We generated $496 million of cash from operations in the second quarter and ended the period with approximately $1.8 billion of cash, cash equivalents and short-term investments. Total debt at quarter end was approximately $5.8 billion. In May, we took advantage of attractive capital market conditions and issued $750 million of debt due in 2026 and at a coupon of 4.75%. This debt issuance prefunded the majority of our 2023 maturities. And due to the shape of the yield curve, we were able to reinvest these cash proceeds in the interim at interest rates in excess of the bond coupon.

As a result of this transaction, our full-year 2023 interest expense will increase by $10 million to approximately $280 million. That said, this increase will be more than offset by the interest income earned on the invested issuance proceeds. In mid-July, we used a portion of the debt issuance proceeds to repay our $118 million, 78% note at maturity, and we intend to use the remainder of issuance proceeds towards our December 2023 maturity. Capital expenditures for the quarter were $81 million. We returned $139 million to shareholders through the payment of our quarterly base dividend which was increased in the first quarter by 5.6% to $0.19 per share. In addition, we returned $50 million to shareholders through share repurchase activity in the second quarter.

These shares were repurchased at an average price of $29.59 and as of quarter, our $1 billion authorization. Looking forward, we will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. As highlighted on Page 18, adjusted funds available for distribution for the second quarter totaled $415 million, and we have generated $470 million of adjusted FAD year-to-date. Looking forward, key outlook items for the third quarter are presented on Page 19. In our Timberlands business, we expect third quarter earnings and adjusted EBITDA will be approximately $25 million lower than the second quarter of 2023. Turning to our Western Timberlands operations.

Domestic log demand was steady at the outset of the third quarter in response to improved pricing and a way of lumber and as mills continue to build inventories ahead of wildfire season. That said, absent fire-related disruptions in the region, log supply is expected to remain ample as the quarter progresses, largely driven by a seasonal influx of logs from nontraditional timber owners. As a result, our domestic sales realizations are expected to be moderately lower compared to the second quarter. As is typical during the warmer and dryer months, we have transitioned in the higher elevation operations, which generally have lower productivity. As a result, our fee harvest volumes will be moderately lower in the third quarter. Forestry and road costs are expected to be seasonally higher as we do a significant amount of this work during the summer months and per unit log and haul costs are expected to be lower, partly due to a decrease in fuel prices.

Moving to the export markets, starting with Japan. As Devin mentioned, elevated inventories of European lumber imports and reduced consumption continue to weigh on the Japanese log market. That said, we anticipate our Japanese sales volumes will increase compared to the second quarter due to the timing of vessels, and we expect our sales realizations to be comparable. In China, elevated log imports from New Zealand and reduced log consumption continued to have an impact on the Chinese log market. We expect these conditions to persist through the third quarter. As a result, our sales realizations into China are expected to be lower compared to the second quarter, and we anticipate our sales volumes will be significantly lower as we flex logs to domestic customers to capture higher-margin opportunities.

In the South, we expect sawlog markets to moderate somewhat in the third quarter and fiber markets to soften further. This is being driven by a seasonal increase in log supply, elevated mill inventories and softening demand, particularly for pulp and paper products. That said, takeaway for our logs is expected to remain steady given our delivered programs across the region. Our fee harvest volumes are expected to be comparable to the second quarter and will include a higher mix of fiber logs as increased spinning activity continues. With a higher percentage of fiber logs, we expect our sales realizations to be slightly lower compared to the second quarter. Per unit log and haul costs are expected to be comparable and forestry and road costs are expected to be seasonally higher.

In the north, our fee harvest volumes are expected to be significantly higher compared to the second quarter as we have fully transitioned from spring breakup conditions, and our sales realizations are expected to be moderately lower due to mix. Turning to our Real Estate, Energy and Natural Resources segment. Demand for our real estate properties remain steady, and we continue to anticipate a consistent flow of HBU transactions with significant premiums to timber value. For the third quarter, we expect earnings will be slightly higher and adjusted EBITDA will be approximately $20 million higher than the second quarter of 2023 due to the timing and mix of real estate sales. For the full-year, we continue to anticipate adjusted EBITDA of approximately $300 million for the segment and now expect basis as a percentage of real estate sales to be 35% to 40% for the year.

For our Wood Products segment, benchmark prices for lumber and OSB entered the third quarter on an upward trajectory, supported by improving demand relatively lean inventories and the prospects of supply disruptions following an early start to wildfire season in Canada. As shown on Page 21, our current and quarter-to-date average sales realizations for lumber and OSB are well above the second quarter averages. Assuming this pricing dynamic remains intact for the balance of the third quarter, we expect our Wood Products financial results to be significantly higher compared to the second quarter of 2023. That said, excluding the effect of changes in average sales realizations for lumber and OSB, we anticipate third quarter earnings and adjusted EBITDA will be slightly lower than last quarter.

For our Lumber business, we expect moderately higher production and sales volumes in the third quarter and slightly lower unit manufacturing costs. Log costs are expected to be moderately lower compared to the second quarter. For our oriented strand board business, we expect production and sales volumes to be comparable to the second quarter. Unit manufacturing costs are expected to be slightly higher and fiber costs are expected to be comparable. Turning to our Engineered Wood Products business. As Devin mentioned, we continue to see improving demand for EWP products, and this has extended our order activity well into the third quarter. As a result, we expect our sales volumes to increase slightly compared to the second quarter. Notwithstanding this dynamic, we anticipate slightly lower sales realizations as supply and demand continue to rebalance in certain markets.

That said, third quarter EWP prices are expected to remain substantially above pre-pandemic levels, and we'll continue to adjust in response to demand signals from the homebuilding segment, which has seen more strength of late, particularly for single-family construction. Raw material costs are expected to be higher compared to the second quarter, primarily for OSB web stock. For our distribution business, we expect adjusted EBITDA to be comparable to the second quarter. With that, I'll now turn the call back to Devin and look forward to your questions.

Devin Stockfish: Thanks, Davie. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Our view on the housing market has become incrementally more positive over the last several months, supported by improvements in homebuilder sentiment and increase in new home sales and an uptick in single-family starts. Despite elevated mortgage rates, we continue to see resilient demand from the homebuilding segment largely driven by the historically low inventory of existing homes, a strong labor market and solid household balance sheets. That being said, there continues to be a degree of uncertainty around the trajectory of mortgage rates in the broader U.S. economy. As a result, we still expect to sign starts in 2023 to be lower than the last couple of years.

But again, our outlook has become more positive as the year has progressed, and there may be incremental upside if mortgage rates move down from the high 6% range. And longer-term, we remain quite optimistic on housing fundamentals supported by favorable demographic trends and significantly underbuilt housing stock. Turning to the repair and remodel market. Activity strengthened slightly in the second quarter and has held up well year-to-date, largely supported by solid demand from the professional segment. Demand from the do-it-yourself segment was steady in the second quarter and is largely normalized to pre-pandemic levels. Near-term, we expect stable demand from this segment as prospective homebuyers may choose to remodel in lieu of purchasing a new home in a higher mortgage rate environment.

And longer-term, we continue to believe the repair and remodel market will be an important demand driver for our businesses, supported by strong home equity levels and an aging housing stock. In closing, our teams delivered solid operational and financial results in the second quarter. In addition, we continue to make meaningful progress against the multi-year targets we set out in 2021 through strategic Timberlands acquisitions and the advancement of our Forest Carbon business. Looking ahead, we're encouraged by recent improvements in the housing market and maintain a favorable long-term outlook for the demand fundamentals that will drive growth for our businesses. We remain focused on operational excellence and innovation, driving industry leading margins and supporting our customers.

And with our strong financial position, our unmatched portfolio of assets and disciplined approach to capital allocation, we're well positioned to drive long-term value for our shareholders. With that, I think we can go ahead and open it up for questions.

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