The Weyerhaeuser Second Quarter 2024 Earnings Conference Call began with the operator introducing the host, Andy Taylor, Vice President of Investor Relations. Taylor thanked everyone for joining and reminded them of the risks associated with forward-looking statements. CEO Devin Stockfish then reported on the company's second quarter earnings and highlighted the solid results, thanking the teams for their efforts. He also mentioned a growth opportunity within the Southern Timberlands portfolio.

Weyerhaeuser is acquiring 84,000 acres of timberlands in Alabama for $244 million, with one transaction already closed and the remaining ones expected to close later this year. These acquisitions will expand their footprint in a strong timber market and are expected to generate high cash flow and harvest tons per acre. The company is also on track to reach their multiyear Timberlands growth target of $1 billion by the end of 2025. In the second quarter, Timberlands contributed $81 million to earnings, with adjusted EBITDA of $147 million. The Western domestic market saw downward pressure on log prices due to elevated inventories and a softening lumber market, resulting in slightly decreased sales realizations compared to the first quarter.

In the second quarter, the company saw moderate increases in fee harvest volumes and domestic sales volumes, despite higher log and haul costs. In the Western export market, demand for logs remained steady, with slightly higher sales realizations. In China, log consumption increased modestly but takeaway decreased towards the end of the quarter. In the South, adjusted EBITDA remained steady, with sawlog markets moderating and fiber markets stabilizing. Takeaway for logs remained steady, resulting in comparable sales realizations. Fee harvest volumes and forestry and road costs were seasonally higher, while log and haul costs remained comparable.

In the North, adjusted EBITDA decreased slightly due to lower sales volumes during spring breakup. Real estate and ENR contributed $59 million to earnings, with adjusted EBITDA increasing by $8 million. The real estate business saw strong demand for HBU properties, resulting in high-value transactions. The Natural Climate Solutions business has over 70 agreements for potential solar projects and is advancing several projects in the development pipeline. Wood Products had a 22% improvement in adjusted EBITDA, driven by higher OSB pricing, sales volumes, and lower costs in lumber and EWP.

The second quarter for the lumber business saw a loss of $8 million due to soft pricing and an oversupply of lumber. Demand for lumber in the repair and remodel and multifamily housing segments has been lower, particularly in the Southern Yellow Pine market. The average sales realizations decreased by 2%, but sales volumes were higher due to increased production. The decision to indefinitely curtail operations at the New Bern sawmill was made due to its small size and lack of investment, making it financially unfeasible to continue operations. The mill is expected to be fully curtailed in the third quarter.

The speaker thanks the New Bern team for their contributions and addresses the recent curtailment, stating that they will try to minimize its impact by offering employment opportunities or transition services to affected employees. They also mention their focus on efficiency and cost control, and announce a 5-10% reduction in lumber production in the third quarter due to current market conditions. They will continue to assess their performance and make adjustments as needed. The speaker then discusses the performance of their OSB and Engineered Wood Products segments, noting higher average sales realizations and improved fiber costs.

In the second quarter, the VWP market saw a slight increase in demand due to solid single-family construction activity. This led to higher sales volumes and comparable sales realizations. Unit manufacturing costs improved, but raw material costs were higher for I-joist due to OSB web stock. In Distribution, adjusted EBITDA decreased due to lower commodity margins offsetting higher sales volumes. The company ended the quarter with $1 billion in cash and $200 million earmarked for Timberland acquisitions. They generated $432 million in cash from operations, returned $146 million to shareholders through dividends, and repurchased $50 million worth of shares.

The company plans to continue using their flexible cash return framework to repurchase shares when it will benefit shareholders. Adjusted EBITDA for unallocated items increased in the second quarter. However, third quarter results for the Timberlands business are expected to be lower due to decreased sales volumes and realizations in the West. The company also expects lower domestic sales realizations and slightly lower fee harvest volumes in the third quarter. In Japan, sales volumes are expected to be comparable to the second quarter, but average sales realizations are expected to decrease due to market challenges.

In the third quarter, log demand in China is expected to decrease due to lower consumption levels and an increase in log inventories. In the South, sawlog markets are expected to moderate while fiber markets remain stable. Sales realizations are expected to be comparable to the second quarter. Fee harvest volumes are expected to be higher in both the South and North regions. Real estate markets are solid and the company has increased its guidance for adjusted EBITDA. The company also expects an increase in contributions from their Natural Climate Solutions business.

The company expects lower earnings and adjusted EBITDA in the third quarter due to the timing and mix of real estate sales. The Wood Products segment is also expected to have lower earnings and adjusted EBITDA, with stable benchmark prices for lumber and OSB. Lumber production will be reduced by 5-10%, leading to lower sales volumes and higher manufacturing costs. OSB production will also be lower due to planned maintenance outages, but sales volumes will be comparable. Demand for Engineered wood products remains steady, with comparable sales volumes to the second quarter.

The company expects lower sales realizations for plywood and MDF products in the third quarter, but anticipates lower raw material costs for OSB web stock. The distribution business is expected to have slightly lower adjusted EBITDA due to a decrease in commodity realizations. The housing market is holding up reasonably well in the single-family segment, but the multifamily segment has been more challenged. The company expects solid single-family building activity in the second half of the year, but the multifamily segment to remain soft. Overall, the company maintains a positive long-term outlook on housing fundamentals. The repair and remodel market has been softer, particularly in the do-it-yourself segment.

The Professional segment is performing well despite inflationary pressures and a slowdown in the housing market. The company expects steady repair and remodel activity in the second half of 2024 and has a positive long-term outlook. The company remains focused on operational excellence and innovation, and is well positioned to navigate market conditions. The reduction in Wood Products capacity in the third quarter is expected to be between 5% and 10%, and the company will continue to monitor market conditions to determine the final amount.

The speaker discusses the company's strategy for positioning itself in the current competitive landscape, which has seen smaller players gaining more staying power. They have been focused on strengthening their balance sheet and making their operations low-cost to weather market dips. This approach allows them to avoid taking drastic actions during challenging times, such as the current downturn in lumber prices. The market is currently facing an imbalance in supply and demand due to a pullback in multifamily and repair and remodel projects.

The company is constantly balancing their supply and demand in order to create value and drive earnings. They are also making investments in Timberlands, which they believe will bring significant returns in the future. They are excited about the recent Alabama transactions and see it as an opportunity to acquire high-quality Timberlands.

The speaker is pleased with the cash flow per acre of their Southern portfolio and plans to highlight the value of their timberlands by inviting investors to see the quality of the asset and showcasing the potential for alternative values like solar. They also mention their flexible cash return framework, which allows them to provide dividends, invest in the business, and engage in share repurchases.

The company is well positioned to take advantage of improved markets in the future. They will continue to evaluate options and allocate capital to create value for shareholders. The next question is about the downward pressures on timber EBITDA, and the CEO explains that it is mostly due to lower prices in the West, as mills are not able to make money with current lumber prices, resulting in reduced takeaway and challenges in raising prices.

The speaker discusses the state of the lumber market in Japan and the challenges of raising prices due to domestic dynamics and the value of the yen. They also mention the increase in capacity in the southern US over the last 5 years and the current imbalance between production and demand for lumber in the region. They note that production has decreased in both the US South and Northwest, as well as in British Columbia.

The speaker is unable to give a precise estimate of the decrease in operating rates of their competitors due to lack of insight. However, the demand for treated lumber and multifamily housing, which use Southern Yellow Pine, has decreased, resulting in pressure on the market. Over time, the market is expected to balance out as Southern Yellow Pine takes over some of the markets traditionally dominated by SPF. The speaker still believes in the company's ability to increase dividends based on sustainable cash flow generation.

The company's recent timberland acquisitions and growth in the Natural Climate Solutions business will support ongoing cash flow generation and contribute to the growth of the dividend. Other factors such as improvements in capital structure, debt paydown, share repurchase, and cost structure also contribute to the company's ability to increase the dividend even in challenging market conditions. The treated market is down in the mid- to high single digits, with the DIY component likely experiencing a similar decline. The operating rates for lumber, OSB, and EWP in Q2 were in the low to mid-80s.

The speaker discusses the latest timberland acquisitions in Alabama and the potential for Natural Climate Solutions revenues. They also address the potential for improved harvest contributions and cash flow in the next few years, particularly in the West where realizations are currently down due to the lumber market. They expect higher log realizations in the West in a normalized lumber environment.

The company expects to see an increase in log realizations in the west and harvest volumes in the South due to their timberland acquisitions. They also anticipate higher log prices in areas with new capacity and are focused on growing their export business in the U.S. South. The company is also exploring alternative values for their timber portfolio, such as solar, wind, carbon capture, and real estate development, which they expect to materialize in the future. They will continue to prioritize low log and haul costs while also creating alternative values from their land base.

Devin Stockfish, CEO of the company, discusses the confidence they have in their timberland acquisition program and the stable pricing for their EWP products. He also mentions the competitive environment and their unique customer support that gives them a competitive advantage. Analyst Mike Roxland asks about the weakness in housing starts and Devin notes that it may be affecting regional and smaller builders more than larger ones who have more resources to offer incentives.

Devin Stockfish, CEO of Weyerhaeuser, discusses the impact of interest rates on new home construction and the competitive advantage of bigger builders. He also talks about the operating rate for their Engineered Wood Products (EWP) segment and the potential for an inflection point in pricing. The operating rate for EWP is expected to be in the low 80s for Q3 and they are trying to match production with customer demand.

The company is currently running at a steady rate until there is a significant increase in activity. The inflection point will be reached when there is more housing activity, specifically on the single-family side. Even in the current environment, the company can still do well in the CWP business. Lumber prices have been at multiyear lows, causing challenges for the industry.

The company's Northwest and British Columbia operations have been facing challenges due to high log costs and low lumber prices. However, their overall mill set is positioned well on the cost curve and they have demonstrated relative performance. The company expects to be profitable in their southern operations and Alberta, and believes that lumber prices will eventually pick up. In the meantime, they will focus on cost efficiency to navigate the market dip. The company plans to decrease production by 5% to 10% and believes that other companies will also make decisions based on their own operations and cost structures. The operator then asks a question about the U.S. market and potential new capacity from competitors.

Devin Stockfish, CEO of the lumber company, notes that while Q3 sales volume is expected to be similar to Q2, new capacity coming in Q4 may put downward pressure on pricing. However, he believes that the industry will see a boost in demand once interest rates come down and housing shortages are addressed. He also mentions the impact of higher cash deposit rates for Canadian softwood lumber in August.

Devin Stockfish, CEO of Weyerhaeuser, discusses the potential impact of a proposed increase in lumber duties on pricing and capacity in the market. He also provides an update on the progress of the company's Natural Climate Solutions program, stating that the first solar projects will come online this year and continue to grow over time. When asked about the $100 million EBITDA target for Natural Climate Solutions, Stockfish notes that the process is slow but they expect to see cash flow hit their income statement in the coming years.

The speaker believes that the market for their company's services has grown since they first set their target. However, certain aspects, such as carbon capture and storage, have taken longer than expected due to lengthy permitting processes. Solar and mitigation banking have seen high demand, and forest carbon is gaining momentum and has a lot of potential. The speaker is confident in the future success of these markets.

The speaker discusses how the income stream from Forest Carbon will have a greater impact next year. They also mention that OSB prices coming down will benefit the EWP business, and that the fixed cost reduction from New Bern will be relatively small. They are unsure of the exact impact on lumber EBITDA for 3Q, but it may be similar to 2Q or potentially break even with the actions taken.

The speaker believes that the current pricing of lumber is fair, but there is a possibility that prices could increase as the quarter progresses. There are no further questions and the speaker thanks everyone for their interest in Weyerhaeuser. The teleconference is now concluded.

This summary was generated with AI and may contain some inaccuracies.