Weyerhaeuser Company (NYSE:WY) Q3 2023 Earnings Call Transcript

Weyerhaeuser Company (NYSE:WY) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Greetings, and welcome to Weyerhaeuser Third 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 third 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 third quarter GAAP earnings of $239 million or $0.33 per diluted share, a net sales of $2 billion. Adjusted EBITDA totaled $509 million, a 9% increase from the second quarter. These are solid results and I’m proud of the performance delivered by our teams during the quarter. Turning now to our third quarter business results, starting with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $78 million to third quarter earnings. Adjusted EBITDA was $143 million, a $29 million decrease compared to the second quarter, largely driven by lower sales volumes in our Western and Southern operations, and lower average sales realizations for Western export volumes.

In the West, adjusted EBITDA decreased by $22 million, compared to the second quarter. Turning to the Western domestic market, log supply was ample in the third quarter as the typical seasonal influx of logs from nontraditional timber owners came to market. Despite this dynamic, domestic log markets remained fairly balanced as mills maintain steady demand, driven by higher pricing and takeaway of lumber early in the quarter, and mills building log inventories to mitigate potential supply risks and the peak wildfire season. Our average domestic sales realizations were comparable to the prior quarter. As expected, during the warmer and drier months, we transitioned to higher elevations [ph], and lower productivity harvest operations. Additionally, although wildfire activity was limited on our Timberlands, dry conditions across the Pacific Northwest resulted in harvest restrictions in certain areas.

As a result, our fee harvest and domestic sales volumes were moderately lower compared to the second quarter. Our forestry and road costs were seasonally higher, and per unit log and haul costs were lower. Moving to our Western Export business. In Japan, elevated inventories of European lumber imports and reduced consumption continue to weigh on the Japanese log market. That said, our average sales realizations for export volumes to Japan were comparable to the second quarter, largely driven by stable log pricing in the western domestic market. Our Japanese sales volumes decreased in the third quarter. This was partially due to reduced shipments to a customer that sustained fire damage at one of its sawmills during the quarter. While the mill is being rebuilt, our customer is in the process of adding shifts and production at different facilities and expects to recover most of the lost production from the damaged operations.

It will likely take several quarters for this customer to ramp up the additional production. As a result, we’re expecting lower shipments to Japan over the next several quarters. During this period, we expect to ship volume to other customers in Japan and the Western domestic market. In China, despite steady decreases in log inventories at the ports and reduction in log supply, the Chinese log market continued to be impacted by reduced consumption in the third quarter. As a result, our average sales realizations for export volumes to China decreased moderately compared to the second quarter. While demand for our logs continues to be steady, our sales volumes were significantly lower, as we intentionally flex logs to the domestic market to capture higher margin opportunities.

Turning to the South. Adjusted EBITDA for Southern Timberlands decreased by $6 million, compared to the second quarter. Southern sawlog markets moderated slightly in the third quarter, and fiber markets continued to soften, largely in response to elevated mill inventories, a seasonal increase in log supply and reduced demand for finished goods, particularly for pulp and paper products. As a result, our average sales realizations decreased slightly compared to the second quarter. Despite these market dynamics, demand for our logs remain steady given our delivered programs across the region. However, certain geographies did experience wetter than normal conditions at the outset of the quarter, resulting in moderately lower fee harvest volumes compared to the second quarter.

Per unit log and haul costs were comparable and forestry and road costs were seasonally higher. In the North, adjusted EBITDA increased slightly compared to the second quarter, due to significantly higher sales volumes resulting from a seasonal increase in harvest activity that is typical in the third quarter. Our sales realizations were moderately lowered due to Mix. Turning now to real estate, energy and natural resources on Pages 10 and 11. Real estate and ENR contributed $56 million to third quarter earnings. Adjusted EBITDA was $94 million, a $24 million increase compared to the second quarter, largely driven by the timing and mix of property sold. Average price per acre decreased compared to the second quarter, but remains elevated compared to historical levels as 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 an exciting third quarter achievement in our Natural Climate Solutions Business. I’m pleased to report that we received approval from ACR for our first forest carbon credits in Maine. The project covers approximately 50,000 acres, has an initial issuance of nearly 32,000 credits, and is expected to generate 475,000 credits over a 20-year crediting period. I want to thank our team for the exceptional work and diligence and completing this initial project and building the foundation to scale this business as the market continues to mature. Our goal is to develop and bring to market forest carbon projects that generate meaningful carbon additionality with measurable climate benefits. This initial project is an important milestone for Weyerhaeuser and demonstrates our commitment to offering only the highest quality credits.

Looking forward, we are developing several additional forest carbon projects within our U.S Timberlands including two in the South slated for approval in the first half of 2024. As we’ve demonstrated since launching our Natural Climate Solutions business, Weyerhaeuser is uniquely positioned to lead in this space, given our expertise and unmatched Timberlands portfolio. We have established a target to grow this business to $100 million of EBITDA by year-end 2025 and we’ve made solid progress to date towards that target. And beyond 2025, we see significant upside from Natural Climate Solutions as markets continued to develop, particularly in the carbon and renewables businesses. And from our perspective, there is no other company in this space with the capabilities or asset base to deliver on this value creation opportunity at scale like Weyerhaeuser.

Moving to wood products on Pages 12 through 14. Wood Products generated $277 million of earnings in the third quarter and $328 million of adjusted EBITDA. Third quarter EBITDA was a 21% improvement from the second quarter, largely driven by an increase in OSB sales realizations. Before diving into the business results, I would like to take a moment to highlight the operating performance improvements that we’ve made in our Wood Products segment over the past several years. To illustrate the point, for the first half of 2023, we delivered peer-leading EBITDA margins across all of our wood products, businesses. I’m incredibly proud of the work that our teams have done, and for their unwavering commitment to our operational excellence initiatives, innovation and the successful delivery of our ongoing strategic capital investments.

Through these efforts, we’ve positioned our wood products business to deliver industry leading performance. As we’ve demonstrated over the last several years, this has allowed our wood products business to generate significant cash flow for Weyerhaeuser. And despite a moderation in product pricing of late, this business remains well-positioned to navigate through a range of market conditions, and will continue to enhance our competitive advantage as a company, one that supports our commitment to returning meaningful amounts of cash to shareholders and enhancing the value of our portfolio over time. Turning now to lumber results. Adjusted EBITDA was $58 million in the third quarter, a 14% increase over the prior quarter. Benchmark pricing for lumber entered the third quarter on an upward trajectory, supported by improving demand, relatively lean inventories and the prospect of supply disruptions following an early start to the wildfire season in Canada.

By late July, however, demand had softened as supply concerns dissipated, and buyer sentiment turned more cautious due to ongoing macro economic uncertainty. Despite lean inventories, orders were largely limited to necessity purchases throughout the quarter, and benchmark prices trended lower. For the quarter, our average sales realizations were comparable to the second quarter. Our sales volumes were slightly lower, resulting from reduced production at several mills, partially driven by temporary operating disruptions. Log costs were moderately lower compared to the second quarter and unit manufacturing costs were comparable. Adjusted EBITDA for OSB increased by $81 million compared to the second quarter, primarily due to the increase in commodity pricing.

Benchmark pricing for OSB increased sharply at the outset of the third quarter, supported by resilient demand for new home construction activity, lean inventories and supply concerns resulting from annual maintenance outages that are typical in the fall. Pricing remained elevated until mid September and then decreased through quarter end as buyer sentiment turned cautious in response to weaker-than-expected housing starts in August, as well as general concerns about the economy and the prospect of additional supply coming to market. For the quarter, our average sales realizations increased by 39% compared to the second quarter. Our sales volumes were moderately lower in this — in the quarter. Unit manufacturing costs were slightly higher due to planned downtime for annual maintenance.

Fiber costs improved slightly during the quarter. Engineered Wood Products adjusted EBITDA was $125 million, a decrease of $19 million compared to the second quarter. Strong demand for EWP products, which are primarily used in single-family home building applications kept most of our EWP products on an extended lead times for the entire third quarter. As a result, our sales volumes increased slightly compared to the second quarter, primarily for solid section products. Our average sales realizations for most products decreased slightly as supply and demand continued to rebalance in certain markets. It’s worth noting that our current EWP prices remain above pre-pandemic levels. Unit manufacturing costs were slightly higher in the third quarter, and raw material costs increased primarily for OSB webstock.

In Distribution, adjusted EBITDA was $31 million in the quarter, a $3 million decrease compared to the second quarter driven by lower EWP realizations in certain markets and lower sales volumes for some products. With that, I’ll turn the call over to Davie to discuss some financial items in our fourth quarter outlook.

David Wold: Thanks, Devin, and good morning, everyone. I’ll be covering key financial items and third quarter financial performance before moving into our fourth quarter outlook. I’ll begin with key financial items which are summarized on Page 16. We generated $523 million of cash from operations in the third quarter, and ended the period with approximately $1.8 billion of cash, cash equivalents and short-term investments, which includes amounts raised and are made debt issuance that pre-funded the majority of our 2023 maturities. In July, we used a portion of the debt issuance proceeds to repay $118 million of notes at maturity. Total debt at quarter end was approximately $5.7 billion, including 860 million that matures in December.

Capital expenditures for the quarter were $99 million, which is a typical level for the third quarter, and we remain on track to invest approximately $440 million of capital for the full year. We returned $138 million to shareholders through the payment of our quarterly base dividend and remain committed to growing this by 5% annually through 2025. In addition, we returned $25 million to shareholders through share repurchase activity in the third quarter. These shares were repurchased at an average price of $32.67. And as of quarter end, we had completed $733 million of repurchase under our $1 billion authorization. Looking forward, we will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value.

As highlighted on Page 18, adjusted funds available for distribution for the third quarter totaled $424 million, and we have generated $894 million of adjusted FAD year-to-date. Third quarter results for our unallocated items are summarized on Page 15. Adjusted EBITDA for this segment decreased by $13 million, compared to the second quarter. This decrease was primarily attributable to changes in intersegment profit elimination and LIFO. Looking forward, key outlook items for the fourth quarter are presented on Page 19. In our Timberlands business, we expect fourth quarter earnings and adjusted EBITDA to be comparable to the third quarter of 2023. Turning to our Western Timberland operations, we expect log demand and the domestic market to soften in the fourth quarter, as mills adjust to lower pricing and take away of lumber and work through elevated log inventories.

As a result, our domestic sales realizations are expected to be moderately lower compared to the third quarter absent weather related log supply disruptions. Our fee harvest volumes in forestry and road costs are expected to be comparable in the fourth quarter, and per unit log and haul costs are expected to be moderately higher. Moving to the export markets, starting with Japan. As Devin mentioned, we are expecting fewer export shipments into the Japanese market over the next several quarters in response to the operational disruption experienced by one of our customers in the region. As a result, we expect fourth quarter sales volumes to be moderately lower compared to the third quarter. Our Japanese log sales realizations are expected to be slightly higher.

In China, log supply into the region has adjusted to lower consumption levels, and the market is trending toward a more balanced state. As a result, we anticipate fairly stable pricing for our logs shipments into China for the balance of the year. For the quarter, our average sales realizations are expected to be slightly lower compared to the third quarter average. Given steady demand for our logs coupled with moderating conditions in the western domestic market, we expect to increase our sales volumes into China in the fourth quarter. In the South, we expect stable log markets in the fourth quarter, as mills maintain healthy log inventories ahead of wetter conditions that are typical in the winter months. As a result, we expect our sales realizations to be comparable to the third quarter.

Our fee harvest volumes and per unit log and haul costs are also expected to be comparable, and we anticipate seasonally lower forestry and road costs in the fourth quarter. In the North, our fee harvest volumes are expected to be significantly higher compared to the third quarter. We anticipate slightly lower sales realizations due to mix. Turning to Real Estate, Energy and Natural Resources, real estate markets have remained solid year-to-date, and we’ve capitalized on steady demand in pricing for HBU properties. As a result, we are revising our guidance for full year 2023 adjusted EBITDA to $310 million, an increase of $10 million from prior guidance. We continue to expect basis as a percentage of real estate sales to be 35% to 40% for the year.

For the fourth quarter, we expect earnings and adjusted EBITDA to be lower than the third quarter of 2023 due to the timing and mix of real estate sales. For our Wood Product segment, we expect fourth quarter earnings and adjusted EBITDA will be moderately lower compared to the third quarter of 2023 excluding the effects of changes in average sales realizations for lumber and OSB. Benchmark prices for lumber and OSB entered the fourth quarter on a downward trajectory resulting from cautious buyer sentiment in response to a seasonal reduction in housing construction activity and ongoing macroeconomic headwinds. However, benchmark prices for OSB have stabilized in the last couple of weeks. As shown on Page 20, our current and quarter-to-date average sales realizations for lumber and OSB are lower than the third quarter averages.

For our lumber business, we expect moderately higher sales volumes in the fourth quarter and slightly lower unit manufacturing costs. Log costs are expected to be comparable to the third quarter. For our oriented strand board business, we anticipate sales volumes to be moderately higher compared to the third quarter with slightly lower unit manufacturing costs. Fiber costs are expected to be slightly higher in the fourth quarter. Turning to our Engineered Wood Products business, as Devin mentioned, we continue to see strong demand for EWP products given resilient single-family construction activity year-to-date. As a result, our order files are extended well into the fourth quarter and product pricing is expected to be fairly stable through year-end.

For the quarter, our average sales realizations are expected to be lower compared to the prior quarter average. Our sales volumes are expected to be slightly lower, primarily for solid section products resulting from an increase in planned downtime for annual maintenance in the fourth quarter. However, we anticipate an increase in sales volumes for I-Joist products. Raw material costs are expected to be slightly higher compared to the third quarter primarily for OSB Webstock. For our Distribution business, we expect adjusted EBITDA to be lower compared to the third quarter, primarily driven by a decrease in commodity realization. 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 macro view on the housing market is largely unchanged. Although we have seen some recent headwinds in the multifamily segment in response to increasing interest rates. Importantly, however, the single-family segment has remained resilient year-to-date. In fact, despite the elevated mortgage rate environment, single-family starts increased 3% quarter-over-quarter, and new home sales were up in September. As a reminder, single-family construction is a much more important demand driver for our business relative to multifamily. In the near-term, we continue to believe that the underlying housing demand is solid.

Even at higher interest rates, we expect single-family demand to hold up reasonably well given the limited inventory of existing homes on the market, combined with the home builders ability to offer mortgage rate buy downs and other incentives. That said, buyer sentiment will continue to be influenced by affordability challenges brought about by increased mortgage rates and elevated home prices, as well as the state of the overall economy. As a result, we continue to anticipate a choppier housing market in the near-term relative to the last couple of years. I will note, however, our long-term view on housing fundamentals continues to be very favorable, supported by strong demographic trends and a vastly under built housing stock. Turning to the repair and remodel, market activity remained steady in the third quarter and has held up well year-to-date.

Although we’re likely to see a seasonal reduction in repair and remodel activity over the winter months, we believe underlying demand fundamentals are solid, supported by prospective homebuyers choosing to remodel in lieu of purchasing a new home and a higher mortgage rate environment. And looking beyond 2023, most of the key drivers supporting healthy repair and remodel demand remain intact, including favorable home equity levels and an ageing housing stock. In closing, we delivered solid results across our businesses in the third quarter. We also achieved an important milestone in our natural climate solutions growth program with the approval of our first forest carbon credits and looking ahead, although near-term market conditions have moderated, we remain constructive on the longer term demand fundamentals that support our businesses.

Our balance sheet is exceptionally strong and we remain focused on maintaining our industry leading operating performance, serving our customers and delivering superior long-term value and returns for our shareholders. With that, I think we can go ahead and open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from George Staphos with Bank of America. Please proceed with your question.

George Staphos: Hi, thank you. Good morning, everybody. Thanks for the details. I wanted to …

Devin Stockfish: Good morning.

George Staphos: Good morning. I wanted to spend the first couple questions on wood. And the first one on EWP, Devin, if you could. So we’d heard as well that lead times in EWP have been extended for you. Do you think you’re unique or is the industry operating at that same stance. Has there been any developments specific to Weyerhaeuser on EWP that’s led to the extended lead times? Have you been able to pick up share, say, in distribution that in turn has fed into your demand in DWP. Any color there would be helpful. The second question, if we can take a step back and look at your EBITDA trends across the businesses, the last number of years, again, what Weyerhaeuser done on a manufacturing basis has been terrific. Do you still think that you are more or less black at the bottom across your mill system in light of the fact that there’s — certainly there’s been a lot of inflation that’s occurred in the cost structure, maybe not in fiber, but other areas that you’d have to contend with if we have a deeper downturn.

So how would you have us think about those two points?

Devin Stockfish: Sure. Well, I’ll take EWP first, George. Really, it’s a combination of two things, and I’m speaking primarily with respect to Weyerhaeuser and not necessarily other participants in the market. For us, we candidly got a little behind the curve earlier in the year. Remember, back to the beginning of 2023, our view was that single-family housing was going to struggle a little bit in a higher mortgage rate environment. And so we did adjust our operating posture somewhat to reflect what we thought was going to be a softer housing environment. Well, what turned out to be the case was single-family held up remarkably well. And so we have ramped up our production to try to get back on track. But to some extent, that higher level of single-family construction activity combined with us dialing it back a little bit at the first of the year, put us behind a little bit.

And so we’ve been managing through it. I think we’re catching up. I will say, even though at this point, we do still have fairly extended lead times, but I think we’re making good progress against that. In terms of the question around black at the bottom, there’s no question that over the last several years in the inflationary environment that we’ve seen the underlying cost structure has gone up, not just for us, but I would assume for the entire industry. And what I would say, though, is I still have a high degree of confidence in our black at the bottom approach. We continue to be, in my view, the low-cost producer across all of our business lines. And so even if we do see a more material downturn, I do think we will weather that much better than the rest of the industry, and I would expect us to stay black at the bottom across each of our businesses.

Now that being said, there are going to be presumably if we see a material downturn, there will be a few mills that will struggle to stay cash flow positive across the entirety of the year. I’ll just highlight the Pacific Northwest and British Columbia, our two markets where it can be challenging. Just primarily because the dynamic in how log costs come down is oftentimes slower than how quickly lumber prices can move. And so we’ve seen that a few times when you’ve seen lumber prices move down quickly, typically — particularly in those markets, the log prices come down a little bit more slowly, which can make the economics challenged for a brief moment in time. But we do still feel confident in black at the bottom. Our organization is focused every day on keeping costs out of the business, improving efficiency and overall driving down our cost structure.

And I think that will serve us well across all points in the market, whether times are good or times are a little more challenged.

George Staphos: Thanks, Devin. My last one, and I’ll turn it over. If we go to Slide 8 in the upper left hand corner when we look at realizations for the West. And obviously, it’s not a new development, it’s been occurring. But I guess the question I had is, if we go back to Q2, what your view has been the reason why we’ve seen this steady erosion in realizations in the West? And in your view, what would be the single biggest factor to reversing that trend if we look out over the next 2 to 4 quarters. Thanks and good luck in the fourth quarter.

Devin Stockfish: Yes. Great question. I mean it really comes down to lumber prices. In the Pacific Northwest, the market is very tensioned, and frankly, there are just not enough logs to cover all the demand. So the pricing for logs in the Pacific Northwest is really going to be governed by what happens with lumber prices. And so the mills they will pay up to the point where they can still drive some margin across the mill set, and that’s largely going to really support what log costs do. Now the one nuance there is we obviously have an export program to Asia, and that can supplement our realizations. They’re tied. There is a correlation between what happens in the domestic log market in Japan and China. And so to the extent that we can get the Japanese market back up, which I think we’re trending in that direction just because you’ve started to see a lot of that European lumber that had built up in Japan work its way through the system.

But it ultimately comes back to what’s going on with lumber prices in the Northwest.

George Staphos: Thanks, Devin. I will turn it over.

Devin Stockfish: Yes, great.

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

Kurt Yinger: Great. Thanks and good morning, everyone.

Devin Stockfish: Good morning.

David Wold: Good morning, Kurt.

Kurt Yinger: I just — good morning. I just want to start off on capital allocation. And at least in my view you guys are currently trading at a pretty wide discount to NAV here. obviously, timberland M&A remains an important part of the strategy. But with the competitiveness on deals and your stock where it is, how do you think about the attractiveness of repurchases versus acquisitions. And then somewhat relatedly, if you were to continue to see that NAV discount, why then — how willing are you to be kind of more aggressive with share repurchases maybe above and beyond what the variable returns framework would permit, so to speak.

David Wold: Yes. You bet, Kurt. This is Davie. I’d just start out by saying, look, we are in a very fortunate position as you referenced. We have a lot of levers. So that includes M&A, investing in the business, paying down debt, dividend payments, among others, and we’re constantly evaluating our views on capital allocation. But all the factors that go into that are dynamic. So it’s something we always need to be watching. But as we’ve said, our capital allocation framework starts with that commitment to return 75% to 80% of our adjusted FAD back to shareholders via the base supplemental and share repurchase. So that portion is really earmarked for returning cash to shareholders. And with the remaining piece above and beyond that, i.e., the 20% to 25%, we can allocate that between acquisitions, share repurchase reducing our debt.