Weyerhaeuser Company

Ladies and gentlemen, thank you for standing by and welcome to the Weyerhaeuser Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to Beth Baum, Vice President of Investor Relations and Enterprise Planning. Please go ahead.

Thank you, Regina. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's second quarter 2020 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 Russell Hagan, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Thanks, Beth. Good morning, everyone, and thank you for joining us today. I hope everyone is staying healthy and is well. This morning, Weyerhaeuser reported second quarter gap earnings of $72 million, or 10 cents per diluted share, on net sales of $1.6 billion. Excluding net charges of $5 million for special items, we generated earnings of $77 million, or 11 cents per diluted share. Adjusted EBITDA totaled $386 million in the second quarter. This is approximately 7% lower than the first quarter, but 13% higher than a year ago. Our teams delivered strong operational and safety results despite the disruptions from COVID-19 and the unprecedented volatility caused by the pandemic. In a moment, I'll dive into our business results, but first let me set the stage with some comments on the housing market. New residential construction activity declined sharply in March and April as the COVID-19 pandemic triggered stay-at-home orders and rising unemployment across the nation. April housing starts were the lowest in over five years and over 25% lower than April 2019. The rapid decline in new residential construction activity quickly translated to weaker order files for building products and significant production curtailments by wood products manufacturers. Over the last few months, demand for housing and wood products have shown unexpected resiliency in the face of broad economic disruption. In late May, states began to reopen their economies. and U.S. housing activity rebounded sharply, despite the continued extreme weakness and broader macroeconomic conditions. Housing starts improved sequentially, and June starts were only 4% lower than a year ago. Repair and remodel activity has also shown remarkable strength, driven by robust do-it-yourself demand. Collectively, these factors drove a sharp uptick in wood products pricing and demand as the quarter progressed. As we look to the back half of the year, we're cautiously optimistic regarding a continued improvement in U.S. housing. Mortgage rates are at historic lows, demand for housing exceeds the available supply, and societal preferences are shifting in favor of larger single-family homes in less urban areas. The pace of home sales is improving. In June, new home sales were 7% above year-ago levels. At the same time, the trajectory of the broader U.S. economy remains uncertain in light of rising COVID infection rates and the pullback or pause of many economic reopening plans. Key indicators that we are monitoring have generally plateaued at recessionary levels. Unemployment stands at 11%, with initial claims well in excess of a million per week. Mortgage forbearance rates are near 8%. Mortgage availability remains tight. Consumer sentiment is comparable to levels measured in April and May, and US GDP has contracted in an unprecedented manner. Further, the specifics regarding additional federal economic relief packages are also unclear at this point. Our customers are expecting strong demand through Labor Day, but remain cautious of COVID-related economic and operating disruptions. We'll be watching all of these factors closely to see how they influence our markets as we move out of the summertime and into the fall. Turning now to our second quarter business results, starting with Timberlands on pages six through eight of our earnings slides. Timberlands contributed $75 million to second quarter earnings and $140 million to adjusted EBITDA. In Western Timberlands, EBITDA decreased $20 million compared with the first quarter. Log sales volumes and average realizations were comparable to the first quarter, as we flexed significant volume out of the domestic market to capture higher margin opportunities in China. Fee harvest volumes decreased 3%, forestry and road building costs increased seasonally, and export costs were modestly higher. In the western domestic market, log demand and pricing dropped sharply in April, as mills curtailed productions. In response, many landowners reduced harvest operations or redirected volume to stronger export markets. When demand and pricing for Douglas fir lumber rebounded, mills resumed production and actively sought to replenish log decks. Log supply was slow to respond to the increased demand, and pricing trended higher exiting the quarter. On average, our second quarter domestic log pricing was moderately lower than the first quarter. Turning to our export markets. In Japan, housing starts are down approximately 11% year to date, as housing demand slowed following the fourth quarter 2019 consumption tax increase. Demand for our logs has generally held up well, enhanced by our strong customer relationships and limited availability of Canadian export logs. However, our second quarter log sales volumes to Japan declined, and average realizations decreased slightly as we've begun to see incremental effects from the COVID-19 outbreak on Japanese construction activity. In China, demand for our logs rebounded sharply in the second quarter as construction and sawmilling activity resumed following the COVID-19 outbreak and sawmills returned to near normal operating rates. Softwood log inventories at Chinese ports decreased nearly 40% during the quarter and into June at 4.4 million cubic meters. Takeaway was strong in April as mills restocked inventories and then eased as the quarter progressed. Supplies of New Zealand radiata and European spruce logs were also below normal due to COVID-19 disruptions. We flexed significant volume into the China market to take advantage of this opportunity, and average realizations for our China export logs increased modestly compared with the first quarter. Compared with the year-ago quarter, log export revenues increased by $18 million due to higher sales volumes. Moving to the south, southern Timberlands EBITDA decreased $8 million compared with the first quarter. As in the west, demand for southern saw logs remained weak through April and into May as mills curtailed production and minimized log inventories. As lumber demand and pricing rebounded, capacity came back online. Although log takeaway for June was trending towards normal, some customers remained cautious and log decks were generally below average levels. Demand for our fiber logs remained steady through the quarter, supported by downstream demand for hygiene products. Realizations for our saw logs and fiber logs were generally unchanged from the first quarter. Average log realizations declined 2% due to mix, as we harvested an increased proportion of fiber logs in the quarter. Fee harvest volumes declined 4% compared with the first quarter and 7% compared with the second quarter of 2019 as we began to implement the previously announced 10% reduction in full-year southern harvest volumes. Comparing our overall southern Timberland second quarter results with the year-ago period, EBITDA declined by $16 million due to lower fee harvest volumes and lower average sales realizations. In northern Timberlands, EBITDA decreased by $4 million compared with the first quarter Fee harvest volumes declined seasonally as spring breakup limited activity across most of our northern operations. Real estate, energy, and natural resources, pages 9 and 10. Real estate and E&R contributed $19 million to second quarter earnings and $57 million to adjusted EBITDA. Second quarter EBITDA was $44 million lower than the first quarter and $14 million lower than the year-ago period. As expected, real estate sales were significantly lower than the first quarter. We experienced continued steady interest in rural properties, but transactions were slower to close due to delays in title work, financing approvals, and recording deeds. Average price per acre decreased, and average land basis as a percentage of real estate sales was higher due to the mix of properties sold. As in the first quarter, second quarter real estate sales included low productivity acreage in southern Oregon that we acquired with the Prum Creek merger. Results from energy and natural resources were comparable to the first quarter. Demand for construction materials has remained steady, as infrastructure projects have generally benefited from essential industry designations during the pandemic. Wood products, pages 11 and 12. Wood products delivered its strongest performance since the third quarter of 2018, contributing $159 million to second quarter earnings and $198 million to adjusted EBITDA. EBITDA increased $14 million compared with the first quarter as higher average lumber realizations and improved manufacturing costs were partially offset by lower sales volumes for most products. In April, we reduced production across our manufacturing facilities to align with customer demand. As demand improved, we increased operating rates and most businesses exited the quarter at pre-COVID operating levels. Manufacturing costs improved across our operations despite the production volumes, the lower production volumes. Our lumber business delivered standout performance for the quarter. EBITDA was $24 million higher than the first quarter and $59 million above a year ago levels due to improved realizations and lower manufacturing costs. Lumber pricing began to stabilize early in the second quarter as mills curtailed production in response to lower demand. With inventories extremely lean across the channel, pricing strengthened steadily as demand improved. This was particularly notable in the southern markets. Benchmark lumber pricing improved by approximately $135 per thousand board feet, or nearly 40% during the months of May and June. On average, the framing lumber composite price increased 2% in the second quarter compared with the first. Our average lumber realizations increased by 5% as our mix of production is weighted more heavily to Southern Yellow Pine. Unit manufacturing costs decreased by 2% compared with the first quarter. Our lumber mills delivered outstanding operating performance, achieving the lowest quarterly and monthly controllable manufacturing costs on record, despite weekly fluctuations in operating posture. I want to thank our entire lumber business for the commitment to operational excellence that's driving these industry-leading results. In OSB, EBITDA decreased $4 million compared with the first quarter due to slightly lower sales volumes and average realizations. Supply-demand dynamics generally mirror those of lumber, but with a more modest uptick in pricing. Our sales volumes decreased 3% compared with the first quarter. Average realizations decreased 2% in line with the change in benchmark OSB composite. Manufacturing costs improved compared with the first quarter due to the slightly lower resin cost and focused cost control across the business. Compared with the year-ago quarter, OSB EBITDA increased $33 million due to higher average sales realizations and lower manufacturing costs. Engineered wood products EBITDA decreased by $9 million compared with the first quarter due to lower sales volumes. Average sales realizations for solid section products were flat with the first quarter, and average I-joist realizations decreased by 1%. Sales volumes decreased 12% for solid section products and 11% for I-joists in the second quarter. Because over 90% of these volumes are used in new residential construction, these product lines benefited minimally from the strong second quarter repair and remodel activity. Controllable manufacturing costs decreased compared with the first quarter, but this was offset by higher input costs due to the increased costs of oriented strandboard. Compared with the year-ago quarter, EBITDA for engineered wood products decreased by $22 million due to significantly lower sales volumes, higher input costs, and slightly lower average realizations. Distribution EBITDA increased by $1 million compared with the first quarter, as we continue to focus on improving product margin and controlling costs. The business also set a new record for June monthly EBITDA. Compared with the year ago quarter EBITDA increased by $2 million due to higher product margins and lower delivery and warehouse costs. Turning now to operational excellence. Each of our businesses has remained focused on delivering on its OpEx initiatives, despite the disruptions caused by the pandemic and that commitment is evident in our second quarter results. Halfway through the year, we have made good progress against our $50 to $70 million full-year Op-Ex goal, and I am confident we will achieve this target by year end. I'm extremely proud of the dedication and focus of our teams as they have safely adopted business practices, rapidly and efficiently pivoted operating postures, and capitalized on operational excellence opportunities while navigating unprecedented fluctuations in market demand. Staying on track to achieve our OpEx goal is a real accomplishment given the rapidly changing environment in which we've been operating. Now I'll turn to a few comments regarding capital allocation. The board continues to regularly review opportunities to reinitiate an appropriate quarterly dividend. As we said last quarter, this review takes into account a number of variables, including our market conditions as well as the broader macroeconomic environment. All else equal, the Board's preference is to reinitiate a dividend sooner rather than later. While we have been seeing improved business conditions over the last couple of months, we need to get comfortable that those improvements will be sustainable even as the pandemic and other macro headwinds continue. I want to be clear that we remain committed to returning a significant amount of our free cash flow back to shareholders as part of our capital allocation philosophy. Our board also recognizes the need to deliver on that commitment through a sustainable dividend policy that will drive long-term shareholder value. Some of our businesses generate relatively stable cash flows. Other of our businesses are more cyclical in nature. Our overarching goal is to ensure a sustainable capital allocation framework that will enable us to return a meaningful and appropriate level of cash to shareholders across market cycles. Our other capital allocation priorities include investing in our business and maintaining an appropriate capital structure. we've deferred discretionary capital for 2020, but we continue to invest in the maintenance expenditures required to sustain and further improve our strong operating performance. And we will continue to consider incremental opportunities to optimize and enhance our assets and operations. Russell will provide more details in a few minutes, but the actions we have taken to enhance our financial flexibility, in addition to the better than expected pricing and demand environment, have allowed us to maintain our financial strength during this volatile period. With respect to our capital structure, we are working to bring down our leverage over time. We have repaid our revolver balance, redeemed the majority of our 2021 debt maturities, and earmarked cash for the remainder of our 2021 notes. Going forward, we will continue to review opportunities to efficiently reduce our gross debt balance. I'll now turn it over to Russell to discuss financial items and our third quarter outlook.