Weyerhaeuser Company

Greetings and welcome to the Weyerhaeuser First Quarter 2022 Earnings Conference Call. At this time, all participants are on 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 keypad. A confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during today's conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Andy Taylor, Director of Investor Relations. Thank you, Mr. Taylor. You may begin.

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's first quarter 2022 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 to GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer, and Nancy Lowy, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Thanks, Andy. Good morning, everyone, and thank you for joining us today. This morning, Weyerhaeuser reported first quarter gap earnings of $771 million, or $1.03 per diluted share, on net sales of $3.1 billion. Excluding special items relating to our debt refinancing actions, we earned $978 million, or $1.31 per diluted share. Our employees once again delivered phenomenal operational and financial results in the quarter, notwithstanding persistent supply chain, transportation, and pandemic-related disruptions. Their collective efforts helped the company achieve its strongest first quarter adjusted EBITDA on record at $1.5 billion. This represents a 122% increase over the fourth quarter of 2021. Turning now to our first quarter business results. I'll begin the discussion with Timberlands on pages six through nine of our earnings slides. Timberlands contributed $182 million to first quarter earnings. Adjusted EBITDA increased by $71 million compared to the fourth quarter. In the West, adjusted EBITDA increased by 77% compared to the fourth quarter. Western domestic log markets were favorable through the first quarter. driven by strong demand as mills sought to capitalize on unseasonably high lumber prices. As a result, our domestic sales realizations were significantly higher compared to the fourth quarter. Overall log supply in the western system was plentiful during the quarter due to favorable weather conditions, as well as increased volumes from other landowners in response to strong log pricing. This drove log inventories at the mills to above target levels by the end of the quarter, particularly in Oregon. Our fee harvest volumes were significantly higher compared to the fourth quarter and per unit log and haul costs were lower as we made the seasonal transition to lower elevation and lower cost harvest operations. Forestry and road costs were seasonally lower in the quarter. Turning to our export markets. In Japan, demand for our logs remained strong in the first quarter. High North American lumber prices combined with global logistics challenges particularly with respect to port congestion and shipping container shortages, continued to limit the availability of imported lumber into Japan. These dynamics are driving strong demand for our customers' locally produced lumber in Japan and increased demand for our imported logs. As a result, our Japanese log sales realizations in the first quarter increased significantly compared to the fourth quarter. Sales volumes were slightly lower due to the timing of vessels. The Russia-Ukraine conflict did not have a material impact on our log export business into Japan during the first quarter. However, we do ultimately expect a reduction in Russian and European wood supply into Japan as a result of the conflict, which will likely bolster demand for our log exports into the Japanese market over time. In China, log inventories at the ports have remained elevated coming out of the Lunar New Year and we're seeing lower takeaway as a result of ongoing pandemic-related disruptions in the country. Notwithstanding these headwinds, in-market demand for our western logs remained favorable in the quarter, due largely to supply disruptions into China. Imports of lumber and logs into China continue to be impacted by global logistical challenges, port congestion, and restrictions on imported Australian logs. Imports were further constrained in the first quarter as Russia commenced its previously announced ban on log exports. And later in the quarter, European log supply was also disrupted by the Russia-Ukraine conflict. As a result, our sales realizations for China export logs increased slightly in the quarter. Our sales volumes to China, however, decreased significantly as we intentionally shifted volume to the domestic market to support our domestic customers and capitalize on strong western log prices. Moving to the south, southern Timberland's adjusted EBITDA was comparable to the fourth quarter. Notwithstanding ample log supply and improving log inventories as the quarter progressed, southern saw log markets remained favorable in the first quarter as mills sought to benefit from the strong lumber and panel pricing environment. Fiber markets were also favorable as mills bolstered inventories from the lean levels experienced at the outset of the quarter. As a result, our sales realizations increased slightly compared to the fourth quarter. Our fee harvest volumes and forestry and road costs were seasonally lower in the first quarter, and per unit log and haul costs were moderately higher, primarily for fuel-related transportation costs. Regarding our southern export business, Our log exports to China remain temporarily paused as a result of recently adopted and fairly restrictive rules implemented by Chinese regulators to address potential phytosanitary concerns on imported pine logs. In response, we continue to redirect logs to domestic mills and the India export market during the first quarter. We continue to maintain a constructive, longer-term outlook for our southern export business to China and other Asian markets. In the north, adjusted EBITDA increased by $1 million compared to the fourth quarter due to improved sales realizations across all products. Fee harvest volumes were seasonally lower in the first quarter. Turning to real estate, energy, and natural resources on pages 10 and 11. Real estate and E&R contributed $81 million to first quarter earnings and $116 million to adjusted EBITDA. First quarter adjusted EBITDA was $67 million higher than the fourth quarter due to the timing of real estate transactions. Similar to the last few years, our real estate activities in 2022 are more heavily weighted toward the first half of the year. Average price per acre decreased compared to the fourth quarter due to the mix of properties sold, but remains elevated compared to historical levels as we continue to benefit from strong demand for HBU properties. resulting in high-value transactions with significant premiums to timber value. Now for a few comments on our natural climate solutions business. In March, we announced an agreement with Oxy Low Carbon Ventures to pursue our first carbon capture and storage project. This partnership combines more than 30,000 acres of Weyerhaeuser's uniquely positioned subsurface ownership in Louisiana with Oxy's proven technical expertise in the management and sequestration of carbon dioxide. It will take several years to bring this project into production, and we expect it will come online in 2025 or 2026. This project represents an important milestone in our previously announced plan to grow our natural climate solutions business. We expect to announce additional carbon capture and storage agreements as we continue to advance discussions with high-quality developers on portions of our southern U.S. acreage. Moving now to wood products on pages 12 through 14. Wood products contributed $1.2 billion to first quarter earnings. Adjusted EBITDA increased by $716 million compared to the fourth quarter, a 138% improvement. This represents the second highest quarterly adjusted EBITDA on record for our wood products business. These are exceptional results. considering the ongoing transportation and supply chain headwinds faced by our teams in the first quarter. I want to specifically recognize our supply chain and logistics teams for their continued focus and resolve while navigating these challenges. Starting with lumber and OSB markets, benchmark lumber and OSB prices entered the quarter on an upward trajectory as demand for home building and repair and remodel remained favorable. and supply constraints persisted due to transportation and labor-related challenges, in addition to winter weather disruptions. This dynamic continued for most of the quarter, driving lumber and OSB prices once again to near-record high levels. Demand softened somewhat late in the quarter as many buyers paused to assess downside risk with elevated price levels and to evaluate the potential impacts of rising mortgage rates on the housing market. Lower than expected takeaway from home centers also impacted demand to some extent in the quarter. Despite generally lean inventories heading into the spring building season, buyers remained cautious through the end of the quarter. With the reluctance to build meaningful inventory in a dynamic pricing environment. As a result, lumber and OSB prices peaked and started on a downward trajectory in March. Adjusted EBITDA for our lumber business increased by $453 million compared to the fourth quarter, a 232% improvement. Our average sales realizations increased by 76% in the first quarter, while the framing lumber composite pricing increased by 81%. Production volumes increased moderately, resulting from less planned downtime and weather-related downtimes. Sales volumes were slightly lower driven by ongoing transportation challenges. This dynamic resulted in an expansion of inventory levels during the quarter. Log costs were significantly higher, primarily for Western logs. Adjusted EBITDA for our OSB business increased by $216 million compared to the fourth quarter, a 123% improvement. Our average sales realizations increased by 61% in the first quarter, while the OSB composite pricing increased by 94%. This relative difference was largely a result of extended order files that lagged surging OSB prices and shipping delays due to transportation disruptions primarily in Canada. Our production volumes improved slightly in the first quarter, resulting from less downtime for planned maintenance. As a result, sales volumes increased moderately compared to the fourth quarter, notwithstanding significant transportation headwinds in Canada, in January and February. Unit manufacturing costs were slightly higher in the quarter, and fiber costs were significantly higher. Engineered wood products adjusted EBITDA increased by $22 million compared to the fourth quarter, surpassing last quarter's record by 19%. Sales realizations improved in the first quarter, and we benefited from previously announced price increases for solid section and I-JOYS products. This was partially offset by moderately higher raw material costs, primarily for OSB web stock and resin. Production volumes were moderately lower for solid section and IJOYS products, driven in large part by tight veneer supply and pandemic-related staffing challenges early in the quarter. As a result, sales volumes were comparable to the fourth quarter. In distribution, adjusted EBITDA increased by $32 million compared to the fourth quarter, an 80% improvement. as the business experienced strong demand and captured improved margins across all products. Before turning the call over to Nancy, I'd like to comment briefly on an exciting growth opportunity within our southern timberlands business. Earlier this month, we announced an agreement to acquire approximately 81,000 acres of high-quality timberlands in North and South Carolina for approximately $265 million. This is a unique opportunity to enhance our portfolio with highly productive, and well-managed timberlands, which are located in some of the best coastal markets in the U.S. South and strategically positioned to deliver operational synergies with our existing timber and mill footprint. This acquisition offers extremely attractive timberland attributes and is expected to deliver portfolio-leading cash flow and harvest tons per acre within our southern timberlands business. Additionally, We expect to capture incremental benefits from real estate and natural climate solutions opportunities over time. The transaction is expected to close later in the quarter and represents an exciting milestone in our multi-year strategy to grow the value of our Timberlands portfolio through disciplined investments. So with that, I'll turn the call over to Nancy to discuss some financial items and our second quarter outlook.

Thank you, Devin, and good morning, everyone. I'll be covering key financial items and first quarter financial performance before moving into our second quarter outlook. I'll begin with key financial items, which are summarized on page 16. We generated $957 million of cash from operations in the first quarter. This is an increase of over $460 million from the fourth quarter and is our highest first quarter operating cash flow on record. We ended the quarter with approximately $1.2 billion of cash and cash equivalents and total debt of $5.1 billion. At the end of February, we initiated a series of transactions to further enhance our strong financial position by effectively refinancing $900 million of debt. This included the issuance of $450 million of notes due in 2033 with a 3.38% coupon, and $450 million of notes due in 2052 with a 4% coupon. The net proceeds plus cash on hand were then used to close cash tender offers for $931 million of principal on notes with considerably higher rates. We incurred a net after-tax charge of $207 million related to premiums and unamortized debt issuance costs and debt discounts in connection with the early debt repayments. which is included in our first quarter results as a special item. These actions enabled us to capitalize on favorable interest rates prior to the most recent increase by the Fed, resulting in a meaningful reduction in the weighted average coupon in our debt portfolio, while also smoothing and extending the weighted average maturity. Overall, our annualized interest savings will be approximately $38 million. Capital expenditures for the quarter were $70 million, which is typical in the first quarter. We returned $121 million to shareholders through share repurchase activity. These shares were repurchased at an average price of $37.87. And as of quarter end, we had approximately $800 million of remaining capacity under our $1 billion share repurchase program. We will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. We also returned $134 million to shareholders through the payment of our quarterly base dividend, which was increased by 5.9% to 18 cents per share during the quarter. This is in line with our commitment to grow our sustainable base dividend by 5% annually through 2025. Adjusted FAD for the first quarter totaled $850 million as highlighted on page 18. As a reminder, we will supplement our base dividends each year with an additional return of cash to achieve the targeted annual payout of 75 to 80% of adjusted FAD. As demonstrated in 2021, we have the flexibility in our framework to return this additional cash in the form of a supplemental dividend or a combination of a supplemental dividend and opportunistic share repurchase. First quarter results for our unallocated items are summarized on page 15. Adjusted EBITDA for this segment decreased by $31 million compared to the fourth quarter. This decline was primarily attributable to a $59 million non-cash charge for the elimination of intersegment profit and inventory in LIFO in the first quarter due to the elevated levels of high-value inventory. As seasonal inventory levels are reduced in the second quarter, we do expect to record a non-cash benefit for the elimination of intersegment profit in inventory and LIFO. Looking forward, key outlook items for the second quarter are presented on page 19. In our Timberlands business, we expect second quarter earnings before special items and adjusted EBITDA will be significantly lower than the first quarter, but still higher than any other quarter since the fourth quarter of 2018. Turning to the Western Timberlands operations, domestic log demand softened somewhat at the outset of the second quarter in response to ample log supply, elevated mill inventories, and reduced takeaway of finished products as lumber prices retreated from historically high levels. As a result, we expect our domestic sales realizations to be lower in the second quarter, but still substantially higher than any quarter in 2021. Forestry and road costs are expected to be significantly higher as we enter the spring and summer months, and per-unit log and haul costs are also expected to increase. We anticipate our fee harvest volumes will be comparable to the first quarter. Moving to the export markets, in Japan, demand for our logs remains strong as imported lumber continues to be restricted by global shipping challenges, and more recently, in response to wood flow disruptions resulting from the conflict between Russia and Ukraine. As a result, our Japanese sales volumes are expected to increase significantly compared to the first quarter. We anticipate our second quarter sales realizations to be comparable to the strong levels experienced in the first quarter. In China, despite elevated log inventories at the ports, demand for our logs remains favorable as imports of lumber and logs from other countries continue to be constrained. As a result, our sales realizations on log imports into China are expected to be slightly higher, compared to the first quarter. We anticipate our sales volumes to be significantly lower as we continue to flex logs to our domestic customers to capture the highest margin. In the south, despite the pullback in lumber and OSB pricing at the outset of the quarter and a seasonal increase of log supply, log demand remains stable as mills maintain elevated inventories to mitigate risk from ongoing transportation challenges. As a result, we expect our sales realizations to be comparable to the first quarter. We anticipate our fee harvest volumes will be moderately higher as seasonal weather patterns transition to drier conditions. Similar to the West, forestry and road costs are expected to be significantly higher as we enter the spring and summer months, and we anticipate moderately higher per unit log and haul costs. In the north, due to product mix, sales realizations are expected to be significantly higher than the first quarter, while fee harvest volumes are expected to be significantly lower as we enter the spring breakup season. Turning to our real estate, energy, and natural resource segment, real estate markets remain strong heading into the second quarter, and we continue to anticipate a consistent flow of HBU transactions with significant premiums to timber value. For the second quarter, We expect net earnings will be comparable to an adjusted EBITDA will be slightly higher than the second quarter of 2021. We expect an increase in acres sold and a higher basis year over year due to the mix of properties we anticipate to sell. For our wood product segment, we expect second quarter earnings and adjusted EBITDA will be higher than the first quarter, excluding the effect of changes in average sales realizations for lumber and OSB. Demand for our products remain favorable heading into the spring building season, supported by strong new residential construction and professional repair and remodel activity. As Devin mentioned, supply continues to be constrained by transportation challenges, and inventories through the channel remain lean. Despite these dynamics, benchmark pricing for lumber and oriented strandboard entered the second quarter on a rapid downward trajectory, as buyers continued to assess downside risk of elevated price levels and were reluctant to build inventories in this dynamic pricing environment. By late April, benchmark pricing for both products stabilized as buyers took steps to replenish inventories to prepare for the spring building season. As shown on page 20, for lumber, our current and quarter-to-date realizations are significantly lower than the first quarter average. For OSB, our current realizations are comparable, and quarter-to-date realizations remain higher than the first quarter average due to the length of our order files. For our lumber business, we expect improved production volumes and moderately lower unit manufacturing costs in the second quarter. Sales volumes are expected to improve significantly with increased production, as well as higher seasonal inventory drawdown. We anticipate moderately lower log costs compared to the first quarter, primarily for western logs. For our OSB business, we expect moderately higher sales volumes compared to the first quarter, resulting from higher production volumes and improving transportation networks, primarily in Canada. Unit manufacturing costs are expected to be slightly lower, and fiber costs are expected to be comparable. For our engineered wood products business, As we continue to capture the benefit of price increases announced in February, we expect higher sales realizations for our solid section and I-Joyce products. We anticipate this will be completely offset by significantly lower sales realizations for our plywood products. Our sales and production volumes are expected to be significantly higher in the second quarter as veneer supply continues to improve. We anticipate this will be partially offset by significantly higher raw material costs primarily for OSB web stock. And for our distribution business, we're expecting adjusted EBITDA to be significantly lower than the first quarter, primarily due to reduced commodity margins. And with that, I'll now turn the call back to Devin and look forward to your questions.

Thanks, Nancy. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. First quarter housing starts averaged 1.75 million units on a seasonally adjusted basis, an improvement of 5% over the fourth quarter. Activity dipped slightly in January, driven by winter weather and pandemic-related labor challenges, but improved as the quarter progressed. March housing starts totaled nearly 1.8 million units on a seasonally adjusted basis, the highest monthly level since 2006. Housing permits in the first quarter averaged nearly 1.9 million units on a seasonally adjusted basis, surpassing last quarter by 7%, and surging to its highest quarterly average since before the Great Recession. Although these results demonstrate strong underlying demand for new home construction, the cycle time between starts and completions continues to be extended as homebuilders face ongoing supply chain disruptions, labor availability challenges, and rising material costs. Additionally, we do expect increasing mortgage rates and higher inflation to have some impact on the housing market. However, notwithstanding these headwinds, our customers continue to see strong demand and remain optimistic for new home construction in 2022. And we remain constructive on near-term and longer-term housing demand fundamentals, given favorable demographic trends, a significantly underbuilt housing stock, a strong labor market, and elevated household balance sheets. Turning to repair and remodel, we continue to see favorable activity from large professional projects in the first quarter, representing a continuation of the strong demand signal we saw from this segment in 2021. Demand from the do-it-yourself segment softened modestly in the first quarter, largely driven by concerns over the return of near record high lumber prices. Overall, our long-term outlook for repair and remodel continues to be favorable, supported by an aging housing stock, rising home equity, and historically low supply of new and existing homes for sale. In closing, we delivered our strongest first quarter financial performance on record, and I'm incredibly proud of our employees for their continued dedication and resilience. We continue to make meaningful progress towards the multi-year growth targets we announced at our Investor Day last September, and remain committed to serving our customers and delivering industry-leading performance across our operations. Our balance sheet is strong and with $850 million of adjusted FAD generated in the first quarter, 2022 is off to a great start. We believe the company is well positioned to deliver considerable long-term value and superior returns for our shareholders. With that, I think we can go ahead and open it up for questions.

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Susan McClary with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone, and congrats on a great quarter. Morning.

Thank you.

Yeah. My first question is, you know, obviously there's a lot of puts and takes and moving parts when you think about housing and the lumber and OSB markets that are out there, and, you know, appreciating a lot of that commentary that you gave around some of those shifts in terms of demand and, you know, different sort of dynamics in the quarter, but I guess When we think about the builders and the backlogs that they're seeing and even the continued sales paces that have been coming through April, how do you think about the potential to see some of this inventory starting to reverse itself as they try and get through those backlogs and what that could possibly mean for pricing as we go through the summer and maybe even into the early parts of the fall?

Yeah, no, great question, Susan. You know, I think, first of all, I'll just say, trying to predict pricing for lumber and OSB is always difficult. But, you know, a few thoughts, I think, just to kind of put it in perspective. You know, we've certainly seen some volatility from a pricing standpoint for both lumber and OSB over the last six, nine months. We, you know, we saw the run up over the first quarter and then it came back down, you know, a fair bit as we got through the end of March into April. Seems to have stabilized here over the last couple of weeks. You know, as we think about what's going to happen over the next several months, you know, a few things I think drive our thinking. First of all, I do think that the inventory levels across the channel are pretty lean. And I think that's just largely a function of people being nervous about carrying inventory at the higher price levels. So heading into the spring building season, I think inventories are lower than you would normally expect for this time of year. And that's both with respect to lumber and OSB. You know, I would say with the one exception that maybe the inventories at mills in Canada are probably at or slightly above normal levels just because of some transportation issues. But again, across the system, inventory levels are pretty low. So on the supply side, you know, I think we're going to get into the months where you're going to see production, you know, picking up. Transportation should start to improve a little bit in Canada with the rail. But I think the demand side is going to continue to be strong. We certainly are seeing good, strong demand from our home builder customers as they head into the spring building season. You know, we can talk more about housing in general, but, you know, from our standpoint, we're expecting a good, strong spring building season from a residential construction standpoint. On the repair and remodel side, the pro segment continues to go really, really well. A lot of demand out of that segment. And I think the do-it-yourself segment, even though we did see a little bit of a dip in the first quarter, that seems to be stabilizing as well as we get into the springtime period. So, you know, net-net, we're feeling pretty good about the spring and would expect the pricing environment to stay pretty strong.

Yeah, okay. I appreciate all that, Devin. I know there's a lot there, and we'll see how it all comes together. But I appreciate the commentary. My follow-up question is it's exciting to hear the arrangement that you announced with Oxy in the quarter as we think about the carbon opportunities that are out there. Can you talk a little bit more about that potential opportunity and maybe how we should be thinking about some other announcements that could be coming down the line as you continue to invest in that?

Sure. Sure. Yeah, we're really excited about it. You know, obviously this is our first carbon capture and storage agreement that we've announced. I think we've picked a really good partner with Oxy Low Carbon Ventures, which is a subsidiary of Occidental Petroleum. And this is really an opportunity to combine the unique position that we are in with so much acreage, subsurface rights, and good geologic information. and partner with a firm that has a lot of experience, technical expertise in the management and sequestration of CO2. So really excited about the project. It is going to take a few years to get everything put together. You've got permitting, you've got infrastructure build-outs, etc. But we think this is going to come online somewhere in the 2025-2026 timeframe. We're not providing the economics behind the deal right now, But, you know, really, we'll start to see the real economics flow once it goes online and we're putting CO2 into the ground. But really excited about it. We, you know, we're in active negotiations and discussions with a number of other partners throughout our southern ownership. So would expect to be announcing some additional agreements over the next 12 to 18 months.

Great. That's exceptionally helpful. I'm going to sneak one more in, which is just it was good to see you buying back some stock in the quarter. Obviously, it sounds like things are remaining supportive as we think about the balance of this year. Can you talk about just your appetite to maybe continue within the repurchase activity there, how we should be thinking about the opportunities for cash?

Yeah, hi, Susan. I'll take that. You know, as we've said in the past, we do think that share repurchase is a good tool for returning capital to shareholders under the right circumstances. And specifically, that's when we see it's the best option for shareholder value creation. We did actually purchase $121 million, as you saw in Q1, and we'll continue to look at share repurchase opportunistically. You know, that's why we increased the repurchase authorization to $1 billion. We wanted to have more flexibility, that was flexibility on price, but also on the ability to move quickly when we do see the opportunity. So we'll continue to be assessing the share repurchase along with all the other options we have on capital allocation. And as we do every quarter, we'll report out our share repurchase activity each quarter.

Okay. Thank you very much for that, and good luck with everything.

Thank you. Thank you. Our next question is from George Stappos with Bank of America. Please proceed with your question.

Hi, everyone. Good morning. Thanks for all the details. Congratulations on the progress and also the well-timed refinancing activity. I had three questions. I'll ask them one, two, three, just to make it efficient for you. So first off, on inventories, Devin, you had mentioned Some elevated log inventories in Oregon. What effect do you think that might have in the market, if anything at all? And are you seeing any signs that the Canadian inventory is finding its way into the market? Secondly, could you maybe piggyback on Susan's question? Can you talk to us about the prospects for accelerating the supplemental dividend, if in fact that's where we're at by the end of the year? Obviously, lots can change. And doing one earlier today, as opposed to what has been your plan, which is to have it payable in the first quarter following the year. And then lastly, can you update us on where you stand in terms of getting project audits done and credits issued with the carbon sequestration credit project up in Maine? Thanks, guys, and good luck in the quarter.

Yeah, thanks. Well, maybe I'll take the question on inventories and carbon, and Nancy can cover the supplemental dividend question. You know, with respect to inventories, we did see some elevated log inventories in Oregon. So, you know, all things considered, I would expect that to put a little bit of pressure on pricing in the log market in the Pacific Northwest, and that's reflected in our guidance. But, you know, I think the overall story in the Northwest is still pretty strong We've got good lumber prices, and so the mills are running full out. You know, I think we're going to have some good export activity to Japan. So, you know, we're still expecting a very strong market in the Pacific Northwest, just a little bit of a headwind down in Oregon as mills work through some of that inventory. You know, with respect to the inventory at Canadian mills, you know, I can speak with respect to our mills, obviously not so much with respect to our competitors. You know, for us, we're seeing those come down over the course of Q2. We are seeing some slight improvements in rail in Canada. And so that's certainly going to be helpful as we work that through. So I expect those to come down over the course of the second quarter as we progress into the deeper spring. With respect to the carbon project up in Maine, it's coming along on plan. So as we mentioned last year, we listed that project. on a voluntary market. We're in the process of third-party validation. So that's going well so far, and we would expect that to continue and be in a position to have the credits actually issued later this year. And then we'll look to monetize those when the price is right for carbon.

Yeah. And, George, I'll take the interim dividend. So, you know, in terms of the interim dividend we paid last year, that was a one-time exception. to our new dividend framework. We've always anticipated that the supplemental dividend is going to be paid out annually in Q1 for the prior fiscal year. And again, the primary reason for that, as you know, is to make sure we're ensuring we're matching our variable dividend component to the cash flow we're actually generating. So we've got to kind of wait until we see through the whole year. So we don't anticipate an interim dividend this year.

Fair enough. Makes sense. Good luck, and I'll turn it over. Thanks, guys. Thank you.

Thank you. Our next question comes from Mark Weintraut with Seaport Research Partners. Please proceed with your question.

Thank you. Obviously, we're seeing amazing lumber OSB pricing. I think we've seen a lot of evidence now of pensioning in the wood baskets in the West when we see strength. In the South, Are you beginning to see in any of your baskets where drain is catching up to growth? And how far away do you think we are from potentially a real inflection point for pricing and profitability in the South?

Yeah, well, you know, Mark, I think the answer is it's really dependent on the specific woodbasket, right? And so it's very regional in terms of the supply-demand dynamic within each individual woodbasket. No question there are some areas that with all the new capacity coming online, you're getting, you know, back to a more balanced dynamic. You know, you can look across spots on the Atlantic Coast. North Carolina, I think, is a good example. You know, there are some micro markets in Mississippi, Arkansas, you know, north central Louisiana. So there are spots where you're seeing that happen. I do think still on balance, though, when you look across the south as a whole, it's still more heavily weighted to, you know, being oversupplied. And so that's just, you know, as we've said, it's a long process and it's going in the right direction. And I think we've seen Some of that over the last 12 to 18 months when you look at southern saw log prices, and we expect that trend to continue. But I do think there are a number of spots where you still have a ways to go. So I would say, you know, it's just going to continue to be slow, steady improvement over time. But in the interim, you know, we're really focused on generating value even at existing prices. And so, you know, we'll be positioned through, you know, our execution, our ownership to participate as that continues to improve over time.

And I do appreciate you've been really consistent on this. And it's maybe not a fair question, but do you have a perspective on how long it might be as this new supply comes on in the South to when it's kind of a more broad-based balancing and tightening?

Yeah, I mean, I think it's good. It's going to happen over a number of years. I mean, we've seen a lot of new capacity coming into the U.S. South. I think the number I saw last from 2017 through all the stuff that's been announced since coming online over the next year or two, you're talking 9 to 10 billion board feet of additional capacity that's coming into the system. So we'll see some of that coming on later this year. I think importantly, most importantly for us is just where that capacity comes online. And we've certainly seen a number of mills coming into wood baskets where we have a lot of fee ownership. So, you know, I think it'll happen over a number of years and some spots will improve faster than others, but we certainly see the, you know, the trend heading in the right direction.

Thank you. Appreciate the perspective.

Yep. Thank you.

Thank you. Our next question comes from Paul Quinn with RBC Capital Markets. Please proceed with your question.

Yeah, thanks very much, Maureen. Just maybe starting that Timberland acquisition from Camel Group, the price was reported at $3,300 an acre, which is pretty high relative to just about everything I've seen out there. Just wondering how big that HBU component is. Can you give us some color there so we can sort of understand that side of it?

Yeah, so just maybe a few comments here to put it in perspective. You know, this 81,000 acres of timberlands, really some of the best, highest quality timberland that's come to market in quite some time. It's, you know, really good stocking levels, mature age class, high percentage grade mix, high percentage planted pine acreage. So really very, very high quality, you know, market or timberlands come into market. So that's, You know, really for us, that's how we underwrote this deal was really from a timber standpoint and the $13 million a year of EBITDA that we're talking about over the next 10 years. That's really what we used to underwrite the deal was just really the timber piece. So the HBU, we always find HBU opportunities when we do these kinds of transactions, and I suspect that will be the case with this transaction as well. Similar with some of the natural climate solutions opportunities there, solar mitigation banking, we think there's some opportunities there as well. But we didn't underwrite this deal just based on HBU. It was really based off of the timber portfolio that's on the land base.

Okay. And then maybe just you referenced you expect log volumes to increase into Japan and due to the Russian conflict. So Q1 looked pretty high. Just wondering how high Q2 is. And then secondarily, Europe shipped about 1.65 billion board feet of lumber into North America last year. How much do you think that is going to drop in 2022 as a result of the conflict?

Yeah, so a couple of things there. For us, as we think about the impacts from Russia-Ukraine, we obviously don't do any direct business in either of those markets. But you noted two of the three potential impacted markets for us. And it's really, you know, when we think about the three different geographies, Japan is number one. And we've talked about this before. Our customers compete with European glulam going into the Japan market. And we've seen, even as we've gone into Q2, we've seen that volume dial back a little bit, which is an opportunity for our customers that are processing our Pacific Northwest Doug Furlogs to pick up market share. And so we're going to do everything we can to support our customers as they try to build market share. So I think, you know, there will be some opportunities to bolster our sales into Japan as a result of that. And we're certainly looking to do that in Q2. You noted the second potential impacted geography, which is North America. And, you know, I think as we see the Europeans essentially ban Russian wood coming into Europe, the European market's going to have to keep more of that fiber lumber in that domestic market to satisfy their needs, which should result in a reduction of European supply coming into the U.S. market. You know, I still think with the pricing environment that we have in the U.S., you are going to see some level of European lumber imports into the U.S., which I will note, just as an aside, is still a relatively small amount, you know, as we think about the overall market. But we'll see some reduction in that European volume coming into the U.S. The other market where we could be impacted is China. Obviously, we do have a business into China exporting logs. I would expect the Russians to send more wood into China as other markets have been closed off. So that'll be a little bit of a mixed bag, a little bit more Russian wood coming into China, probably a little less European wood going into that market. I expect that's going to be kind of a net neutral for us, but could be bumpy here for a bit.

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

All right. Thank you.

Thank you. Our next question comes from Mark Wild with Bank of Montreal. Please proceed with your question.

Good morning, Devin. Good morning, Nancy. Good morning, Mark. I just want to come back on Paul's question on the North Carolina, South Carolina acquisition. I think that you pointed to harvest volumes in the first few years in the sort of six and a half to seven tons per acre per year, which is quite high relative to what I think most of us use for kind of sustained harvest. Can you give us some perspective on where that level is versus what you would expect on a trend basis?

Yeah, I mean, so if you look at our southern ownership as a whole, it's well south of that. So you're usually looking kind of in the three and a half to four tons per acre from a harvest standpoint. So this is quite a bit higher. And that's really just a reflection of a couple of things. First of all, very high grade mix, particularly over the first decade or so. which drives a lot of that and a mature age class. And so, you know, we're just going to see a lot more opportunity to monetize just given the age class and in stocking levels that we have on this ownership.

So is there any way to kind of take that and just think about sort of if $13 million a year is sort of coming out of the chute, your level of EBITDA off the line, what kind of a more of a normalized trend would be?

You're talking in kind of the second and third decades?

Yeah. Yeah. I'm just trying to think about, I mean, you're clearly, you're getting some benefit in the early years because of the maturity of the lands. And I'm just trying to think about sort of what type of yield it implies on a more normalized basis.

Yeah, so without trying to get into predicting decades out into the future, what I'd say, Mark, we're feeling really good about the cash flow profile over the first 10 years. I mean, that will obviously go down over time, and it will, I think, go more in line with our historical trends across the southern ownership as a whole. But the other thing I would note about that, when we talk about that EBITDA, that's really just focused on our existing Timberlands business as a it really does not reflect, you know, I think as Paul alluded to HBU opportunities and other natural climate solutions opportunities, which we do think will be incremental to that over time. Okay.

The second question I have is around the lumber business. And just when I look at the data for last year, it's kind of striking that Southern lumber capacity was up 900 million board feet, yet production was only up about 140 million. So it, it, You would think in a context of the highest prices ever that actually like operating rates would have gone up, but operating rates actually went down 400 basis points. Just trying to get your sense of what went on there. Was that like COVID related labor issues and how much of a bounce back we see in 22?

Yeah, I think it's primarily related to COVID disruptions. It's very difficult to when you're in the midst of a pandemic, to have sufficient labor to pick up shifts when things go wrong. I mean, in a normal environment, you're going to have weather issues. You're going to have maintenance issues. You're going to have all the things that happen at a lumber mill. But you ordinarily have the opportunity to run a few extra shifts, whether it's a Saturday or a little overtime, to get that kind of back up to where you need it to be. That's really been challenging in the environment that we've been over the last, you know, call it 12 to 18 months. And I would say now, just given the fact that labor availability is so tight across the economy as a whole, even as you've come out of COVID, where you're not still facing the same level of issues with quarantines, it's just still hard to get people. And so I'd say generally speaking, you know, we're in an environment where there's just not enough labor to pick up those extra shifts. And when you have new people at a mill, you know, the other thing that maybe sometimes people forget is the folks that run the equipment at a mill are very skilled and knowledgeable. And they, you know, having people that have been there and know what they're doing really drives the efficiency and productivity at a mill. And so when you have, you know, higher turnover or you're having labor challenges and getting people in roles, you know, that has an impact as well. So I think it's really it's COVID and it's labor, Mark, are the two things that are driving that.

Yeah, just from a warehouser perspective, do you expect any kind of full-year improvement just year-over-year in terms of your production capability, production volumes?

We do, and that's really a couple of things. One, on the lumber side, obviously that's part of our organic growth strategy, so that will continue to progress on pace, and I would expect our production to be up year-over-year from a lumber standpoint. And even OSB and EWP, assuming that on the EWP side we can continue to find sufficient veneer, I would expect that to be, you know, at or slightly above last year as well. Okay.

Just if I can flip one other one in here. On EWP, you've got a really great franchise there, Devin, and it's a product area that is growing. So can you just talk with us about any kind of potential investment opportunities to continue to grow that franchise?

Yeah, I mean, we really do. The Trust Choice franchise is a great product. It has a lot of value in the market, both because of the quality of the product, but also the team in place that helps support our customers. So you're absolutely right. It's a great product. We are looking for opportunities to grow that organically through our capital programs. That's really where we're focused right now. But I do think EWP as a product is an area where we've got a unique skill set and a really key part to play in the market for growing that. So we're looking at that. Nothing specific to announce today, Mark, but I think you're exactly right. That's an opportunity for us over time.

Okay.

Sounds good. I'll turn it over. Thanks, Devin. Thank you.

Thank you. Our next question comes from Anthony Petanari with Citi. Please proceed with your question.

Good morning. Good morning. Can you talk a little bit more about kind of the current market for, you know, good quality industrial timberlands in the South and maybe specifically what you're seeing in terms of prices in the market, maybe appreciation compared to, you know, pre-pandemic period, maybe level of sort of institutional interest you're seeing in timberlands. And I guess, you know, timber has historically been talked about as sort of a good inflation hedge area. We're obviously seeing record inflation. How do you see that hedge playing out?

Yeah, well, there's no question there has been a lot of interest in Timberlands over the last 12, 24 months. We're seeing a lot of parties at the table for all of the deals that come to market. So a lot of interest, I think, both from your traditional buyers, the REITs, the TMOs, the private, you know, integrated companies. But we're also seeing some new entrants into this market in terms of, you know, some of the capital that's being raised around carbon and ESG. So it is a, you know, it's a space where we're seeing a lot of interest. I think you've seen that reflected in some of the deal values of late. And so, you know, we are seeing the overall buying community value Timberlands maybe at a higher level than they have even just over the last few years. So we're certainly seeing that. You know, to what extent is that people coming in based on timber being an inflation hedge? A little hard to say. I mean, historically, I think that has been true, that timber has been a good inflation hedge. And so certainly we continue to believe that that's true over time. And as you say, this is a a period where that will likely be tested given what's going on with inflation. But, you know, to your main question, absolutely. There's a lot of interest in Southern Timberlands, Western Timberlands for that matter as well.

Okay. That's, that's helpful. And maybe just staying with Timberlands. I mean, you, you made a couple of acquisitions last year in Oregon and Alabama, but you also, I think divested, you know, close to close to 300,000 acres. Should we be surprised to see you pursue strategic divestitures in tandem with acquisitions in the Carolinas? Do you see a decent pipeline of these 50,000 to 100,000 type acre pickups like Oregon, Alabama, and now the Carolinas?

Yeah, you know, I'd say Oregon was a unique opportunity to really do two deals together. But I think if you just step back and look at all of the divestitures and acquisitions that we've done over the last several years, you know, it really goes to our main strategy of optimizing and growing the value of our timber portfolio. So we have done a number of sizable divestitures over the last several years. You know, I think to some extent in the West and in the South, we've, you know, we've largely taken care of the big opportunities. And so, you know, we're going to continue to look here and there to optimize. So you may see us, you know, sell smaller acreage here and there. But overall, I think we're certainly, you know, in more of a growth mode at this point, given kind of where we've positioned the portfolio over the last several years. You know, in terms of the pipeline, you know, there's, We've started off the year pretty strong. I think there's about a billion and a half of acquisitions that have happened thus far this year. We'll see how the pipeline develops over the next several months. Our best guess here, sitting here in April, probably in the neighborhood of three to three and a half billion of acquisitions is what we're expecting for the year. So we're active. We look at all the deals that come to market, but we're also talking to you people all the time about trying to create deals as well. So we'll continue to be active in this space and continue to look for opportunities to grow the value of our portfolio in a disciplined way.

Okay. That's very helpful. I'll turn it over.

All right. Thank you.

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

All right. Well, thank you, everyone, for joining us this morning. We appreciate your continued interest in Weyerhaeuser. Have a great day.

This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.