Weyerhaeuser Company

Greetings and welcome to the Weyerhaeuser Second 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 the conference, please press star 0. 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.

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Warehouser's second quarter 2022 earnings. This call is being webcast at www.warehouser.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 Davey Wold, 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, I'm very pleased to welcome Davey Wald to the call. Davey became our chief financial officer in May. He previously served as our chief accounting officer and brings 20 years of significant accounting, financial, and strategic acumen to the CFO role. He's demonstrated outstanding leadership since joining Weyerhaeuser in 2013, and I'm excited to have Davey on our senior leadership team and to partner with him as we execute on our long-term strategy. This morning, Weyerhaeuser reported second quarter gap earnings of $788 million, or $1.06 per diluted share, on net sales of $3 billion. Adjusted EBITDA totaled $1.2 billion in the second quarter. We delivered strong results across each of our businesses, and I'd like to thank our teams for their exceptional work and continued focus as we continue to navigate dynamic market conditions. Through their collective efforts, we've generated year-to-date adjusted EBITDA of $2.7 billion, our strongest first half EBITDA results on record. Turning now to our second quarter business results, I'll begin the discussion with Timberlands on pages six through nine of our earnings slides. Timberlands contributed $153 million to second quarter earnings. Adjusted EBITDA totaled $219 million, a decrease of $28 million from the prior quarter. In the West, adjusted EBITDA decreased by $21 million compared to the first quarter. Western domestic log markets softened slightly in the second quarter, as mill inventories recovered at the outset of the quarter and lumber prices declined considerably from elevated levels earlier in the year. As a result, our second quarter domestic log sales realizations were moderately lower compared to the first quarter, but remained high relative to historical pricing levels. While log supply in the western system was ample at the outset of the quarter, it became constrained by unseasonably wet weather as the quarter progressed, which drove mill inventories to below target levels by quarter end, particularly in Oregon. These adverse weather conditions resulted in a moderate reduction in our fee harvest volumes compared to the first quarter. Forestry and road costs were seasonally higher, and per unit log and haul costs increased significantly in the second quarter, as we transitioned into higher elevation logging units. Turning to our export markets. In Japan, demand for our logs remained strong in the second quarter. Lumber imports from Europe into Japan continued to be restricted by ongoing global shipping challenges for most of the quarter. This dynamic continued to drive increased market share for our customers and robust demand for our logs. As a result, our Japanese sales realizations were moderately higher compared to the first quarter. Our sales volumes increased significantly, resulting from strong demand and timing of ships. In China, log inventories at the ports declined slightly in the second quarter, resulting from improved takeaway as pandemic-related lockdowns started to ease. Imports of lumber and logs into China continue to be limited by global logistical challenges and port congestions. Additionally, log supply into China continues to be impacted by restrictions on Australian logs, Russia's recent ban of log exports to China, and disruptions of European wood flow resulting from the Russia-Ukraine conflict. As a result, demand for our western logs remained favorable in the quarter, and our sales realizations for China export logs increased moderately. Our sales volumes to China, however, decreased significantly, as we continue to intentionally shift volume to the domestic market to support our domestic customers and capitalize on favorable margin opportunities. Moving to the south, southern Timberlands adjusted EBITDA decreased by $5 million compared to the first quarter. Notwithstanding weakening lumber and OSB pricing and a seasonal increase in log supply, southern saw log markets remained favorable during the second quarter, as mills maintained elevated inventories to mitigate risks from ongoing transportation challenges. Fiber markets experienced a similar dynamic. As a result, our sales realizations increased slightly compared to the first quarter. Our fee harvest volumes were moderately higher as seasonal weather patterns transitioned to drier conditions. Forestry and road costs were seasonably higher, and per-unit log and haul costs increased significantly, primarily for fuel-related costs. Turning to our southern export business, our log exports to China remain temporarily paused due to the new phytosanitary regulations on pine logs put in place last year by Chinese regulators. We remain optimistic that this headwind for pine exports to China will be transitory and still maintain a constructive, longer-term outlook for our southern export business to that market. In the meantime, we continue to redirect logs to domestic mills in the U.S. South, and look to grow our India export market. In the north, adjusted EBITDA decreased by $2 million compared to the first quarter due to significantly lower sales volumes associated with seasonal spring breakup conditions, partially offset by significantly higher sales realizations for most products. Turning to real estate, energy, and natural resources, on pages 10 and 11. Real estate and E&R contributed $65 million to second quarter earnings and $107 million to adjusted EBITDA. Second quarter adjusted EBITDA was $9 million lower than the first quarter, primarily due to the timing and mix of properties sold, but was $16 million higher than a year ago quarter. Notwithstanding the recent macroeconomic headwinds, we continue to capitalize on favorable demand for HBU properties, as buyers seek the safety of hard assets in an inflationary environment, resulting in high value transactions with significant premiums to timber value. Now for a brief comment on natural climate solutions. Following our announced agreement with Oxy Low Carbon Ventures in March for our first carbon capture and storage project in Louisiana, we continue to advance discussions with high quality developers as this market continues to emerge. Additionally, We continue to make progress on our forest carbon pilot project in Maine and are working towards project approval by year end. Moving to wood products on pages 12 through 14. Wood products contributed $863 million to second quarter earnings and $912 of adjusted EBITDA. Compared to the first quarter, adjusted EBITDA decreased by $321 million as lumber and OSB prices declined considerably from elevated levels earlier in the year. These are outstanding results considering the ongoing supply chain headwinds faced by our teams in the second quarter. Starting with the lumber and OSB markets. Benchmark lumber and OSB prices entered the second quarter on a downward trajectory as demand for home building and repair and remodel softened and buyers remained lean inventories given uncertainty in the markets. Despite lean inventories throughout the channel, sentiment was cautious as buyers assessed downside risk of elevated price levels and were reluctant to build inventories in a 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 and in response to strong April housing starts data. This dynamic continued through mid-May at which point buyer sentiment once again turned cautious, resulting from rapidly rising mortgage rates, housing affordability concerns, and the prospects of a possible recession. This drove benchmark prices downward through late June before stabilizing at the end of the quarter as buyers reentered the market to bolster lean inventories. Despite the substantial reduction in lumber and OSB prices during the quarter, benchmark prices for both products remain elevated compared to pre-pandemic historical averages. Adjusted EBITDA for our lumber business decreased by $289 million compared to the first quarter. Our average sales realizations decreased by 25% in the second quarter, while the framing lumber composite pricing decreased by 32%. Our sales volumes increased significantly due to seasonal inventory drawdowns and improved production. Log costs increased slightly, primarily for Canadian and southern logs, and unit manufacturing costs were slightly higher during the quarter. Adjusted EBITDA for our OSB business decreased by $60 million compared to the first quarter. Our average sales realizations decreased by 14% in the second quarter, while the OSB composite pricing decreased by 34%. This relative outperformance was largely a result of order files that lag rapidly declining OSB prices. Our sales volumes increased slightly resulting from improved production. Unit manufacturing costs were moderately higher in the quarter, and fiber costs were comparable. Engineered wood products adjusted EBITDA increased by $37 million compared to the first quarter and established a new quarterly EBITDA record. Sales realizations were significantly higher for most products, and we continue to benefit from previously announced price increases for solid section and IJOYS products. This was partially offset by significantly higher raw material costs, primarily for OSB web stock. Production volumes were significantly higher for most products as veneer supply improved. As a result, sales volumes increased for most products in the second quarter. In distribution, adjusted EBITDA decreased by $24 million compared to the first quarter, primarily due to lower margins resulting from the commodity price correction. The distribution team did a terrific job in managing inventories in this dynamic pricing environment. With that, I'll turn the call over to Davey to discuss some financial items in our third quarter outlook.