Weyerhaeuser Company

Greetings and welcome to the Weyerhaeuser second quarter 2023 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 keypad. A confirmation to indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. 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 Weyerhaeuser's second 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 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. Yesterday, Weyerhaeuser reported second quarter gap earnings of $230 million, or 31 cents per diluted share, on net sales of $2 billion. Excluding special items, we earned $238 million, or 32 cents per diluted share. Adjusted EBITDA totaled $469 million in the second quarter. This is a 19% increase from the first quarter, and was largely driven by an increase in wood products commodity pricing and strong EWP sales volumes. Notwithstanding elevated mortgage rates, we've been encouraged by resilient demand for new homes this year, which provided a nice tailwind for our wood products business in the second quarter. We delivered solid results in the quarter, and I'd like to thank our teams for their collective efforts and focus on safety, operational excellence, and continuing to serve our customers. Before moving into our business results, I'd like to comment briefly on a Timberlands transaction we completed earlier this month. As we reported yesterday, we acquired 22,000 acres of high quality Timberlands in Mississippi for approximately $60 million. This acquisition is comprised of highly productive Timberlands strategically located to deliver immediate synergies with existing warehouser timber and mill operations. With a mature age class and well stocked timber inventory, we expect these timberlands to generate strong cash yields. Additionally, the acquisition offers incremental real estate and natural climate solutions opportunities in the future. This transaction is a great example of our ongoing efforts to enhance our portfolio with high-quality, well-managed timberlands that generate solid returns for our shareholders. As highlighted on page 22 of our earnings slides, We continue to make great progress against our target to grow our Timberlands portfolio through $1 billion of disciplined investments between 2022 and 2025. To date, we've deployed approximately $360 million against this target, including the recent Mississippi transaction and the acquisitions in the Carolinas and Washington, which were completed in 2022. Turning now to our second quarter business results. starting with Timberlands on pages 6 through 9 of our earnings slides. Timberlands contributed $104 million to second quarter earnings. Adjusted EBITDA was $172 million, a $16 million decrease compared to the first quarter. This was largely driven by lower average sales realizations for export logs in the West. Turning to the Western domestic market, favorable weather conditions during the quarter supported increased log supply across the region. Log demand improved as mills returned to more normalized operating levels in response to strengthening lumber prices, and later in the quarter, took precautionary measures to bolster log inventories ahead of wildfire season. These dynamics kept log prices fairly stable during the second quarter, and as a result, our average domestic sales realizations were comparable to the first quarter. Our fee harvest volumes were slightly higher than the first quarter as a result of favorable operating conditions. Domestic sales volumes were significantly higher as we intentionally shifted logs to the domestic customers to capture higher margin opportunities. Per-unit log and haul costs improved in the second quarter, and forestry and road costs were seasonally higher. Moving to our western export business, in Japan, log markets continued to soften in the second quarter in response to elevated inventories of European lumber imports, as well as lower consumption driven by reduced post and beam housing activity. As a result, our average sales realizations for export volumes to Japan were lower compared to the first quarter, and our sales volumes were comparable. As we look forward, we expect European lumber inventories in Japan to normalize in the coming months, which should increase demand for our Douglas fir logs into the Japanese market later in the year. In China, log markets soften in the second quarter in response to an influx of log supply from New Zealand, combined with a reduction in log takeaway at the ports. As a result, our average sales realizations for export volumes to China were lower compared to the first quarter. Our sales volumes were significantly lower as we intentionally flexed logs to the domestic market. Turning to the south. Adjusted EBITDA for southern Timberlands was $79 million, a slight reduction compared to the first quarter. Southern saw log markets remained fairly balanced in the second quarter, as log supply improved with drier conditions, and mills bolstered log inventories following weather-related challenges in the first quarter. In contrast, southern fiber markets softened in response to elevated inventories of logs and finished goods at mills as well as lower overall demand for pulp and paper end products. Given favorable operating conditions, our thinning activity increased in the second quarter, resulting in a higher mix of fiber logs. As a result, our average sales realizations were slightly lower compared to the first quarter, and our fee harvest volumes were comparable. Per unit log and haul costs were slightly lower, primarily due to lower fuel prices, and forestry and road costs were seasonably higher. In the north, adjusted EBITDA decreased by $4 million compared to the first quarter due to significantly lower sales volumes associated with seasonal spring breakup conditions. Turning now to real estate, energy, and natural resources on pages 10 and 11. Real estate and E&R contributed $52 million to second quarter earnings. Adjusted EBITDA was $70 million, a $19 million decrease compared to the first quarter. largely driven by the timing and mix of properties sold. Average price per acre increased significantly in the second quarter and remains elevated compared to historical levels. 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 our natural climate solutions business. We continue to make progress on our forest carbon pilot project in Maine. In the second quarter, we completed the third-party audit process and submitted the project to the American Carbon Registry for final approval. Once approved, we expect an initial issuance of approximately 30,000 credits in year one, and we're currently developing two additional projects in the U.S. South. We remain focused on positioning our credits to capture the highest value possible in the marketplace. Moving to wood products, on pages 12 through 14. Wood products generated $218 million of earnings in the second quarter and $270 million of adjusted EBITDA. Second quarter EBITDA was an 82% improvement from the first quarter, largely driven by an increase in lumber and OSB sales realizations and strong sales volumes for engineered wood products. Starting with lumber, adjusted EBITDA was $51 million in the second quarter, a $43 million increase over the prior quarter, and largely driven by improved sales realizations. Benchmark pricing for lumber held fairly stable in April and May, as sentiment remained cautious. Buyers mostly limited orders to necessity purchases, despite lean inventories. By mid-June, overall sentiment and benchmark pricing improved in response to stronger housing activity. Perceived risks to supply from Canadian wildfires and announced milk curtailments also bolstered buying activity in June. For the quarter, the framing lumber composite was comparable to the first quarter, while our average sales realizations increased by 6%, with the relative outperformance driven by our regional mix and product mix. Our sales volumes were moderately higher compared to the first quarter, as our northwest mills returned to more normalized operating levels. Log costs were slightly lower, primarily for western logs, and unit manufacturing costs were slightly higher during the quarter. Adjusted EBITDA for OSB increased by $15 million compared to the first quarter, primarily due to the increase in commodity pricing, slightly offset by higher unit manufacturing costs related to planned and unplanned downtime. Benchmark pricing for OSB entered the second quarter on an upward trajectory, largely driven by lean inventories and steady demand from new home construction activity. As the quarter progressed, buyer sentiment and benchmark pricing continued to improve, as Canadian wildfires disrupted supply and in response to improving residential construction activity. As a result, the OSB composite pricing increased by 21% compared to the first quarter. Our average sales realizations increased by 11%. This relative difference was largely due to our extended order files, which result in a lag effect for OSB realizations. Our production and sales volumes were moderately lower in the second quarter, and unit manufacturing costs were moderately higher due to planned downtime for annual maintenance and a temporary period of unplanned downtime related to wildfire activity near one of our facilities in Alberta. Fiber costs improved slightly during the quarter. Engineered wood products adjusted EBITDA increased by $62 million, or 76%, compared to the first quarter. This result is directly tied to improving demand for EWP products. which are primarily used in single-family home building applications. As a result, our production and sales volumes were significantly higher for most products in the second quarter, and unit manufacturing costs improved significantly for solid section and iJoyce products. That said, our average sales realizations were lower for most products, as supply and demand continued to rebalance across the broader EWP market. it's worth noting that our current EWP prices remain above pre-pandemic levels. Raw material costs decreased for all products in the second quarter. In distribution, adjusted EBITDA increased by $12 million compared to the first quarter, a 55% improvement, as the business benefited from strong EWP sales volumes in the second quarter. With that, I'll turn the call over to Davey to discuss some financial items in our third quarter outlook.

Thank you, Devin, and good morning, everyone. I will be covering key financial items and second quarter financial performance before moving into our third quarter outlook. I'll begin with key financial items, which are summarized on page 16. We generated $496 million of cash from operations in the second quarter and ended the period with approximately $1.8 billion of cash, cash equivalents, and short-term investments. Total debt at quarter end was approximately $5.8 billion. In May, we took advantage of attractive capital market conditions and issued $750 million of debt due in 2026 at a coupon of 4.75%. This debt issuance pre-funded the majority of our 2023 maturities, and due to the shape of the yield curve, we were able to reinvest these cash proceeds in the interim at interest rates in excess of the bond coupon. As a result of this transaction, our full year 2023 interest expense will increase by $10 million to approximately $280 million. That said, this increase will be more than offset by the interest income earned on the invested issuance proceeds. In mid-July, we used a portion of the debt issuance proceeds to repay our $118 million, seven and an eighth percent note at maturity, and we intend to use the remainder of issuance proceeds towards our December 2023 maturity. Capital expenditures for the quarter were $81 million. We returned $139 million to shareholders through the payment of our quarterly base dividend, which was increased in the first quarter by 5.6% to 19 cents per share. In addition, we returned $50 million to shareholders through share repurchase activity in the second quarter. These shares were repurchased at an average price of $29.59, and as of quarter 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 second quarter totaled $415 million, and we have generated $470 million of adjusted FAD year to date. Looking forward, key outlook items for the third quarter are presented on page 19. In our Timberlands business, we expect third quarter earnings in adjusted EBITDA will be approximately $25 million lower than the second quarter of 2023. Turning to our western Timberlands operations, Domestic log demand was steady at the outset of the third quarter in response to improved pricing and takeaway of lumber, and as mills continue to build inventories ahead of wildfire season. That said, absent fire-related disruptions in the region, log supply is expected to remain ample as the quarter progresses, largely driven by a seasonal influx of logs from non-traditional timber owners. As a result, our domestic sales realizations are expected to be moderately lower compared to the second quarter. As is typical during the warmer and drier months, we have transitioned into higher elevation operations, which generally have lower productivity. As a result, our fee harvest volumes will be moderately lower in the third quarter. Forestry and road costs are expected to be seasonally higher, as we do a significant amount of this work during the summer months. And per unit log and haul costs are expected to be lower, partly due to a decrease in fuel prices. Moving to the export markets, starting with Japan, As Devin mentioned, elevated inventories of European lumber imports and reduced consumption continue to weigh on the Japanese log market. That said, we anticipate our Japanese sales volumes will increase compared to the second quarter due to the timing of vessels, and we expect our sales realizations to be comparable. In China, elevated log imports from New Zealand and reduced log consumption continue to have an impact on the Chinese log market. We expect these conditions to persist through the third quarter. As a result, our sales realizations into China are expected to be lower compared to the second quarter, and we anticipate our sales volumes will be significantly lower as we flex logs to domestic customers to capture higher margin opportunities. In the south, we expect saw log markets to moderate somewhat in the third quarter and fiber markets to soften further. This is being driven by a seasonal increase in log supply, elevated mill inventories, and softening demand, particularly for pulp and paper products. That said, takeaway for our logs is expected to remain steady given our delivered programs across the region. Our fee harvest volumes are expected to be comparable to the second quarter and will include a higher mix of fiber logs as increased thinning activity continues. With a higher percentage of fiber logs, we expect our sales realizations to be slightly lower compared to the second quarter. Per unit log and haul costs are expected to be comparable and forestry and road costs are expected to be seasonally higher. In the north, our fee harvest volumes are expected to be significantly higher compared to the second quarter, as we have fully transitioned from spring breakup conditions and our sales realizations are expected to be moderately lower due to mix. Turning to our real estate, energy, and natural resources segment, demand for our real estate properties remains steady and we continue to anticipate a consistent flow of HBU transactions with significant premiums to timber value. For the third quarter, we expect earnings will be slightly higher and adjusted EBITDA will be approximately $20 million higher than the second quarter of 2023 due to the timing and mix of real estate sales. For the full year, we continue to anticipate adjusted EBITDA of approximately $300 million for the segment and now expect basis as a percentage of real estate sales to be 35% to 40% for the year. For our wood product segment, benchmark prices for lumber and OSB entered the third quarter on an upward trajectory, supported by improving demand, relatively lean inventories, and the prospects of supply disruptions following an early start to wildfire season in Canada. As shown on page 21, our current and quarter-to-date average sales realizations for lumber and OSB are well above the second quarter averages. Assuming this pricing dynamic remains intact for the balance of the third quarter, we expect our wood products financial results to be significantly higher compared to the second quarter of 2023. That said, excluding the effect of changes in average sales realizations for lumber and OSB, we anticipate third quarter earnings in adjusted EBITDA will be slightly lower than last quarter. For our lumber business, we expect moderately higher production and sales volumes in the third quarter and slightly lower unit manufacturing costs. Log costs are expected to be moderately lower compared to the second quarter. For our oriented strandboard business, we expect production and sales volumes to be comparable to the second quarter. Unit manufacturing costs are expected to be slightly higher, and fiber costs are expected to be comparable. Turning to our engineered wood products business, as Devin mentioned, we continue to see improving demand for EWP products, and this has extended our order activity well into the third quarter. As a result, we expect our sales volumes to increase slightly compared to the second quarter. Notwithstanding this dynamic, we anticipate slightly lower sales realizations as supply and demand continue to rebalance in certain markets. That said, third quarter EWP prices are expected to remain substantially above pre-pandemic levels and will continue to adjust in response to demand signals from the home building segment, which has seen more strength of late, particularly for single-family construction. Raw material costs are expected to be higher compared to the second quarter, primarily for OSB web stock. For our distribution business, we expect adjusted EBITDA to be comparable to the second quarter. With that, I'll now turn the call back to Devin and look forward to your questions.

Thanks, Davey. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Our view on the housing market has become incrementally more positive over the last several months. supported by improvements in homebuilder sentiment, an increase in new home sales, and an uptick in single-family starts. Despite elevated mortgage rates, we continue to see resilient demand from the homebuilding segment, largely driven by the historically low inventory of existing homes, a strong labor market, and solid household balance sheets. That being said, there continues to be a degree of uncertainty around the trajectory of mortgage rates in the broader U.S. economy. As a result, we still expect housing starts in 2023 to be lower than the last couple of years. But again, our outlook has become more positive as the year has progressed, and there may be incremental upside if mortgage rates move down from the high 6% range. And longer term, we remain quite optimistic on housing fundamentals, supported by favorable demographic trends and a significantly underbuilt housing stock. Turning to the repair and remodel market, Activity strengthened slightly in the second quarter and has held up well year-to-date, largely supported by solid demand from the professional segment. Demand from the do-it-yourself segment was steady in the second quarter and has largely normalized to pre-pandemic levels. Near-term, we expect stable demand from this segment as prospective homebuyers may choose to remodel in lieu of purchasing a new home in a higher mortgage rate environment. And longer-term, We continue to believe the repair and remodel market will be an important demand driver for our businesses, supported by strong home equity levels and an aging housing stock. In closing, our teams delivered solid operational and financial results in the second quarter. In addition, we continue to make meaningful progress against the multi-year targets we set out in 2021 through strategic Timberlands acquisitions and the advancement of our forest carbon business. Looking ahead, we're encouraged by recent improvements in the housing market and maintain a favorable long-term outlook for the demand fundamentals that will drive growth for our businesses. We remain focused on operational excellence and innovation, driving industry-leading margins, and supporting our customers. With our strong financial position, our unmatched portfolio of assets, and disciplined approach to capital allocation, we're well-positioned to drive long-term value 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 to 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 comes from George Staffos with Bank of America. Please proceed with your question.

Thank you, everyone. Good morning. Thanks for the details. Morning. I want to start off. How are you doing, Devin? I want to start off on SG&A and I guess relatedly all the things you're doing to manage costs at the company. Your cost management, at least from our vantage point, has been commendable. Again, year to date, SG&A really hasn't moved much. Are there any cost pressures, though, that you're looking out to 24 and 25 that you'll need to manage against that are maybe building and we'll see a little bit more movement to the upside there in future years? What do you think about that?

Yeah, I mean, first of all, I say thanks for the recognition, George. As you know, this is work that we've been doing day in, day out for a number of years to stay focused on cost. And it's a never-ending journey to keep control on costs, and particularly over the last few years with all of the inflationary pressures. I think in terms of what we're doing on a day-to-day basis, it's just incorporated into our planning and our operations to daily focus on keeping our costs down. I think we are seeing from an overall inflationary standpoint that not specific to SG&A, but just overall, we are seeing some of our cost pressures starting to wane a little bit, fuel, energy, resin, waxes, things of that nature. But on the SG&A front, labor costs, those are sticky, and those inflationary pressures are something that we continue to have to manage. In terms of the primary focus areas over the next several years, I think it's largely more of the same. I think labor costs will continue to be something that we'll have to manage closely. But beyond that, I think it's, you know, a lot of the same things that we've been doing over the last several years. I don't know, Davey, would you like to add anything to that?

Sure, Devin. You know, I would just point out that this goes back to everything we've been doing for a number of years on OPEX. And as we look forward, our focus on OPEX and continuing into innovation and everything we're working on every day, we expect that to be a lever for us over time to continue to manage costs and drive those down into the future.

Okay, thank you. Two follow-ons that I'll turn over very quickly. So given what's been a nice pickup in demand over the course of the year in wood products, recognizing it wasn't so strong earlier in the year, are timber prices in the south for saw logs where you would have expected them given that backdrop? Now, why aren't we seeing more lift? Recognizing, again, it's a market-by-market, very local market, but are timber prices in the south for saw logs where you would have expected given the backdrop. Why or why not? And then can you give us a bit more color in terms of the normalization, the factors that you're seeing in supply and demand in EWP, particularly in TrustJoyce, and why we're not seeing more of a lift higher given the favorable single-family outlook? Thank you, guys.

Sure. Well, I'll start with the saw log question in the south. And, you know, I think we've seen over the last several years some uplift on saw log pricing. And, you know, we've been talking about this for a long time, a lot of new capacity coming into the south. And certainly what we've seen in those geographies where we've had new capacity or expanded capacity, we have seen those markets tension and we've seen upward pressure on pricing. I think this year there are a few things going on. For the first half of the year, I think saw log prices held up pretty well, at least in the markets that we participate in. I think unlike the fiber logs, which have seen a little bit more pressure just because of what's going on in the pulp and paper industry, the saw log market has held up pretty well. I think there is a nuance going on there with respect to the availability of transportation. One of the things that we saw over the last couple of years was just a real shortage of trucking capacity, and I think that put a little bit of an uplift on pricing just as mills, particularly strong lumber markets, were making sure that they had adequate log decks. As that trucking capacity has loosened a little bit, I think some of that pressure has come off. As we think about where we are in the year, it's not atypical to see a little downward pressure on log prices just because in the summer months, in the drier weather, you have more supply hitting the market. So that's the dynamic at play. I do think over time, and again, just going back to my point earlier, as we see capacity continuing to come into the region, you are going to see continued pressure and tensioning across the South. So I think the trajectory is still what we had expected, and certainly I think we're optimistic over the next several years as these mills continue to come into the region that you'll see continued upward price pressure. You'll have ups and downs seasonally like we always do, but The overall trajectory, I think, still looks positive. With respect to your question around EWP, I think if you really want to understand what's going on today, you have to look back a couple of quarters and just think about the trajectory of what's happened. As we got into late last year and early 2023, we had a fair bit of destocking going on. So you combine that with the lower residential construction activity, And it really put the EWP market, you know, in a softer place earlier in this year. And so that was really the story in Q1. As you remember, we did dial back our production in EWP to address that. I think we have a pretty good customer base. We have a strong product. And so as that market started to recover, there was good demand for our product. And, you know, we certainly saw that over the course of Q2 moving into Q3. But the reality is in Q1 and Q2, just as those markets rebalanced, we had to take pricing action as everyone else did just to make sure that we were competitive in each individual market. There's generally a time lag in terms of those pricing actions, whether you're raising prices or lowering prices. And so some of what you're seeing in Q3 is just the lag effect of pricing actions that we had to take earlier in the year. I would say on balance, the market is recovering nicely. Our order files are back to the place where they're fairly extended. We're even on allocation for a few products at this point. So the market's stabilizing, but each individual market has its own dynamics, and we'll make pricing action where necessary to make sure we're competitive. But I think directionally, we feel pretty good about where EWP is and the trends that we've seen lately.

Thank you, Devin. Great.

Our next question is from Kurt Yinger with DA Davidson. Please proceed with your question.

Great, thanks, and good morning, everyone. Good morning. I know it wasn't a huge impact for you guys in the quarter, but could you just talk about some of the derivative impacts from the wildfires up in Canada in terms of just operating your facilities there? logistics and transportation and the role that is perhaps played in some of the pricing strength that we've seen in the last two to three months?

Sure. Well, I'll give you an update on our operations specifically and then mention more or less, you know, the impact that it had on pricing in the market. So, you know, in terms of the impact to us, we had two of our three mills in Alberta that were impacted. We had a lumber mill and our OSB mill that both had to take about two weeks downtime each as the fires caused evacuations in those local communities. And so the net impact to us from a financial standpoint was relatively minor, sub $4 million for the quarter. I think the bigger impact, though, as you mentioned, was just with all of the fire activity, it did cause some concern around supply, particularly, I think, on the lumber side. And I suspect that was part of what drove some of the pricing activity to the upside in lumber as we got into June and early parts of July. So I think that the real impact was on the overall lumber market and just kind of the concerns around supply availability with the fires. I would say from a transportation standpoint, it did obviously have some impact, but I would say not material.

Got it. Okay, that's helpful. And then just two quick ones. First, could you talk about what you're hearing and seeing in terms of European lumber imports into the U.S. kind of for the back half of the year, as well as on the timberland side, you know, the pipeline of opportunities that you see and just kind of your outlook in terms of potential additional bolt-on or larger scale transactions going forward?

Sure. Well, with respect to European lumber, we certainly saw a higher than normal amount of volume coming in late last year, early part of this year. Ordinarily, I would say European lumber volumes don't have a meaningful impact on the market. I do believe earlier in the year with the amount of volume that was coming in, particularly on the East Coast, it probably did have some impact on the supply-demand dynamic and probably pushed pricing down just a bit. We've seen the volumes of imports really starting to wane here over the last several months, which makes sense as the lumber prices have come down. It's less economically viable for some of that wood to come to the US. So our expectation is we will see lower volumes. I think you'll still have some degree of European volume coming into the market as many of those producers want to maintain. that supply chain and give them the ability to flex depending on what's going on here versus in Europe. But I suspect it will be a lower volume coming in for the back half of the year. As we think about the M&A market on the Timberland side, as you probably have noticed, it's been lighter this year than it has been over the last few years. I think last year you probably saw in the neighborhood of $5 billion of transaction activity were certainly trending much lower than that this year. And that's really, I think, largely a function of, A, probably some pull forward from last year, pretty heavy year. I think there's probably a piece of this, too, that as the market is trying to figure out how to price carbon and ESG options in this space, perhaps some are holding out with the view that prices are going to continue to go up. So we'll see what the back half looks like. But we're expecting it to be a lighter year this year than it has We're always in the market. That being said, as you saw with the Mississippi transaction, we'll continue to look at every deal that comes to market. We'll continue to have conversations with parties to see if we can do deals outside of the auction process. It's a competitive market, but I think there will be properties where we're very well suited to make those acquisitions and deliver returns for our shareholders.

Okay. Thanks for the color, Devin, and good luck here in Q3, guys.

Thank you.

Thank you. Our next question comes from Susan McClary with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone.

Good morning.

Good morning, Susan.

My first question is, you know, Devin, can you talk just a bit about the production levels and the inventory that you're seeing at the mills just across lumber? You know, as the builders are gearing up and adding those starts on the ground, how are you thinking about overall lumber inventory out there? And maybe what could that mean for your ability to hit that 5% annual growth target that you've set out there?

Yeah, so, you know, the first part of the question in terms of inventories, I'd say on balance in the lumber space, inventories are on the lean side, not nearly as lean as OSB, but I'd say leaner than normal inventory. I think what's going on right now is there is adequate supply coming on, and so people are feeling more comfortable with those lean inventories. And as you know, typically the August timeframe is a period where you see a little bit of pullback in demand, particularly on the R&R side. Just because of the heat of the summer, people are less inclined to build a deck if it's 110 degrees outside. I think you have some normal seasonal demand pullback just on the R&R side. But in terms of what that leaner inventory looks like is, you know, as you get into the fall, if buyers continue to carry lean inventories, and certainly our inventories at the mills are on the lean side as well, if you get into the fall when that R&R activity picks up and you have strong single-family homebuildings, we've seen what happens there, particularly if you have some sort of supply shock, maybe from fire season or some other thing happening, you know, that can really push pricing up fairly quickly. And, you know, we saw that even just in June with the fire activity in BC, what that can do to pricing. So I think it all depends on, you know, if we see repair and remodel activity pick back up in the fall as we normally do and the builders continue to build, which is what we're expecting, That could be a nice setup for fall pricing in lumber. In terms of our ability to meet the 5%, you know, there are going to be puts and takes every year. What we're doing is we're doing the work with building the capacity, so the CapEx projects, the improvements in reliability, et cetera, that we need to do to hit that target. You know, last year, obviously, we were down a little bit because of the strikes in the northwest. This year, we did dial back production a little bit just because lumber was demand had slackened a little, particularly in the Northwest and BC. So, you know, we'll see what the ultimate production number is for the year, but ultimately we're doing the work from a capacity and an operation standpoint to support that 5% per year. Yeah.

Okay. That's very helpful, Collar. And then I guess, you know, as you do think about some of the dynamics that are going on in the lumber market from both the supply and demand perspective and do you think about where pricing can go as we think about the back half of this year and probably even the first half of next year, given what the builders are talking to and looking to add on the ground? And maybe how is that different from what happened in the last few years that could either put a floor or ceiling in terms of the upside potential around the pricing?

Yeah, I mean, I'll offer the caveat that lumber pricing is very, very hard to predict, as we've seen over the last several years. You know, I would say if we look back over the pandemic era, I don't know that I would necessarily look at $1,000 lumber prices as being something we're going to see very often. That was a result of just a number of factors coming together at the same time, all of the supply chain disruptions, etc. So I'm not sure that's how you should be thinking about things. As we think about where lumber prices are going to go in the fall, it's really a function of, you know, A, what's going to happen on the supply side, And I think we're going to continue to see puts and takes there with the additions in the South, the capacity coming out of British Columbia. That dynamic, I think, is going to continue to play out. And then it's just really a function of what happens with home building and repair and remodel. Our view is the home builders have done a remarkable job of managing and navigating an environment with higher mortgage rates. They seem to be pretty optimistic in the conversations that we're having with them. So My expectation is the back half of the year, even with high 6% mortgage rates or even 7% mortgage rates, is that we're still going to see strong single family building, which will be supportive. And then it's the question of R&R. And, you know, we've seen pretty strong demand out of that segment. Just as a data point, year over year, our second quarter into the home improvement warehouse market was actually up. So, you know, we continue to expect that to be a strong market. And as the treaters come back in in the fall, I would expect that we're going to see reasonably strong lumber prices. And then again, it'll just depend on, you know, are there upside surprises on building or are there supply shocks that, you know, can cause that price, you know, price ceiling to go up?

Yeah. Okay. I appreciate all the thoughts, Devin. Thank you. And good luck with everything.

All right. Thank you.

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

Thank you. So thanks for all the details on lumber and walking us through your thought process and how pricing might evolve. If we think about OSB, I guess the first question I have is you give on that slide that I think the current prices were like $70 higher as of July 1, the way you look at it. But I think you also referenced that you've got your order files are, what, three or four weeks, I believe. And so if we were to kind of assess real-time pricing in OSB, what does that mean? Can you give us a sense as to what you'd expect your prices to be, given what we already know, three to four weeks out once it's the real-time prices are what you would be calling your current prices.

Yeah, I mean, without specifically giving the number, what I can tell you is directionally, our order files are actually five to six weeks out. So they're fairly extended. As you noted, Mark, what that means for us is that there is a lag to the current pricing. And so while what you see quarter to date in the earnings package is lower than current, that that will catch up over time. So there will be a several week lag on the upside. And, you know, the flip side of that is there's also a several week lag on the downside. So, you know, we ultimately get it. It's just a timing question. And, you know, for us, as we think about the quarter, you know, there's a fair amount of leverage there. It's eight million dollars of EBITDA per quarter for every ten dollar increase. So, there's a fairly significant upside. And I think just given the length of the order files, that's going to translate into a pretty strong quarter for OSB for us.

Okay. And recognizing that prices can move from where they are. But I mean, so can I look back five weeks or so and look at the increase that we've had and expect that to, because that's over $100 plus, to expect that to um, translate into your prices and, and then, and then they'll go wherever prices real time go as we go forward. Is that a reasonable way to look at it?

Yeah, that's generally right.

Okay. Um, and then you, you kind of had, you'd mentioned that, um, you felt in lumber that maybe we can see some improvement in the fall, et cetera. Um, but you know, it sounded like you're reasonably cautious over the summer. Correct me if I, if I interpreted that incorrectly. Um, How do you feel on OSB? Did you see the dynamics differently? And if so, why?

Yeah, I do different just because there's not a lot of OSB available. And I think what you're seeing right now with the pricing dynamic is most buyers went into the summer with very little inventory. And as you've seen that building activity pick up, the demand ended up being higher than people expected. And when they're going out and trying to buy open market OSP, there's just none there. And so that's going to take a little while to figure itself out. OSP is not as reliant on the R and R market. So it's a little bit more focused on the single family construction, which has continued to be pretty strong. So absent, you know, a material pullback on the housing side, it would seem to me that we're going to see pretty tight market there for OSB, which should mean you should have strong OSB pricing into the fall.

Okay, super. And just one last one. I know there are lots of concerns on fire season weeks or a couple months ago, and not hearing as much about it, and certainly not in your comments recognizing there's uncertainty. Have things calmed down, or are things feeling like it's not going to be as as dangerous a situation this year? Just a quick update.

Yeah. So, you know, in the Northwest, it's been a relatively mild wildfire season to date. I always caution people, though, it really starts to become an issue typically in August and the early part of September. So we're not necessarily in the heat of the wildfire season yet in the Northwest. Obviously, in Canada, it's been a really bad year so far. There has been some rain in Alberta, so while we still have fire activity going on, I think that's calmed a little bit. In northern BC, I think the fire activity has started to pick up a little bit. So as you think about some of the key regions for us, Washington, Oregon, British Columbia, I think that story will play out over the course of August. But to your point, at this juncture in the northwest, fire season hasn't been that bad.

I appreciate the color. Thank you.

Thank you.

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

Good morning. You know, just following up on the Mississippi deal, I think it transacted at kind of somewhat of a premium to some, you know, comps that we've seen in the state. I think you talked about it being well-stocked and maybe having some synergies with existing operations. I'm just wondering if if you could maybe touch on, I guess, the real estate and E&R opportunities that I think you were mentioned in the press release. And maybe more broadly, I think you're the largest landowner in Mississippi. Can you just talk about that sort of Mississippi, Louisiana, Arkansas market in terms of anything that you're particularly excited about or concerned about maybe in the next few years?

Yeah, sure. So You know, it's a really nice acquisition for us. A couple of things I would highlight, as you noted, really good mature age class, high percentage of saw log mix. And importantly, there's two pieces of it. There's a northern piece and a southern piece. Each of them are really close, so short haul distances to lumber mills that we have in Mississippi. So some really nice synergies there. I think from a comp standpoint, just for frame of reference, one of our large competitors did a deal in Mississippi recently at $2,700 an acre. So it's pretty in line with what we've seen for the higher quality acquisitions in that Mississippi region. We are the largest landowner in Mississippi by a fair margin. I think the positive news from a Mississippi standpoint is we're seeing a fair bit of new capacity coming in there. From a sawmill standpoint, we've got the pellet mills that are coming in and building new mills in Mississippi. So it's a market, while it's been less tension perhaps than some of the other markets, and this is true for Louisiana and Arkansas, by the way, I do think that's where a lot of the new capacity is coming in. And with the work that Russell and his team are doing, We're working real hard to make sure that we can influence where some of that capacity is coming in so that it's placed in a region where we benefit from a Timberland standpoint and can drive synergies for those customers. So I think we feel pretty good about the trajectory of all three of those markets. And my instinct here is that over the next several years, you're going to see some of the biggest price growth in those markets as that new capacity comes into place.

Okay, that's very helpful. And then just switching to climate solutions, I think you mentioned two carbon projects underway in the South. Given the experience you've gained with the main pilot, I mean, is it possible to say how long it might take for those two Southern projects to maybe ultimately start issuing credits? Is that one or two years or maybe longer or shorter? And then I kind of thought that the main project was chosen because you know, economics in the northern region are maybe less compelling than in the southern region. I don't know if that's the case or if that's changed, but is there any sort of change in view where, you know, carbon projects are getting more feasible or more attractive and, you know, you're moving them to the south or maybe these are special regions within the south? I don't know if you can comment there.

Sure. Well, you know, I think, first of all, with the main project, and, you know, that's why we call it a pilot project, is there were learnings that you know, we acquired through that process. And I think we've been able to take the learnings from that main project and apply that to those two projects in the south. So my expectation is those projects are going to move dramatically faster than the main project. And, you know, we could have those, you know, issued as soon as later this year or early next year. So much faster. And again, I think we've taken a lot of the learnings from that initial project, which was the whole point in building out that group and the expertise so that we can start to scale this business. In terms of the regional decision-making for where carbon projects go, you're absolutely right. We started in Maine because the economics there are more supportive. But as you think about a portfolio of 7 million acres across the South, there are going to be certain parcels and certain tracks that are less economically beneficial than others. And so they're going to be places where the economics for carbon, even in the near term, still makes sense in the South. And, you know, just to be clear, we're only going to do carbon projects where we think the economics in doing carbon will beat the economics of doing timber. And so, you know, part of that is the quality of the land base, but part of that is where we think carbon prices are trending. And what we've seen here of late is, for improved forest management carbon projects that are of high quality, they're generating strong pricing, and that's our expectation when we bring these credits to market.

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

All right. 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, guys. Just want to follow up on this natural climate solutions and the carbon optionality that you've got. If you could, and I appreciate the extra color on the 30,000 credits that you expect in year one, what's the size of the main project, the scope of it that you put forward, and then what's the size of the two projects that you've got in the U.S. South?

Yeah, so we're not providing the specific acreage really for a couple reasons, Paul. First is, as we think about how we're managing these carbon projects, we're not just taking those acres out of production. We're going to continue to generate timber revenues from those acres in addition to carbon. So it's a little, you know, we feel like it's a little hard to put that in context just by throwing acres out there. So we're not going to be providing acreages for these products will ultimately provide the number of credits and the revenues that we're generating from the credits. And that's how we'll dimension that going forward.

Okay. Well, just trying to scale it from my side then, the 30,000 credits, is that equating to somewhere in the $500,000 to $600,000 range?

Well, it depends on what you think pricing is going to be, you know, $30,000, you know, Yeah, mid-20s is kind of a good way to think about it in terms of what we've seen lately, and I think the quality of the credits we're bringing to market are really going to be at the top of the range, so that's how we're thinking about it.

Okay, and then just lastly, is this 100% addition to your cash flow, or is there an impact when you put these projects together? the carbon projects forward, i.e., is there an impact on harvest in the area?

Yeah, there will be some. Now, obviously, we're picking areas which, you know, have economics where that's supported by the, you know, the carbon. But ultimately, if you're going to get carbon credits, you are giving up some degree of volume. And so we're going to pick regions where that margin is the lowest and where, you know, that offset makes the most sense. But Yes, there will be some offsetting impact to timber revenues where we do carbon projects.

All right. Makes sense to me.

Best of luck. Thanks.

All right. Thank you.

Thank you. Our next question comes from Ketan Mathura with BMO Capital Markets. Please proceed with your question.

Thank you and good morning. First question, Devin, you talked about, you know, the order files in OSP, which are quite extended right now. Can you give us some sense of what the order files are like in engineered wood and in lumber and how they compare, you know, for this time of the year versus historical average?

Yeah, lumber price, lumber order files are pretty normal. I mean, that's in a couple week timeframe, one to two weeks, which is pretty typical, particularly for this time of year. The EWP order files are extended, you know, depending on the product, out even beyond OSB. So they're back to a place where they're fairly lengthy, the order files.

Understood. Gotcha. And then coming back to Wi-Fi, are your mills in Alberta back up? I thought I heard you say that you took some downtime at two of your three mills. are they back up running, you know, kind of fully or are there some, you know, some restrictions, whether related to the log decks or anything else there?

No, those mills are both back up running full. No, no ongoing issues there. The downtime was really just when the fire got close to the community, there were evacuation orders. So everybody had to leave town. But as soon as those evacuation orders were lifted, we were back at the mills and they're both back up running full.

All right. Okay. That's all from my side. Good luck. Thank you.

All right. Thank you. Thanks, Caden.

Our next question is from Mike Roxland with Truist Securities. Please proceed with your question.

Thank you, Devin, Davey, Andy, and Kara for taking my questions. Very good quarter. Thank you. Just on EWP, Can you talk about any regional differences that you've seen on EWP demand? I recall the West being more impacted some months ago from soil market conditions and the climate weather. So have you seen a ramp on the West more than the South? Just help us figure out how that demand improvement has been broken out by region.

Yeah, I mean, California in particular earlier in the year and late last year was struggling, and that was, if you recall, just a result of wave after wave of storms hitting that market. So you really saw building activity slow quite a bit. As we got deeper into spring and early summer, the California market picked up quite a bit. And you can see that mostly in the Douglas fir lumber sales that we've got going into that California market. That really saw an uptick as that building activity increased. I'd say there are always regional differences You know, California, I think, has been picking up. Texas is always a strong market. The South has generally been pretty strong, and I think all of those trends are holding. You know, when you think about what's going on with EWP, you know, there's obviously two pieces of that, though. There's the demand and how much building's going on, and then there's also the supply that's going into each individual region. And, you know, our experience is every local market has its own competitive dynamic, and so it's always balancing... making sure that you're serving your customers, trying to make sure your margins feel good, but also making sure that you're holding market share against competitors who all want the same business. So that dynamic plays out in every region every day. But I'd say on balance, again, the EWP market certainly has stabilized. And as you can see with our order files extending out We feel pretty good about that trajectory. I mean, there will always be some ups and downs on pricing, but directionally, we feel pretty good about where EWP is going.

Thanks for that, Doug. Just following up, I mean, it's kind of interesting when you look at your sequential improvement in lumber versus EWP. Lumber, about 5% sequentially in terms of volumes, but EWP up about 63% quarter to quarter. Can you help us frame what's really driving the difference? I mean, is it all due just to the fact that EWP is more single-family related? Maybe lumber's got that R&R component, or is there anything else driving the difference between lumber demand and EWP demand?

Yeah. I mean, when you look at our sales volumes, it's really more of a function that we had scaled down our EWP production earlier in the year because of what was going on and just the dynamic with so many buyers destocking. The big volume increase in EWP, I mean, obviously it's related to the fact that there's been a pickup in home building activity, but the delta between the improvements in volume in EWP and the improvements in volume in lumber is just that EWP was operating at 60% capacity for the first quarter, whereas lumber wasn't down nearly as much. But that was an intentional decision on our part just to match supply with demand.

Gotcha. And one final question before turning it over. Just the operating rate in EWP and 2Q?

Yeah, it was in the mid-70s, low to mid-70s, and so we think it will be up just a little bit in Q3. All right.

Thanks very much, and good luck in the second half.

All right. Thank you.

If 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. Terrific. Thanks, everyone, for joining us this morning, and thank you for 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.