Weyerhaeuser Company

Greetings and welcome to Weyerhaeuser Third Quarter 2023 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 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce 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 third quarter 2023 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer, and 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 third quarter gap earnings of $239 million, worth 33 cents per diluted share, on net sales of $2 billion. Adjusted EBITDA totaled $509 million, a 9% increase from the second quarter. These are solid results, and I'm proud of the performance delivered by our teams during the quarter. Turning now to our third quarter business results. starting with Timberlands on pages six through nine of our earnings slides. Timberlands contributed $78 million to third quarter earnings. Adjusted EBITDA was $143 million, a $29 million decrease compared to the second quarter, largely driven by lower sales volumes in our western and southern operations and lower average sales realizations for western export volumes. In the west, adjusted EBITDA decreased by $22 million compared to the second quarter. Turning to the western domestic market, log supply was ample in the third quarter, as the typical seasonal influx of logs from non-traditional timber owners came to market. Despite this dynamic, domestic log markets remained fairly balanced as mills maintained steady demand, driven by higher pricing and takeaway of lumber early in the quarter, and mills building log inventories to mitigate potential supply risks in the peak of wildfire season. Our average domestic sales realizations were comparable to the prior quarter. As expected, during the warmer and drier months, we transitioned to higher elevation and lower productivity harvest operations. Additionally, although wildfire activity was limited on our timberlands, dry conditions across the Pacific Northwest resulted in harvest restrictions in certain areas. As a result, our fee harvest and domestic sales volumes were moderately lower compared to the second quarter. Our forestry and road costs were seasonally higher, and per-unit log and haul costs were lower. Moving to our western export business. In Japan, elevated inventories of European lumber imports and reduced consumption continued to weigh on the Japanese log market. That said, our average sales realizations for export volumes to Japan were comparable to the second quarter, largely driven by stable log pricing in the western domestic market. our Japanese sales volumes decreased in the third quarter. This was partially due to reduced shipments to a customer that sustained fire damage at one of its sawmills during the quarter. While the mill is being rebuilt, our customer is in the process of adding shifts in production at different facilities and expects to recover most of the lost production from the damaged operations. It will likely take several quarters for this customer to ramp up the additional production. As a result, we're expecting lower shipments to Japan over the next several quarters. During this period, we expect to ship volume to other customers in Japan and the western domestic market. In China, despite steady decreases in log inventories at the ports and a reduction in log supply, the Chinese log market continued to be impacted by reduced consumption in the third quarter. As a result, our average sales realizations for export volumes to China decreased moderately compared to the second quarter. While demand for our logs continues to be steady, our sales volumes were significantly lower as we intentionally flexed logs to the domestic market to capture higher margin opportunities. Turning to the south, adjusted EBITDA for southern Timberlands decreased by $6 million compared to the second quarter. Southern saw log markets moderated slightly in the third quarter, and fiber markets continued to soften, largely in response to elevated mill inventories, a seasonal increase in log supply, and reduced demand for finished goods, particularly for pulp and paper products. As a result, our average sales realizations decreased slightly compared to the second quarter. Despite these market dynamics, demand for our logs remained steady, given our delivered programs across the region. However, certain geographies did experience wetter than normal conditions at the outset of the quarter, resulting in moderately lower fee harvest volumes compared to the second quarter. Per-unit log and haul costs were comparable, and forestry and road costs were seasonally higher. In the north, adjusted EBITDA increased slightly compared to the second quarter due to significantly higher sales volumes resulting from a seasonal increase in harvest activity that is typical in the third quarter. Our sales realizations were moderately lower due to mix. Turning now to real estate, energy, and natural resources on pages 10 and 11. Real estate and E&R contributed $56 million to third quarter earnings. Adjusted EBITDA was $94 million, a $24 million increase compared to the second quarter, largely driven by the timing and mix of properties sold. Average price per acre decreased compared to the second quarter, but remains elevated compared to historical levels as we continue to benefit from healthy demand for HBU properties, resulting in high value transactions with significant premiums to timber value. I'll now make a few comments on an exciting third quarter achievement in our natural climate solutions business. I'm pleased to report that we received approval from ACR for our first forest carbon credits in Maine. The project covers approximately 50,000 acres has an initial issuance of nearly 32,000 credits and is expected to generate 475,000 credits over a 20-year crediting period. I want to thank our team for the exceptional work and diligence in completing this initial project and building the foundation to scale this business as the market continues to mature. Our goal is to develop and bring to market forest carbon projects that generate meaningful carbon additionality with measurable climate benefits. This initial project is an important milestone for Weyerhaeuser and demonstrates our commitment to offering only the highest quality credits. Looking forward, we are developing several additional forest carbon projects within our U.S. Timberlands, including two in the south slated for approval in the first half of 2024. As we've demonstrated since launching our natural climate solutions business, Weyerhaeuser is uniquely positioned to lead in this space given our expertise and unmatched Timberlands portfolio. We've established a target to grow this business to $100 million of EBITDA by year-end 2025, and we've made solid progress to date towards that target. And beyond 2025, we see significant upside from natural climate solutions as markets continue to develop, particularly in the carbon and renewables businesses. And from our perspective, there is no other company in this space with the capabilities or asset base to deliver on this value creation opportunity at scale like Weyerhaeuser. Moving to wood products on pages 12 through 14. Wood products generated $277 million of earnings in the third quarter and $328 million of adjusted EBITDA. Third quarter EBITDA was a 21% improvement from the second quarter largely driven by an increase in OSB sales realizations. Before diving into the business results, I would like to take a moment to highlight the operating performance improvements that we've made in our wood product segment over the past several years. To illustrate the point, for the first half of 2023, we delivered peer-leading EBITDA margins across all of our wood products businesses. I'm incredibly proud of the work that our teams have done and for their unwavering commitment to our operational excellence initiatives, innovation, and the successful delivery of our ongoing strategic capital investments. Through these efforts, we've positioned our wood products business to deliver industry-leading performance. As we've demonstrated over the last several years, this has allowed our wood products business to generate significant cash flow for Weyerhaeuser. And despite a moderation in product pricing of late, This business remains well-positioned to navigate through a range of market conditions and will continue to enhance our competitive advantage as a company, one that supports our commitment to returning meaningful amounts of cash to shareholders and enhancing the value of our portfolio over time. Turning now to lumber results, adjusted EBITDA was $58 million in the third quarter, a 14% increase over the prior quarter. benchmark pricing for lumber entered the third quarter on an upward trajectory, supported by improving demand, relatively lean inventories, and the prospect of supply disruption following an early start to the wildfire season in Canada. By late July, however, demand had softened as supply concerns dissipated and buyer sentiment turned more cautious due to ongoing macroeconomic uncertainty. Despite lean inventories, Orders were largely limited to necessity purchases throughout the quarter, and benchmark prices trended lower. For the quarter, our average sales realizations were comparable to the second quarter. Our sales volumes were slightly lower, resulting from reduced production at several mills, partially driven by temporary operating disruptions. Log costs were moderately lower compared to the second quarter, and unit manufacturing costs were comparable. Adjusted EBITDA for OSB increased by $81 million compared to the second quarter, primarily due to the increase in commodity pricing. Benchmark pricing for OSB increased sharply at the outset of the third quarter, supported by resilient demand for new home construction activity, lean inventories, and supply concerns resulting from annual maintenance outages that are typical in the fall. Pricing remained elevated until mid-September and then decreased through quarter end. as buyer sentiment turned cautious in response to weaker-than-expected housing starts in August, as well as general concerns about the economy and the prospect of additional supply coming to market. For the quarter, our average sales realizations increased by 39% compared to the second quarter. Our sales volumes were moderately lower in the quarter. Unit manufacturing costs were slightly higher due to planned downtime for annual maintenance. Fiber costs improved slightly during the quarter. Engineered wood products adjusted EBITDA was $125 million, a decrease of $19 million compared to the second quarter. Strong demand for EWP products, which are primarily used in single-family home building applications, kept most of our EWP products on extended lead times for the entire third quarter. As a result, our sales volumes increased slightly compared to the second quarter, primarily for solid section products. Our average sales realizations for most products decreased slightly, as supply and demand continued to rebalance in certain markets. It's worth noting that our current EWP prices remain above pre-pandemic levels. Unit manufacturing costs were slightly higher in the third quarter, and raw material costs increased, primarily for OSB web stock. In distribution, adjusted EBITDA was $31 million in the quarter, a $3 million decrease compared to the second quarter, driven by lower EWP realizations in certain markets and lower sales volumes for some products. With that, I'll turn the call over to Davey to discuss some financial items in our fourth quarter outlook.