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.

Thanks, Devin, and good morning, everyone. I'll be covering key financial items and third quarter financial performance before moving into our fourth quarter outlook. I'll begin with key financial items, which are summarized on page 16. We generated $523 million of cash from operations in the third quarter and ended the period with approximately $1.8 billion of cash, cash equivalents, and short-term investments, which includes amounts raised in our May debt issuance that pre-funded the majority of our 2023 maturities. In July, we used a portion of the debt issuance proceeds to repay $118 million of notes at maturity. Total debt at quarter end was approximately $5.7 billion, including $860 million that matures in December. Capital expenditures for the quarter were $99 million, which is a typical level for the third quarter, and we remain on track to invest approximately $440 million of capital for the full year. We returned $138 million to shareholders through the payment of our quarterly base dividend, and remain committed to growing this by 5% annually through 2025. In addition, we returned $25 million to shareholders through share repurchase activity in the third quarter. These shares were repurchased at an average price of $32.67, and as of quarter end, we had completed $733 million of repurchase under 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 third quarter totaled $424 million, and we have generated $894 million of adjusted FAD year to date. Third quarter results for our unallocated items are summarized on page 15. Adjusted EBITDA for this segment decreased by $13 million compared to the second quarter. This decrease was primarily attributable to changes in Intersegment Profit Elimination and LIFO. Looking forward, key outlook items for the fourth quarter are presented on page 19. In our Timberlands business, we expect fourth quarter earnings in adjusted EBITDA to be comparable to the third quarter of 2023. Turning to our Western Timberland operations, We expect log demand in the domestic market to soften in the fourth quarter as mills adjust to lower pricing and takeaway of lumber and work through elevated log inventories. As a result, our domestic sales realizations are expected to be moderately lower compared to the third quarter, absent weather-related log supply disruptions. Our fee harvest volumes and forestry and road costs are expected to be comparable in the fourth quarter, and per-unit log and haul costs are expected to be moderately higher. Moving to the export markets, starting with Japan. As Devin mentioned, we are expecting fewer export shipments into the Japanese market over the next several quarters in response to the operational disruption experienced by one of our customers in the region. As a result, we expect fourth quarter sales volumes to be moderately lower compared to the third quarter. Our Japanese log sales realizations are expected to be slightly higher. In China, log supply into the region has adjusted to lower consumption levels, and the market is trending toward a more balanced state. As a result, we anticipate fairly stable pricing for our log shipments into China for the balance of the year. For the quarter, our average sales realizations are expected to be slightly lower compared to the third quarter average. Given steady demand for our logs, coupled with moderating conditions in the western domestic market, we expect to increase our sales volumes into China in the fourth quarter. In the south, we expect stable log markets in the fourth quarter as mills maintain healthy log inventories ahead of wetter conditions that are typical in the winter months. As a result, we expect our sales realizations to be comparable to the third quarter. Our fee harvest volumes and per-unit log-in haul costs are also expected to be comparable. and we anticipate seasonally lower forestry and road costs in the fourth quarter. In the north, our fee harvest volumes are expected to be significantly higher compared to the third quarter. We anticipate slightly lower sales realizations due to mix. Turning to real estate, energy, and natural resources, real estate markets have remained solid year to date, and we've capitalized on steady demand and pricing for HPU properties. As a result, we are revising our guidance for full year 2023 adjusted EBITDA to $310 million, an increase of $10 million from prior guidance. We continue to expect basis as a percentage of real estate sales to be 35% to 40% for the year. For the fourth quarter, we expect earnings in adjusted EBITDA to be lower than the third quarter of 2023 due to the timing and mix of real estate sales. For our wood product segment, we expect fourth quarter earnings in adjusted EBITDA will be moderately lower compared to the third quarter of 2023, excluding the effects of changes in average sales realizations for lumber and OSB. Benchmark prices for lumber and OSB entered the fourth quarter on a downward trajectory, resulting from cautious buyer sentiment in response to a seasonal reduction in housing construction activity and ongoing macroeconomic headwinds. However, benchmark prices for OSB have stabilized in the last couple of weeks. As shown on page 20, our current and quarter-to-date average sales realizations for lumber and OSB are lower than the third quarter averages. For a lumber business, we expect moderately higher sales volumes in the fourth quarter and slightly lower unit manufacturing costs. Log costs are expected to be comparable to the third quarter. For our oriented strand board business, we anticipate sales volumes to be moderately higher compared to the third quarter, with slightly lower unit manufacturing costs. Fiber costs are expected to be slightly higher in the fourth quarter. Turning to our engineered wood products business, as Devin mentioned, we continue to see strong demand for EWP products given resilient single-family construction activity year-to-date. As a result, our order files are extended well into the fourth quarter, and product pricing is expected to be fairly stable through year end. For the quarter, our average sales realizations are expected to be lower compared to the prior quarter average. Our sales volumes are expected to be slightly lower, primarily for solid section products, resulting from an increase in planned downtime for annual maintenance in the fourth quarter. However, we anticipate an increase in sales volumes for iJoyce products. Raw material costs are expected to be slightly higher compared to the third quarter, primarily for OSB web stock. For a distribution business, we expect adjusted EBITDA to be lower compared to the third quarter, primarily driven by a decrease in commodity realizations. 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 macro view on the housing market is largely unchanged, although we have seen some recent headwinds in the multifamily segment in response to increasing interest rates. Importantly, however, the single-family segment has remained resilient year-to-date. In fact, despite the elevated mortgage rate environment, single-family starts increased 3% quarter-over-quarter, and new home sales were up in September. As a reminder, single-family construction is a much more important demand driver for our business relative to multifamily. In the near term, we continue to believe that the underlying housing demand is solid. Even at higher interest rates, we expect single-family demand to hold up reasonably well given the limited inventory of existing homes on the market, combined with the homebuilder's ability to offer mortgage rate buy-downs and other incentives. That said, Buyer sentiment will continue to be influenced by affordability challenges brought about by increased mortgage rates and elevated home prices, as well as the state of the overall economy. As a result, we continue to anticipate a choppier housing market in the near term relative to the last couple of years. I will note, however, our long-term view on housing fundamentals continues to be very favorable, supported by strong demographic trends and a vastly underbuilt housing stock. Turning to the repair and remodel market, activity remained steady in the third quarter and has held up well year-to-date. Although we're likely to see a seasonal reduction in repair and remodel activity over the winter months, we believe underlying demand fundamentals are solid, supported by prospective homebuyers choosing to remodel in lieu of purchasing a new home in a higher mortgage rate environment. And looking beyond 2023, most of the key drivers supporting healthy repair and remodel demand remain intact. including favorable home equity levels and an aging housing stock. In closing, we delivered solid results across our businesses in the third quarter. We also achieved an important milestone in our natural climate solutions growth program with the approval of our first forest carbon credits. And looking ahead, although near-term market conditions have moderated, we remain constructive on the longer-term demand fundamentals that support our businesses. Our balance sheet is exceptionally strong, and we remain focused on maintaining our industry-leading operating performance, serving our customers, and delivering superior long-term value and 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 remove your question from the queue. 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. My first question comes from George Stappos with Bank of America.

Please proceed with your question.

Hi. Thank you. Good morning, everybody. Thanks for the details. Good morning. Good morning. I wanted to spend the first couple questions on Wood and the first one on EWP, Devin, if you could. So, you know, we'd heard as well that lead times in EWP have been extended for you. Do you think you're unique or is the industry, you know, operating at that same stance? Has there been any development specific to Weyerhaeuser? On EWP that's led to the extended lead times, have you been able to pick up shares, say, in distribution that in turn has fed into your demand on EWP? Any color there would be helpful. The second question, if we can take a step back and look at your EBITDA trends across the businesses the last number of years, again, what Warehouser has done on a manufacturing basis has been fantastic. Terrific. Do you still think that you are more or less black at the bottom across your mill system in light of the fact that there's certainly been a lot of inflation that's occurred in the cost structure, maybe not in fiber, but other areas that you'd have to contend with if we have a deeper downturn? So how would you have us think about those two points?

Sure. Sure. Well, I'll take EWP first, George. You know, really, it's a combination of two things. And I'm speaking primarily with respect to Weyerhaeuser and not necessarily other participants in the market. You know, for us, we candidly got a little behind the curve earlier in the year. You know, remember back to the beginning of 2023, our view was that, you know, single family housing was going to struggle a little bit in a higher mortgage rate environment. And so, We did adjust our operating posture somewhat to reflect what we thought was going to be a softer housing environment. Well, what turned out to be the case was single family held up remarkably well. And so we have ramped up our production to try to get back on track. But to some extent, that higher level of single family construction activity combined with us dialing it back a little bit at the first of the year put us behind a little bit. And so we've been managing through it. I think we're catching up. I will say, even though at this point we do still have fairly extended lead times, but I think we're making good progress against that. You know, in terms of the question around black at the bottom, you know, there's no question that over the last several years in the inflationary environment that we've seen, the underlying cost structure has gone up, not just for us, but I would assume for the entire industry. And what I would say, though, is I still have a high degree of confidence in our black at the bottom approach. We continue to be, in my view, the low cost producer across all of our business lines. And so, you know, even if we do see a more material downturn, I do think we will weather that much better than the rest of the industry. And I would expect us to stay black at the bottom across each of our businesses. Now, you know, that being said, there are going to be presumably if we see a material downturn, there will be a few mills that will struggle to stay cash flow positive across the entirety of of a year. I'll just highlight the Pacific Northwest and British Columbia are two markets where it can be challenging, just primarily because the dynamic in how log costs come down is oftentimes slower than how quickly lumber prices can move. And so we've seen that a few times when you've seen lumber prices move down quickly. Typically, particularly in those markets, The log prices come down a little bit more slowly, which can make the economics challenged for a brief moment in time. But we do still feel confident and black at the bottom. Our organization is focused every day on keeping costs out of the business, improving efficiency, and overall driving down our cost structure. And I think that will serve us well across all points in the market, whether times are good or times are a little more challenged.

Thanks, Devin. My last one, and I'll turn it over. If we go to slide eight. in the upper left-hand corner when we look at realizations for the West. And, you know, obviously it's not a new development. It's been occurring. But I guess the question I had is if we go back to 2Q22, what in your view has been the reason why we've seen this steady erosion in realizations in the West? And in your view, what would be the single biggest factor to reversing that trend if we look out over the next two to four quarters? Thanks, and good luck in the fourth quarter.

Yeah, great question. I mean, it really comes down to lumber prices. In the Pacific Northwest, the market is very tensioned, and frankly, there are just not enough logs to cover all the demand. So the pricing for logs in the Pacific Northwest is really going to be governed by what happens with lumber prices. And so the mills, they will pay up to the point where they can still drive some margin across the mill set And that's largely going to really support what log costs do. Now, the one nuance there is, you know, we obviously have an export program to Asia and that can supplement our realizations. They're tied. You know, there is a correlation between what happens in the domestic log market in Japan and in China. And so to the extent that we can get the Japanese market back up, which I think we're trending in that direction just because you've started to see a lot of that European lumber that had built up in Japan work its way through the system. But it ultimately comes back to what's going on with lumber prices in the Northwest.

Thanks, Devin. I'll turn it over. Yep. Great.

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

Great. Thanks, and good morning, everyone. Morning. Morning, Kurt. Good morning. Just wanted to start off on capital allocation and At least in my view, you guys are currently trading at a pretty wide discount to NAV here. Obviously, Timberland M&A remains an important part of the strategy. But with the competitiveness on deals and your stock where it is, how do you think about the attractiveness of refurchases versus acquisitions? And then somewhat relatedly, if you were to continue to see that NAV discount widen in how willing are you to be kind of more aggressive with share repurchases, maybe above and beyond what the variable returns framework would permit, so to speak?

Yeah, you bet, Kurt. This is Davey. I just start out by saying, look, we're in a very fortunate position, as you referenced. We have a lot of levers, so that includes M&A, investing in the business, paying down debt, dividend payments, among others. And we're constantly evaluating our views on capital allocation, but all the factors that go into that are dynamic. So it's something we always need to be watching. But, you know, as we've said, our capital allocation framework starts with that commitment to return 75 to 80% of our adjusted FAD back to shareholders via the base supplemental and share repurchase. So that portion is really earmarked for returning cash to shareholders. And with the remaining piece above and beyond that, i.e. the the 20 to 25%, we can allocate that between acquisitions, share repurchase, or reducing our debt. So we do have our target to do a billion dollars of Timberland acquisitions here over the next few years. So that's something we're certainly intending to allocate a certain amount of our capital towards. We'll be disciplined as we navigate that market that you reference. But look, yeah, as we look at share repurchase, certainly that's something that that We've said it's a useful tool to return cash to shareholders in the right circumstances, and specifically when our shares are trading at a meaningful discount. We've been quite active in that space. We've done $733 million against our billion-dollar authorization that we announced a little over two years ago. So we'll continue to be opportunistic there. But in summary, while that's really an attractive lever right now, We're going to continue to weigh all those options and ultimately allocate our cash in the way that creates the most long-term value for shareholders.

Got it. And I guess just kind of a follow-up, just making sure I understand. So would you kind of be willing to go some threshold above 100% of adjusted FAD in a given year? kind of recognizing that you got to be cognizant of where debt levels are, but you would be willing to go above that 100% with kind of share repurchases specifically if you felt like that kind of discount was wide enough?

Yeah, so we do have the flexibility within our capital allocation framework for that. So any cash above and beyond the 75% to 80%, that's committed to be returned to shareholders, that's available for growth, debt pay down, or incremental share repurchase. So as always, we're going to evaluate all those options and ultimately allocate our cash in the way that creates the most long-term value. But I'll also add that we're mindful in some periods of shoppiness, those might provide significant value creation opportunities. So we'll be thoughtful and disciplined as we evaluate all those avenues moving forward.

Got it. Okay. Thanks for that. And then just my second one in regards to the fire at your Japanese customers facility, is there a way to kind of quantify what impact you expect that's going to have on, on kind of Japanese export volumes over the next couple of quarters?

Sure. Yeah. We're thinking it's probably going to be in the neighborhood of 15 to 20% over the next couple of quarters and, And then as 2024 moves on, we'll see that shrink down to probably around 10% impact as they move production to other facilities. But I would just note, we do have other Japanese customers, so we're working to reallocate some of that volume. And then you can typically get a nice premium in the domestic market for those high quality Japanese logs. And so we've obviously got plenty of domestic customers that we can move that volume to. So net-net, we wouldn't anticipate a material impact to, you know, our margins from this.

Okay. Well, appreciate the color, guys, and good luck here in Q4. All right. Thank you.

Our next question is from Anthony Pettinari with Citi. Please proceed with your question.

Good morning. You're expecting flattish quarter-over-quarter realizations in 4Q in the south. First question, is there any mixed impact there or is that for pricing? Second, prices for southern logs have been drifting lower for the past four or five quarters. Are you seeing any signs there that give you confidence in stabilization or in re-bottoming? maybe cost curve support, or is the visibility into end market demand and rates just, does it make it too hard to kind of make a call there?

Yeah, you know, in the South, it's typically a little bit easier to predict what's going to happen on realizations than it is in some other markets. You know, the comparable really, the mix doesn't change dramatically quarter over quarter. I think our delivered model and the customer mix that we have. The demand has stayed pretty stable for us. There's still margin to be made on the lumber side, so the demand for saw logs has remained pretty strong. And, you know, even on the fiber side, which certainly has drifted down over the course of the year as we've seen some softness in the pulp and paper markets, you know, I don't know that we're necessarily anticipating a strong upturn here in the near term. But I will note, we're starting for the first time in quite some time to hear a little bit of optimism from many of our pulp and paper customers that a lot of the destocking in their end markets has run its course, and they're going to start rebuilding some inventory as we get deeper into the winter. So we may have bottomed in terms of some demand there. Now, there are some regional differences. I think there are portions of the southeast coastal markets, you know, just because of some mills that have closed down that may take a little longer to recover. But on balance, you know, I think we're all things considered comfortable that we're going to see comparable realizations in Q4.

Okay, that's very helpful. And then just with regards to those, you know, we have seen a number of Kraftweiner mills that have gotten shut down in the south, and I guess one in Washington state. Is that something that I guess that has a specific impact to warehouser. I mean, it sounds like it may have some impact to some of your competitors. I'm just wondering what the potential impact is to you, if any.

Yeah. You know, obviously anytime you see a customer go out of business or take a mill down, that's not great for the market. You know, that does ultimately have some impact on the overall, you know, overall demand level. But we generally try to work pretty proactively to have long-term agreements, both for residuals on the wood product side, the pulp logs on the timberland side. So nothing that's happened to date would cause me a whole lot of concern that it's going to have material impact to us specifically. But nevertheless, we do still need to find homes for those residuals and pulp logs. And so

know it's in everybody's interest to make sure that these customers are healthy long term got it got it and then just maybe shifting gears to wood products and maybe a similar question on lumber you know with random lengths around 375 are you seeing or do you anticipate any kind of supply response maybe we're below uh cash costs for for some of the higher cost producers And then I guess one thing that we've heard this year is that some mills are hesitant to let go of labor because they feel like if they let them go, they may not be able to get them back in this kind of labor market. Has that been like a real dynamic that you think has impacted supply? And if you just have any more kind of broad comments about kind of lumber supply with prices where they are.

Sure. Yeah, I mean, it's always hard to say what others are going to do, so I can't necessarily speak to that other than to just point out that historically, when we've seen lumber prices go below cash costs for any period of time, there ordinarily is some sort of supply response. And our estimation is that in certain regions, a decent amount of the ongoing supply is probably underwater from a cash standpoint. You know, the issue with labor, I think that certainly has been a concern. And, you know, that's probably something that's going to give producers a little bit of pause before taking material downtime. But that being said, you know, ordinarily you're only going to run so long losing money before you ultimately make those decisions. And I would say, you know, although certainly not great, we have seen the labor market improve somewhat versus earlier this year. I think You know, if we were having that same discussion in Q1 or Q2 of this year, I think you probably would have been even more reluctant because the market was so tight. But hopefully that will continue to get better as we move forward.

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

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

Thank you. Good morning, everyone. Good morning. My first question is staying with wood products. It seems like the move in volumes that you saw in a lot of those products over the course of the quarter is in contrast to the outlook that you gave for housing starts and especially I think the commentary and the outlook that the builders have shared over the course of this earnings season. As you think about the setup for the industry going into the end of this year and maybe even into early 2024, how do you think that that will come together and what could it suggest for your ability to operate and to gain share within that segment?

Yeah, you know, I mean, our view on what's going to happen with housing and, you know, I'll just caveat that, that there's obviously a lot of variables at play. But when we talk to the home builders and I'll start, particularly here with the larger national builders, my view is they're going to continue to build. It's going to require ongoing rate buy-downs and other incentives to continue to get people into that market. But with such little existing inventory on the market, it is a demand driver that's helping whether what ordinarily would be a very difficult period at these kinds of mortgage rates But when we talk to the big builders, I think they're going to continue to build. I suspect they're going to build slightly up relative to 2023. I think the more challenged end of that market is the medium and particularly the smaller builders with these higher interest rates. I think that puts some pressure on them in terms of financing land and some of their other expenses. They don't necessarily have all of the same tools available to to help getting some of those new home buyers into a home. So net-net, I think single-family next year might be up slightly, but I think the market share for the big national builders will continue to grow. And for us, we have a diverse customer base. Obviously, we do business with all the big builders. We have good relationships with them. I would expect us to continue to grow our business with them as they grow. We also do business with the medium and small builders as well. And so we'll just have to be nimble and to allocate our product to whichever builders are growing their market share. But notwithstanding all the doom and gloom that you hear about housing, I do think people want homes. We're massively underbuilt. There are not a lot of them available. A lot of the people that are in their early 30s that want a home are ready to go out and be home buyers. and homeowners, and so somebody's going to have to meet that demand. And I give a lot of credit to the builders to navigate this environment. They've done a remarkable job, and all things being equal, we would expect that to continue next year.

And just building on that very quickly, Devin, how do you think about the channel inventories that are out there as we go into the fall? Is there anything you would highlight or call out there?

Yeah, on lumber, it's still pretty lean. I think what we've seen is just... Nobody really has a good beat on the direction of building as we get into these winter months. And there's just a lot of negative commentary in the press. So I think people are fairly reluctant to build inventories. So people are keeping their inventories pretty light on the lumber side. I'd say on OSB, relative to this time of year, it's probably at or maybe slightly below normal. So maybe not as lean as lumber, but certainly not big inventories either. And then EWP, like I said, at least from our vantage point, we're on pretty extended order files right now. And so not a whole lot of extra EWP in the system from our standpoint.

Okay. That's helpful, Culler. And then I just want to squeeze one more in, which is congratulations on getting the forest carbon project in Maine approved. When you think about the progress that you're making there and the $100 million target for EBITDA that you've set out by the end of 2025, is that based on volume or is it based on the pricing to some extent of where these credits can come in? Any updated thoughts on that as you've hit this milestone? Sure. Sure.

Yeah, I mean, we're really pleased with this first carbon credit project. You know, it's not a big number in and of itself, but we learned a lot. And I think we're building the foundation to scale this. And so, you know, we've got two more in the South slated for approval in the first half of next year. We got three more in the pipeline behind that. And remember, you know, these just continue to build. So each of these projects will have annual credit releases. And so- Part of how we're going to get to the $100 million is we've got a lot of different levers, and that's mitigation banking, conservation, renewables, carbon capture and storage, and then the forest carbon. So I think it will probably be a little bit more heavily weighted to the existing businesses at the outset. But over time, we certainly think forest carbon, carbon capture and storage, and renewables will make up a growing percentage of that. And as I said in our opening remarks, The more we learn about this market, the more people we talk to, the trajectory of the opportunity set, I think we have a lot of optimism that the size of this business is ultimately going to scale up into something more meaningful than $100 million. Okay.

Thank you for all the color and good luck.

Thank you.

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

Thank you, Devin, Davey, Andy, Tara, for taking my questions. First, just a point of clarification on EWP pricing. I think you mentioned in terms of the 4Q versus 3Q trajectory that price realization should be moderately lower. But then I think there was a comment made that product pricing should be stable through year end. So how do I reconcile it? I mean, is it really that 4Q is really not going to move all that much relative to 3Q? It'll be down slightly, and therefore that's why product pricing should be stable. I'm just trying to reconcile the little bit of a discrepancy between the two comments.

Yeah, that's right. And so remember when we talk about EWP, I mean, there are a number of products that go in there. So you've got solid section, trust choice. We've got plywood and MDF all flow through EWP. So when we talk about solid, what we're primarily talking about is trust choice and solid section, which are the majority products. We are going to see a little bit of the last couple of quarters, we've had to make some targeted price adjustments. Those usually have a little bit of a time lag, which are kind of flowing into Q4. So that's really what drives that slight down quarter over quarter trend. But on balance, we're seeing pretty stable demand and pricing across our engineered wood products business.

Got to do. Thank you. Sorry. One, on that price, the targeted price adjustments, I think even last quarter you mentioned that you're also making some price concessions on some products in order to remain competitive. So is that something, as you think about how you operate at 3Q, did you do that maybe more than 3Q? You were slow to adjust your operating posture, and so in order to be more competitive with your peers, that you decided to lower prices more aggressively to make up for, quote-unquote, lost volume?

Yeah. Actually, I think it probably had the opposite effect. With very extended order files, that probably took a little pressure off. But frankly, the way we've been approaching pricing is just very targeted, and it's been market by market. and you know every market has its own supply demand dynamic and just like we do with all products we adjust prices either down or up depending on what that dynamic uh looks like in the particular region so i wouldn't say it was any kind of material moves in q3 it was all very targeted uh and and adjusted to the local supply demand dynamic got it gotcha appreciate that one last question just on the on the wp you know just

Can you comment where your operating rate was in 3Q? I think last call you mentioned that you had a low mid-70s type operating rate in 2Q, and then you had a 60% in 1Q. So where was it in 3Q, and where do you think it will be in 4Q?

Yeah, so in Q3, it was kind of in the high 70s range for an operating rate across EWP, and we're thinking that's to be more or less comparable for Q4. You know, there's some puts and takes. We're adding presses to kind of keep up with the demand, but on the same token, we have a number of scheduled annual maintenance downtimes. So net-net, it'll be more or less comparable from an operating rate standpoint.

Got it. Thank you very much.

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

Yeah, thanks very much. Morning, guys. Just a question of OSP was pretty strong in the quarter, but we've got some additional volume coming on at the end of the year. Just wondering why you took maintenance in Q3 as opposed to typically Q4 and why the shipment volumes were lower?

Yeah, so a couple of things. From a maintenance schedule standpoint, we try to schedule them out over the year. To some extent, we may make you know, minor adjustments depending on what's going on in markets. But as a general matter, it's very hard to predict what's going to happen with OSB prices quarter to quarter. And so, you know, largely you kind of have to schedule them to get them done each year and you sequence the mills out across the year. So, you know, the maintenance schedule, more or less, we set in advance and absent some material change, we try to stick to that. In terms of the sales volumes, the big driver there, the production was pretty comparable quarter over the quarter. The sales volume was down a little bit, and that's really just a reflection of at one of our mills where we had the annual maintenance downtime. We have contracted volume really at most of our facilities, and so we had to build up a little bit of extra inventory in Q3 to sell through during that maintenance downtime in October. And so that was really the difference between production and sales volumes. We've already moved most of that volume now through the system as we've come out of the downtime.

Okay. And then just over on the carbon credit side, congratulations on the project. Just wondering how we should think about that in terms of modeling. That 475 over the 20 years obviously comes out to lower than the 32,000 initials. So it's at a straight line decline. And then when do you think about monetizing those credits?

Yeah, you know, in terms of monetizing, we're out in the market right now. Marking that, we're having, I think, some very productive discussions. I would expect us to be selling through those initial credits in relatively short order. And, you know, as we said, I think during the last call, we're anticipating that's going to be priced somewhere in the mid to high 20s range on a pricing standpoint. You know, the annual carbon credits is really just tied to the growth trajectory and the carbon sequestration trajectory over that 20 years. So, you know, it can be a little lumpy. It's not necessarily a straight line in either direction. It'll just depend on the growth profile across that particular forest.

Great. That's all I have. Best of luck. All right. Thank you.

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

Thank you. Devin, I appreciated your rundown and thoughts for single family next year. Would you share kind of your view of how you think repair remodel might play out and the key drivers behind that view?

Sure. You know, I think there are kind of puts and takes there, Mark. You know, on the one hand, a lot of the drivers that have been around for a number of years that have been spurring repair and remodel are still there. We still have an aging housing stock. People have equity in their homes. I do think this lock-in effect that we're seeing with everyone having refinanced at low rates and it's going to keep a lot more people in their homes that otherwise would have moved. And so that's probably going to spur some level of repair and remodel demand. On the flip side of that coin, you know, obviously when people move, that's a catalyst for repair and remodel. And if fewer people are selling their house and buying into new houses, that's going to be a headwind. And, you know, to some extent, higher interest rates can also be a little bit of a headwind there. So some puts and takes, you know, our view is overall, we're expecting that market to remain solid. And I think you've kind of seen a few different views on this, you know, whether it's up slightly or down slightly. You know, our view is it's probably going to be flat to up slightly next year, all things being equal. We'll certainly see a little bit of a slowdown here in the winter months, as we always do. There's always some seasonality to that. But as we look out into 2024, you know, I don't think we're going to see the growth rates that we saw during the heat of the pandemic by any means. I think we've kind of returned to pre-pandemic levels of growth, and I expect that's probably going to be the case next year absent. you know, a material recession or some other event that, you know, that adds an additional headwind there.

Okay, thank you. And maybe just following up on one of the prior questions that was asking about share repurchase and your stock trading to discount underlying Timberland values. I mean, are there scenarios where if the discount is wide enough, it makes sense to sell Timberlands especially given that you're probably going to be in that situation when maybe your wood products businesses aren't doing so well, so you're not generating as much cash. And so are there scenarios where you have plans to sell Timberlands and then use those proceeds to buy back your stock at what might be a wide discount?

Sure, Mark. Yeah, this is Davey. We're always looking at ways to ensure we're maximizing shareholder value and how we generate cash and allocate that capital. And like I said earlier, we're fortunate to have a number of levers there. But really, if I take each of those components separately, we've been very active in the market repurchasing shares, having done $733 million over the last couple of years. So we certainly view that as an attractive opportunity for us to deploy capital. And then on the selling side, of Timberlands, our view is that the value of Timberlands is only going up over time. And recent transactions certainly demonstrate we're not the only one with that viewpoint. And so that's why we've got that target to acquire a billion dollars at Timberlands over the next several years and ultimately why we expect to be a net buyer of Timberlands over time. But of course, we haven't been afraid to make adjustments to our portfolio in the past. The real estate program is a great example on how we monetize properties with a better use to generate capital that we can deploy for other purposes. So As of now, given our strong balance sheet position and the views that we have about the value of Timberlands over time, I'm not sure that we're looking to divest significant amounts of Timberland.

Bottom line, arbitraging these spreads is not the type of thing that you think is sufficiently dial-moving to be a significant part of the toolkit. Is that fair?

Yeah, I mean, we're always looking at all the levers available to us, but I don't know that I see us divesting a significant amount of Timberlands in the near future. Okay.

And maybe just one small detail. So you're indicating OSP prices obviously are down from where they were in the third quarter. In EWP, though, you talked about the costs going up. And is that just a lag or what was the difference between those two directions?

Yeah, Mark. So the way we do those internal transfers is we have a 13-week rolling average on that pricing. And so based on the trajectory of where OSB prices went over the quarter, we do expect that to be up a little bit quarter over quarter.

Okay, great. And then lastly, is there much in the way of difference in how we should be thinking about the carbon projects in the south that you are, that you're reviewing versus what you did up in Maine and maybe if you could explain how they might be different and in particular any financial ramification differences as we think about them.

Yeah, at a high level, not really, Mark. Obviously, the margin threshold that you have to overcome in the north is a little different than the south, but we think where we're getting ready to sell these initial main credits at a mid to high 20s range, I think that would be sufficient for the projects we're thinking about in the south as well. There are different dynamics in terms of the growth rate of trees, etc., and so the biometrician's work is a little different, but Really, from a high level, there's not a material difference in the way we're thinking about those projects versus the ones up in the Northeast.

Great. Appreciate the color. All right. Thank you.

Our next question is from Keitan Mamtora with BMO Capital Markets. Please proceed with your question. Thank you.

Maybe to start with, Devin, can you talk a little bit about what you are seeing in terms of lumber import from Europe? I know it is east from the start of the year, but do you see that continuing to trend down? And then what is your sense of those European inventory sitting at the U.S. ports along the eastern seaboard?

Yeah, I mean, as you say, we certainly saw a pretty significant spike earlier in the year coming in from Europe. That's undoubtedly been coming down. One of the challenges in answering that question with specificity is real-time data on those European imports is tough to get at. There's usually a lag. So it's largely based on anecdotal statements from our sales team. I do think it's continuing to come down. I think it's probably pretty challenging to make the economics work coming in from Europe right now when you have to cover all the transportation costs given where lumber prices are. That being said, I do anticipate the European producers are going to continue to keep some level of supply coming in even at these lower lumber prices because it's an important supply chain for them and an end market that they hope to grow over time. Now, I will say at some point when the European economy improves they still have, I think, a deficit in Europe when you take into consideration the lumber that is not coming in from Russia and Ukraine. I think we probably would have seen a little less European supply coming in if their domestic markets were in better shape. Currently, that's not the case, obviously, but over time, I would expect the European economy to improve and more of that lumber produced in Europe to stay domestic. But In direct answer to your question, we have seen it come down. I do expect it to come down a little bit more, but not go away completely. Got it.

That's helpful. And, Devin, have you worked through all of that sort of inventory from start of the year spike?

I think so, yes.

Got it. Perfect. And, Devin, just any early read on how you are thinking about 2024 CapEx? I'm not looking for a specific number, just directionally. Is it similar to 2023, higher, lower?

Sure, yeah, Caden. So at this point, we haven't given our 2024 guidance. We typically do that at the beginning of the year, so look forward to that next quarter. But I can just say, you know, our multi-year guidance that we've given of 420 to 440, you know, at this point, I don't see our 2024 guidance changing substantially from that.

Perfect. Now that's very helpful. I'll turn it over. Good luck. 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. Well, thanks everyone for joining us this morning and thank you for your continued interest in Weyerhaeuser. Have a great day.

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