Operator:

Greetings, and welcome to the Weyerhaeuser Second Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported second quarter GAAP earnings of $173 million or $0.24 per diluted share on net sales of $1.9 billion. Excluding a special item, we earned $154 million or $0.21 per diluted share. Adjusted EBITDA totaled $410 million, a 16% increase over the first quarter. In these are solid results, and I'd like to thank our teams for their continued focus and operational performances. Through their efforts, adjusted EBITDA improved across each of our business segments compared to the prior quarter, a notable achievement in light of numerous market-related challenges, particularly in the lumber market. Before getting into the businesses, I'd like to comment briefly on an exciting growth opportunity within our Southern Timberlands portfolio. As we announced yesterday, we are acquiring approximately 84,000 acres of high-quality timberlands in Alabama for $244 million. The collective acreage was sourced through multiple transactions, one of which closed in the second quarter for $48 million. The remaining transactions are under contract and expected to close later this year subject to customary closing conditions. These acquisitions represent an attractive opportunity to expand our footprint in one of the strongest inland sawlog and fiber markets in the U.S. These are highly productive and mature timberlands strategically positioned to demonstrate immediate synergies with existing Weyerhaeuser operations. In addition, they're expected to generate portfolio leading cash flow and harvest tons per acre within our Southern Timberlands business. As highlighted on Page 18 of our earnings slides, we've demonstrated meaningful progress toward our multiyear Timberlands growth target. Including these transactions, we will have completed approximately $775 million against our target and are on track to reach $1 billion of strategic timberlands acquisitions by the end of 2025. Turning now to our second quarter business results. I'll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $81 million to second quarter earnings. Adjusted EBITDA was $147 million, a slight improvement compared to the first quarter, largely driven by increased sales volumes out of the West. Starting with the Western domestic market, Log prices faced downward pressure in the second quarter as mills carried elevated log inventories and continue to navigate a softening lumber market. In addition, log supply was ample given the seasonal improvement in weather conditions and recent mill curtailments reduced log takeaway in the region. As a result of these dynamics, our average domestic sales realizations decreased slightly compared to the first quarter. Given favorable operating conditions, our fee harvest volumes were moderately higher, and domestic sales volumes improved as demand for our logs remained stable despite softer end markets. Per unit log and haul costs increased and forestry and road costs were slightly higher. Moving to our Western export business. Log markets in Japan were stable in the second quarter, and demand for our logs was steady. Suppliers of European lumber into Japan continue to face shipping and cost headwinds, which has provided our customers an opportunity to pick up market share. For the second quarter, our average sales realizations for export volumes to Japan increased slightly. Sales volumes increased significantly, partially due to the timing of vessels. In China, log consumption increased modestly following the Lunar New Year holiday and log inventories at the ports declined steadily in the second quarter. That said, log takeaway waned as the quarter progressed. On balance, log demand was solid from our strategic customers in the region, and we significantly increased our sales volumes into China during the second quarter. Our average sales realizations were slightly lower compared to the first quarter. Turning to the South. Adjusted EBITDA for Southern Timberlands was comparable to the first quarter. Southern sawlog markets moderated in the second quarter, largely in response to elevated mill inventories, a seasonal increase in log supply and reduced consumption as mills adjusted to lower pricing and takeaway of lumber. In contrast, Southern Fiber markets were generally stable as supply and demand returned to a more normalized state. On balance, takeaway for our logs remained steady given our delivered programs across the region. As a result, our average sales realizations were comparable to the first quarter. Our fee harvest volumes and forestry and road costs were seasonally higher and per unit log in haul costs were comparable. In the North, adjusted EBITDA decreased slightly 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 ENR contributed $59 million to second quarter earnings. Adjusted EBITDA was $102 million, an $8 million increase compared to the first quarter, partially driven by higher royalty income from construction materials within our Energy and Natural Resources business. In our real estate business, we continue to benefit from solid demand for HBU properties, resulting in high-value transactions with significant premiums to timber value. That said, our average price per acre declined sequentially due to the mix of acres sold in the quarter. I'll now make a few brief comments on our Natural Climate Solutions business. We continue to see strong demand for large-scale solar development and signed additional agreements in the second quarter. In total, we now have over 70 agreements for potential solar projects, covering more than 130,000 acres across the U.S. South. Turning to Forest Carbon. We are advancing several projects through the development pipeline and expect to have 2 new projects in the U.S. South approved later this year. These projects, in combination with our main pilot project are expected to generate over 100,000 credits in 2024. Looking forward, we're encouraged by the growing support for the voluntary carbon markets and are uniquely positioned to capitalize on increasing demand for high-quality credits. Moving to Wood Products on Pages 12 through 14. Excluding a special item, Wood Products contributed $171 million to second quarter earnings. Adjusted EBITDA was $225 million, a 22% improvement over the first quarter, largely driven by an increase in OSB pricing as well as higher sales volumes and lower costs in lumber and EWP. Starting with lumber. Second quarter adjusted EBITDA was an $8 million loss with soft pricing as the primary headwind. Average benchmark pricing for lumber decreased by 5% compared to the first quarter. Despite solid single-family housing starts thus far in 2024, and other end markets for lumber, particularly the repair and remodel and multifamily housing segments have been more muted recently. As a result, lumber supply continued to outpace demand and buyer sentiment remained cautious in the second quarter. Although this dynamic is being felt across the North American lumber market, it's been more acute in Southern Yellow Pine given softness in treater and multifamily demand, which are proportionately larger markets in the South compared to other regions. For the lumber business, our average sales realizations decreased by 2% in the second quarter. Our sales volumes were moderately higher, partially due to increased production following winter weather disruptions in the first quarter. Unit manufacturing costs and log costs were both lower in the second quarter. Before moving to OSB, I'll make a few comments on our recent decision to indefinitely curtail operations at our sawmill in New Bern, North Carolina. These are always difficult decisions given the impact on employees, their families and the local community. So we did not take this decision lightly. New Bern is the smallest mill in our portfolio at 100 million board feet of capacity. Unlike other facilities across our mill set for a variety of reasons, we haven't invested meaningful capital in New Bern. So its cost structure was relatively challenged, making it very difficult in the current pricing environment. Given these variables, along with New Bern's limited integration with our fee timberlands, we didn't see a clear path to achieving sufficient financial results to keep the mill running. As a result, we've commenced an orderly wind down of operations and expect the mill to be fully curtailed in the third quarter. I do want to thank our New Bern team for their contributions to the company as well as the local community for their support over the years. We're working to minimize the impact of the curtailment by providing employment opportunities in other parts of our operations or transition services to affected employees. As for the remainder of our mill set, we are very focused on running efficiently and controlling costs. Given our deeply ingrained OpEx culture and relative position on the cost curve, we firmly believe that we're better positioned to operate through the commodity cycle than most of the industry. Nevertheless, in light of current market conditions, we expect to reduce our lumber production by 5% to 10% in the third quarter. This will take place across our mill set and is inclusive of the new burn curtailment. And looking forward, we will continue to assess our performance, customer commitments and broader portfolio integration as we evaluate the need to further optimize our lumber operations. So now turning to OSP. Adjusted EBITDA [indiscernible] compared to the first quarter, primarily due to higher average sales realizations. Benchmark pricing for OSB began the quarter at elevated levels, but moved significantly lower as the quarter progressed largely in response to the softer-than-expected demand during the spring building season and elevated channel inventories. Pricing stabilized by quarter end and has remained steady into July. Notwithstanding this volatility, average OSB composite pricing was 6% higher compared to the first quarter, while our average realizations were 13% higher. This relative difference was largely due to the length of our order files, which results in a lag effect for OSB realizations. Our production and sales volumes and unit manufacturing costs were comparable to the first quarter and fiber costs improved slightly. Engineered Wood Products adjusted EBITDA increased by $6 million compared to the first quarter. Given solid single-family construction activity, VWP market experienced a slight seasonal improvement in demand at the outset of the second quarter before stabilizing into the summer months. As a result, our sales volumes were higher across all products in the second quarter, and sales realizations were comparable for most. Unit manufacturing costs improved sequentially and raw material costs moved lower for solid section products but higher for I-joist primarily related to OSB web stock. In Distribution, adjusted EBITDA decreased by $2 million compared to the first quarter as lower commodity margins offset higher sales volumes. With that, I'll turn the call over to David to discuss some financial items and our third quarter outlook.

Devin Stockfish:

Thanks, Davie. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Starting with housing. Despite a softer-than-expected spring building season, our macro view on the housing market is largely unchanged from the last quarter. The single-family segment is holding up reasonably well, covering around 1 million units year-to-date, and notwithstanding elevated mortgage interest rates, single-family construction activity continues to be supported by healthy underlying demand for housing, a limited inventory of existing homes on the market and actions taken by the larger public homebuilders to offset affordability challenges. In contrast, the multifamily segment has been more challenged given the significant amount of new supply entering the market this year on top of elevated supply in 2023 and the impact of higher rates on new projects. Moving into the second half of 2024, we're still expecting solid single-family building activity with potential upside if mortgage rates come down as the year progresses. And that's consistent with what we're hearing from our homebuilding customers. In contrast, we expect multifamily to remain soft through year-end and into 2025. Longer term, our view on housing fundamentals continues to be favorable, supported by strong demographic trends and a vastly underbuilt housing stock. Turning to the repair and remodel market. Activity has been softer year-to-date, particularly in the do-it-yourself segment. However, the Professional segment is still holding up relatively well. To a certain extent, persistent inflationary pressures are weighing on consumer sentiment and spending. We're also seeing some near-term headwinds from fewer people buying and selling homes in the current environment. But as we think about the back half of 2024, we are expecting fairly steady repair and remodel activity, albeit at levels below the last several years and would expect demand to increase when interest rates move lower and consumer sentiment improves. And longer term, many of the key drivers supporting solid repair and remodel activity remain intact, including favorable home equity levels and an aging housing stock. So in closing, our teams delivered solid operating performance in the second quarter, and we continue to make meaningful progress on multiyear growth targets to enhance our timberlands portfolio and advance our Natural Climate Solutions business. Although near-term market conditions have moderated, we maintain a constructive longer-term outlook for the demand fundamentals that support growth in housing, repair and remodel and natural climate solutions. And with our unmatched portfolio of assets, our strong balance sheet and disciplined approach to capital allocation, we're well positioned to execute against our strategy and navigate a range of market conditions. We remain relentlessly focused on operational excellence and innovation and are committed to serving our customers and delivering superior long-term value for our shareholders. So with that, I think we can open it up for questions.

Susan Maklari:

My first question is on Wood Products. You mentioned that you are taking that reduction in capacity in the third quarter. Can you talk a bit more about how you arrived at that 5% to 10% range, what would take us to the lower end of that versus the higher end of that range? And how do you think about positioning the operations just given the changes in the competitive landscape more broadly. We've been hearing smaller players have more staying power this cycle? And does that require you to take different actions than perhaps you would in the past. How do you think about positioning the business for the near term as well as the longer term? And I guess maybe what would you need to see to take more actions there?

Susan Maklari:

Okay. That's very helpful, Devin. And then maybe turning to Timberlands. Obviously, you've got this nice deal that's coming together, part of it in the second quarter, the remaining piece in the back half of this year. As you continue to make those investments and you get closer to that $1 billion target by the end of next year, in Timberlands. How do you think about helping investors appreciate the inherent value in these deals? And the potential for the upside in returns that you can realize over time is these alternative opportunities come together and perhaps even relative to alternative uses of your cash, whether it's investing in organic growth or shareholder returns. Any thoughts around that?

David Wold:

Yes. And I would just add to that, I think this really just demonstrates the beauty of our flexible cash return framework as we think about all the options that are available to us. We're continuing to, of course, provide our base dividend to investors, but we're also able to invest in our business, complete attractive share repurchase activity through the cycle when others may not be in a position to do so. So when markets inevitably improve, we'll be well positioned to take advantage of that position. So we can continue to evaluate all the options that are available to us and will ultimately allocate our capital in the way that creates the most value for shareholders.

George Staphos:

So I guess, first of all, with Timberlands and the outlook, it sounded like the larger amount of downward pressures coming from the West. If we think about the key export markets, China, Japan and domestic markets and then think about shipments and realizations or cost for that matter, within that grid, where would you have us think about where you're seeing the most cost for that sequential downtick in timber EBITDA?

George Staphos:

Well, I'm talking about EBITDA, we're expecting EBITDA to decline. So if I think about your markets and realizations and costs were shipments, where is most of that pressure coming from, if you get my question.

George Staphos:

Thanks, Devin. Next question. If we think about lumber markets and we move to the south, and I forget the precise amount of board feet that was added in the industry over the last 5 years. If you had a figure that was top of mind, it would be helpful. What do you think right now, industry operating rates are within the south in lumber are recognizing it's tough to call, not a monolithic market. We're running 5 days, 7 days. But there a lot of capacity that was added in converting. That was the hope that would ultimately drive higher timber pricing over time. Right now, it doesn't look like lumber is being demanded at the rate that capacity came in. What do you think that imbalance is in the South right now in terms of lumber?

George Staphos:

No, that's helpful. Last question for me, I'll turn it over. Recognizing you're not going to make changes on capital allocation based on a quarter or 2 you shouldn't. Where you sit here today, do you still feel comfortable about the dividend growth outlook that you've talked about over the years, the 5%? And how does the acquired Timberland now help you keep up that dividend growth? Or in total, allow more optionality in your capital allocation.

Operator:

Our next question comes from Amir Patel with CIBC Capital Markets.

Devin Stockfish:

Yes. I mean it's probably down in a similar range. As you know, it's hard to get really tight numbers in the repair and remodel market. So you kind of have to piece it together from our different customers and some other anecdotal. But that's kind of where we're thinking mid- to high single on the DIY side.

Devin Stockfish:

Yes. So Q2 for lumber, we were kind of in the low 80% range for OSB, call it, mid-90s and for EWP, low 80s.

David Wold:

Yes. Of course, Amir. We -- it's pretty limited in terms of what we're underwriting today in terms of that upside over time. But as we've seen in the transactions that we've acquired in the Carolinas, and Mississippi and other spots over the last few years, we continue to see a lot more opportunities than we had originally anticipated as we bring those into our portfolio. And so certainly, that's true on the Natural Climate Solutions business, but it's also true as we think about the synergies that we identify in terms of putting them into our operating footprint and really just running those timberlands over time.

Kurt Yinger:

I just wanted to start off on Timberlands. I guess, given kind of the capital that you've deployed there and hopefully the fact that we're at kind of a bottom in terms of the lumber pricing cycle. How much confidence do you have that harvest contributions and cash flow can start to show some sustainable improvements over the next 2 to 3 years? And I guess, excluding price, what other levers do you think are going to be most important in driving that for Weyerhaeuser?

Kurt Yinger:

Got it. Okay. And then in terms of EWP, I mean, it was pretty encouraging to see I-joist and solid section pricing hold firm. How would you kind of describe the competitive environment out there? And how would you sort of characterize pricing risk if we were to see single-family starts kind of sequentially soften a bit further, just given what we've seen in the last couple of months.

Operator:

Our next question comes from Mike Roxland with Truist Securities.

Devin Stockfish:

Yes. I mean I think that it's certainly a component. And there's no question, we have seen a bifurcated market with interest rates being where they are. The ability for the bigger builders to buy down rates is a meaningful competitive advantage in this market. So yes, I think that certainly impacted overall new home construction activity. However, I don't think it's 1 for 1 in terms of for every house that a small builder doesn't build it just doesn't get built because the big builders are just taking market share. And you can certainly see that over the last few years. Now the good news, I think, is as rates come down and as those smaller builders are again able to compete on a little bit more equal footing. I think that is another increment that can come back into the market.

Devin Stockfish:

Yes. Well, in terms of operating rates, in Q1, it was -- there was a little bit of a reliability issue. Some of that was weather related. It was pretty minor in the grand scheme of things. Right now, we are operating at kind of that low 80%. That's more or less what we're expecting for Q3 as well. We can dial that up a little bit if markets improve, but we're really just trying to kind of keep that production in line with what we see as customer demand. So this is the rate we're going to be running at here until we see a meaningful pickup in activity. In terms of what's the inflection point, we're going to need to see a little bit more housing activity. If we can get up to 1.1 or north of that on the single-family side, I think -- it doesn't take a whole lot to see the EWP market tension up. So you don't need all that much more. But again, even in this current environment, we can, I think, do pretty well on the CWP business. It's important to remember, obviously, we've seen prices come down a little bit from the pandemic highs, but when you look at where EWP pricing is relative to history, it's still very strong.

Operator:

Our next question is from Ketan Mamtora with BMO Capital Markets.

Devin Stockfish:

Yes. Well, a couple of things. Good question. So a couple of things I'd note. First of all, when we talk about black at the bottom, it is important to note that our Wood Products segment as a whole certainly has been black at the bottom. But with respect to lumber specifically, no question. This has been a very challenging pricing environment. Recently, we've seen lumber prices at multiyear lows, and this has been a challenge for the lumber industry as a whole. I would say that's particularly true for our Northwest and British Columbia operations where even though we do have low-cost mills, the log costs have remained elevated relative to the lower lumber prices. But just a few things for context when we think about what's going on. So first, our mill set overall is positioned very well on the cost curve. And you can see that, I think, in our relative performance. even, obviously, we're not pleased with where EBITDA has been in lumber, but relative to the rest of the industry, I think we've demonstrated where we sit on the cost curve. Second, I think we can and should be black at the bottom, even at these prices in our southern operations and in Alberta. And I think, look, it's important to remember that pricing is not going to stay at levels where much of the industry is underwater forever. And so we're ultimately going to see a pickup in pricing for lumber, at which point, certainly, we'll be back in the bottom -- back in the black as a system. But in the interim, we're going to keep focusing on costs and OpEx and running our operations efficiencies to navigate efficiently to navigate the market dip and overcome some of these headwinds. In terms of our operating posture as we said, we're going to be down 5% to 10%. That's where we think just with our cost structure, our customer base, where we think that makes sense. And look, others will make the decisions based on their operations and their cost structure. But ultimately, you're not going to sit in a place where prices are below cash breakeven for most of the industry.

Matthew McKellar:

Hi, good morning. Thanks for taking my questions. Paul, just a couple of good products. Maybe first, can you talk about your expectations for the U.S. The market for the rest of the year as far as new capacity coming on from a couple of your peers and ramping up as cautious buyer sentiment? And you noted, I think you all for all related somewhat elevated inventory levels.

Matthew McKellar:

That's helpful. And then just switching over to lumber business. Can you talk about your expectations around the impact of softwood lumber duty cash deposit rates moving higher in August for the Canadian industry. Do you expect that pricing can be higher to offset some of that? Or do you have any expectations around capacity that could come out?

Operator:

Our next question is from Mark Weintraub with Seaport Research Partners.

Devin Stockfish:

Yes. I mean the nice thing about solar is there's a tremendous amount of demand. The flip side is it takes these solar projects a while to work through the system. So -- we're going to have solar development start coming online this year. First 1 is back half of this year and then you add, call it, several year and they just continue to build. And so the pipeline will grow over time, and you're going to start seeing that cash flow hit our income statement. But it's -- unfortunately, it's slow going just the process to move these things through the pipeline.

Devin Stockfish:

Yes. That's a good question. I think when we look at the overall market, I think the opportunity that we see in the future is probably larger than back when we first set out that target, which is natural to some extent as these things continue to mature. I think the time line on several of these different businesses has probably been a little longer than we expected. And that's particularly true around carbon capture and storage. I think that's going to be a big business. But the process to get through all of the permitting, that's just taken a little bit longer than we would have expected. I still have a lot of confidence that ultimately, those are going to be a nice revenue generator. Solar, probably there's been more demand than we had expected. I think the time line, unfortunately, hasn't dramatically shortened relative to when we kick this off. And I do think just from an overall public policy standpoint, we do need to figure out a way to get these solar projects through the pipeline quicker. But the demand level is extremely high. So we feel good about that. I think mitigation banking is another area where we've seen probably a little bit more demand than we had originally anticipated. So that might be a bigger component of that initial $100 million than we originally anticipated. And I think Forest Carbon is we're seeing growing levels of support. We had the Biden administration that came out in support of voluntary carbon markets, SBTI came out talking about voluntary credits for Scope 3 emissions. You've seen a variety of commentary from the environmental community and support. So I feel like that's -- that's growing in momentum. And when we talk to customers for forest carbon, there's a significant amount of demand as long as you can get over that credibility hurdle. And I feel like we're making good progress there. So I think that's another market that we're pretty excited about. And you're going to really start to see that hit in a more material way next year in terms of the income stream coming off of Forest Carbon. So overall So that flows through typically at a little bit higher price and just kind of commodity OSB. And then lastly, we typically have a higher mix of high-value product relative to sheeting, which helps our overall realizations relative to at random links. And it's really those three things typically.

Devin Stockfish:

Yes, absolutely. I mean that OSB web stock, I mean it typically because it is all supplied internally, it's on a 13-week rolling average. So it does roll through. But absolutely, that is a tailwind for margins as you see OSB prices come down for the EWP business.

Anthony Pettinari:

I just wonder, is there any way to quantify the fixed cost reduction you might see from New Bern? And then with the outlook for PAUSE lumber for 3Q. I guess there's a few moving pieces with lower volumes, a little lower log costs, higher unit manufacturing costs. I mean if prices kind of stay where they are now through would your lumber EBITDA maybe be kind of directionally similar to 2Q? Or do you think that you could break even with some of the actions you've taken? Or just any color you can give there?

Operator:

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

Operator:

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

Operator:

Greetings, and welcome to the Weyerhaeuser First Quarter 2024 Earnings Conference Call. [Operator Instructions]. 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported first quarter GAAP earnings of $114 million or $0.16 per diluted share on net sales of $1.8 billion. Adjusted EBITDA was $352 million, a 10% increase over the fourth quarter of 2023. These are solid results, and I'm pleased with the operational and financial performance delivered by our teams.

David Wold:

Thanks, Devin, and good morning, everyone. I'll be covering key financial items and first quarter financial performance before moving into our second quarter outlook. I'll begin with key financial items, which are summarized on Page 16. Our balance sheet remains exceptionally strong with approximately $900 million of cash and total debt of just under $5.1 billion at the end of the quarter. In the first quarter, we generated $124 million of cash from operations. It's worth noting that the first quarter is usually our lowest operating cash flow quarter due to seasonal inventory and other working capital build. Capital expenditures for the quarter were $79 million, which is a typical level for the first quarter. We returned $146 million to shareholders through the payment of our quarterly base dividend, which we increased by 5.3% to $0.20 per share during the quarter.

Devin Stockfish:

Thanks, Davie. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets, starting with housing. On balance, our macro view on the housing market is largely unchanged. Despite elevated mortgage interest rates, the single-family segment remains solid and continues to be supported by strong overall demand for housing, a limited inventory of existing homes on the market and actions taken by the large homebuilders to offset affordability challenges. In contrast, activity in the multifamily segment has moderated given the elevated interest rate environment and the recent and upcoming influx of multifamily units entering the market. As a reminder, single-family construction is a much more important demand driver for our business than multifamily.

George Staphos:

So I want to look a little bit under the hood in terms of timber realizations in the West in the quarter and the implications into 2Q. Now it said you redirected -- you mentioned you redirected volume from export even though realizations were flat in export to domestic markets nonetheless, Western realizations were down a bit. And I guess the question would be, given that price realization, why did you direct so much timber demand domestically when it looked like export markets, at least were able to maintain flat realizations. That's question number one.

Devin Stockfish:

So I answer the third one first with respect to the $100 million. We're still working towards that run rate, $100 million by the end of 2025. As we get closer to that end date, we'll obviously work with you on updating what that longer-term number is, but we're not prepared to do that today. With respect to the first question on the timber markets in the Northwest, the lower realizations was really more a reflection just on mix and not so much on #2, Doug fir log prices, those were just fine. So we moved some, as we always do, looking for the best margin opportunity in Q1 to meet some customer demands. As we roll into Q2, as we noted, we're seeing pretty strong demand from our customers in China, not withstand all of the market dynamics there. So we have an opportunity to flex a little bit more volume to China in Q2, and that's what we're going to do.

Susan Maklari:

My first question is on the solar projects that you mentioned, Devin, you gave some interesting commentary on those. Can you talk a bit about how that could potentially contribute to results in the more near to medium term perhaps. And then anything on the unit economics of those projects and how they compare to some of the others that are falling within the NCS area?

Devin Stockfish:

Yes, Sue, I think you hit the nail on the head there. The big issue, I think, right now, given that single-family construction has been relatively strong. Although I would note even though we've seen strong housing numbers of late on a seasonally adjusted basis, you do see more actual building activity as you get into spring and summer. So there is just that natural increase in the demand for lumber and wood products as the number of actual building activity picks up. But I think the real issue, and this is particularly true for Southern Yellow Pine is R&R has been okay. It hasn't been terrible, but we just haven't seen as much of that spring R&R activity as we typically would have seen I think in the South, in particular, some of the treated market, we haven't necessarily seen as much buying activity there, which obviously Southern Yellow Pine lumber is big in that treated market.

Operator:

Our next question is from Hamir Patel with CIBC Capital Markets.

Devin Stockfish:

Yes. I mean, on some level, yes, because I suspect there's a good chunk of the industry that's been operating below cash breakeven. So historically, that would have caused people to make certain operating decisions. I do think, to some extent, there's still this residual concern coming out of the pandemic around labor and just to the extent people think that prices are going to turn around, kind of trying to hold out a little bit longer, so you don't jeopardize the available labor force in your mills. So perhaps that's some of it. But ultimately, you wouldn't expect people to operate indefinitely if they're below cash breakeven, which I think where our Southern Yellow Pine prices are, for some of the industry, I think that's certainly the case right now.

Devin Stockfish:

I think for lumber, I would say inventory levels are adequate. We've had a few years where they were more or less operating on a pretty lean basis. I think to a large extent, buyers have built up some inventory. I mean, I wouldn't say it's excessive by any means, but at least it's enough for people to not have to be aggressive in terms of their lumber buying, which has been a headwind on price. OSB has been a little bit leaner. I'd say on balance, the channel is still pretty lean on the OSB side. And I'd say EWP is pretty typical for this time of year, not terribly low or high, just generally in normal range for this time of year.

Mark Weintraub:

Maybe first, just following up on the NCS recognizing competitive reasons, you don't like to give too much in the way of details, but are you primarily looking at leasing on the solar side? Or would there be sales arrangements? Is there a strong bias?

Mark Weintraub:

Okay. And obviously, we've seen some other directional estimates on the types of uplift. Is there any reason to believe that your situation would be meaningfully different from what we hear from others?

Mark Weintraub:

Okay. That's very helpful. And just lastly on the CCS. Can you just remind us kind of what the process is here. You got to get that permitting. And then after that, well, you don't get -- the permitting has to be gotten. And then does equipment have to be put in place, et cetera. So what type of time lines are realistic for the CCS projects?

Mark Weintraub:

Right? So is it fair to say that that's probably not a big part of the 2025 but that there's hopefully significant upside beyond that from these projects?

Mark Weintraub:

Okay. And then just lastly, I promise last one, on it. So I believe at one point, you talked about 500,000 acres being potentially suitable or identified for CCS. With the Lapis project, do you have an update on that number?

Mark Weintraub:

And so as you think about ratios of poor space to land base, what might be a reasonable average percentage to use?

Operator:

Our next question is from Ketan Mamtora with BMO Capital Markets.

Devin Stockfish:

Yes. I mean it's really just the lag effect because you're talking about a 3- to 5-week lag trailing behind random lengths. And so what you typically see when you have the tighter markets for us with OSB is we lag on the upside, but then we hold it longer on the downside. That's really it.

Devin Stockfish:

Yes.

Devin Stockfish:

Yes. So lumber kind of in the high 70% operating rate; in OSB, it was the low 90s; EWP was the high 70s. And so again, I think we saw on the lumber side, that operating rate was a little lower probably than we would have anticipated, but that should move back up in Q2. Really, operating rates for all 3 businesses should move up in Q2.

Kurt Yinger:

I just wanted to circle back on EWP. You talked about the extended lead times late last year. What have you done from either a labor or operating posture or capacity perspective to kind of ensure that if the single-family strength continues, you don't run into those same issues again in '24.

Devin Stockfish:

Yes. I mean, I think historically, you would think it's a several year process. So typically, you sign up an agreement for a number of acres. Usually, that initial acreage is going to be larger. The counterparty will go in, do their work, do the assessment on just the economics of the size and scale, et cetera. And that process is pretty straightforward. I think that things really extended this time line of late is there is so much solar activity going on right now. The permitting process has become quite challenging. I think whether it's at the federal, state, local level, they just don't have the resources available to work through the level of permitting activity, that's number one.

Kurt Yinger:

Got it. Appreciate the color.

Operator:

Our next question comes from Anthony Pettinari with Citibank.

Devin Stockfish:

Sure. Well, I mean, the good news is we've been working on OpEx and cost for a decade. So I think we're, relatively speaking, well positioned on the cost curve. When you think about the last 2 quarters, it's obviously been a tougher pricing environment. But the real challenge for us has been primarily in the Pacific Northwest and British Columbia. And the challenge there is if prices come down a lot quicker than log prices, it can create an environment that's very difficult. Now it's important to remember, even in the Pacific Northwest where lumber profitability has been challenged as a system we're still obviously profitable when you think about our Timberlands and Wood Products business together. But as we think about our system as a whole, Pacific Northwest, British Columbia, you're going to be hard-pressed to find anybody that has a lower cost -- unit cost to manufacture lumber than Weyerhaeuser.

Anthony Pettinari:

Okay. That's very helpful. And then if you look across your portfolio in Wood Products and maybe Timberlands and Real Estate as well, are there end markets or exposures or customer sets that you would view as maybe more sensitive to kind of short-term changes in interest rates and with mortgage rates above 7% now. I'm just wondering, with those exposures or customers, are you seeing any impact in terms of customer discussions or tone? Or just any color you can give there?

Devin Stockfish:

Yes. It's cash flow positive at trough level prices.

Matthew McKellar:

I'd like to start by circling back on maybe George's earlier question around Engineered Wood Products and some of the timing issues there. And please correct me if I'm wrong, but I think you've previously talked about there being a bit of a lag in pricing actually for some components of the business. I think you've guided to comparable realizations quarter-over-quarter with higher raw material costs and how much OSB prices have increased, which I think maybe is mostly specific to Trus Joist. I was wondering if you could talk about the impact to margins there and then your ability to maybe push pricing higher to reflect the higher cost of inputs and just how to think about that sort of timing dynamic?

Matthew McKellar:

Maybe next, just wondering if you could just provide a bit of commentary on maybe what the latest you're seeing is on the market for Timberland acquisitions. Any significant changes in tone or sentiment in that market or any other comments you can offer on what you've seen to start '24?

Operator:

Our next question is from Mike Roxland with Truist Securities.

Devin Stockfish:

Yes. You're talking about really only a percentage or 2 of difference. It wasn't intentional. It was really -- we had some weather events in the January time frame that caused us to lose a little production. We had one mill that had reliability challenges for a brief moment in time. But wasn't anything intentional. It was really just some operational things. But as I said, plan to move that up as we get into Q2.

Devin Stockfish:

Yes, it should be in the mid- to low 80s is kind of where we're targeting.

Devin Stockfish:

Yes. I mean, without looking at the numbers next year, that's kind of hard to pinpoint the specific numbers. But what I would say is directionally, when you look at what was happening during the pandemic, really couldn't get solid section or I-joist with a certain level of building activity really once it went over 1.5 million housing starts, there just wasn't enough EWP available. And so it put homebuilders in the position where to keep building homes, they had to find alternatives. And so whether that was using lumber instead of solid section or using open web instead of Engineered Wood Solutions, people did what they had to do. And so I do think all things being equal, most builders would prefer to have Engineered Wood Products. And so as that becomes available, and obviously, there's a cost component. Lumber prices have been a little bit lower, making some of those alternatives, a slightly better cost decision. But that being said, as lumber prices ultimately materialize. I do feel very good about the ability to build market share in EWP.

Buck Horne:

Just a quick follow-up on -- I appreciate the comments on the Timberland M&A markets. Just wondering if you could give a little extra color on valuations across the regions that you're seeing right now in terms of just directionally. And I guess I'm also curious if you think directionally carbon optionality continues to be an increasingly important driver of valuations? Or does that theme kind of moderated in more recent months?

Devin Stockfish:

Yes, trends in the voluntary market are a little challenging because there's such a differential in terms of the quality of those projects that are coming to market, and it's still, to a large extent based off of individual transactions. So insight into pricing can be a bit challenging. That all being said, we continue to believe that we're going to get good solid premiums for the product that we're bringing to market. And we do think that as the demand continues to grow for these high-quality projects, pricing will go up over time. Each individual project, there are going to be puts and takes depending on what's going on in the market. But directionally, we feel good about the trajectory of carbon prices over the course of this year and over the next several years.

Devin Stockfish:

Okay. Well, thank you, everyone, for joining us this morning, and thank you for your continued interest in Weyerhaeuser. Have a great day.

Operator:

Greetings and welcome to the Weyerhaeuser Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone and thank you for joining us. Yesterday, Weyerhaeuser reported full year GAAP earnings of $839 million or $1.15 per diluted share on net sales of $7.7 billion. Excluding special items, full year 2023 earnings totaled $749 million or $1.02 per diluted share. Adjusted EBITDA totaled $1.7 billion for the year. For the fourth quarter, we reported GAAP earnings of $219 million or $0.30 per diluted share on net sales of $1.8 billion. Excluding a net after-tax benefit of $98 million for special items, we earned $121 million or $0.16 per diluted share for the quarter. Adjusted EBITDA was $321 million. I'll start this morning by thanking our employees for their solid execution and performance in 2023. Through their collective efforts, we delivered industry-leading operating performance, continued to serve our customers and drove meaningful advancements across our multiyear targets. As we enter 2024, we're well positioned to capitalize on improving market conditions and remain focused on driving superior long-term value for our shareholders. As highlighted on Page 19 of our earnings slides, we generated $986 million of adjusted funds available for distribution in 2023. We announced yesterday that our Board of Directors declared a supplemental cash dividend of $0.14 per share. When combined with our quarterly base dividend of $0.76 per share, we're returning total dividends to shareholders of $0.90 per share. Including $125 million of shares repurchased during the year, Weyerhaeuser is returning $783 million of total cash to shareholders based on 2023 results or approximately 80% of 2023 adjusted FAD which is at the high end of our annual target payout range. As summarized on Page 20, upon payment of the supplemental dividend, we will have returned $4.6 billion in total cash to shareholders through cash dividends and share repurchase since the first full year of our new cash framework in 2021. It's worth noting that although our adjusted FAD in 2023 was lower than the last couple of years due to challenging market conditions, we continue to demonstrate that our cash return framework is both sustainable and appropriate for the company's portfolio and the cash flow that we generate from our businesses across market cycles. Notably, we increased our base dividend by 5.6% in 2023 and returned additional cash through share repurchase in our supplemental dividend. The additional cash was fully funded within our framework and required no balance sheet or portfolio actions to cover our return commitment. And given the design of our framework, we retain 20% to 25% of our adjusted FAD annually, all of which can be utilized as we evaluate future capital allocation levers, including strategic growth opportunities. We continue to believe this framework is a powerful differentiator, one that enhances our ability to drive long-term shareholder value by returning meaningful and appropriate amounts of cash back to shareholders across a variety of market conditions and also delivers an attractive total dividend yield to our shareholders. Before moving on to business segment results, I'd like to comment briefly on the purchase and sale transactions that we completed in the fourth quarter which included the acquisition of high-quality timberlands in the Carolinas and Mississippi and the divestiture of less strategic acreage in upstate South Carolina. These transactions represent a unique opportunity to further optimize our Southern Timberlands portfolio with high-quality, highly productive acreage that is well integrated with our existing operations. And these transactions were structured in a tax-efficient like-kind exchange, resulting in a net cash inflow of $7 million. The gain was recorded on the sale transaction and reported as a special item in the fourth quarter. As highlighted on Page 22, we're progressing nicely against our target to grow our timberlands portfolio through $1 billion of disciplined investments between 2022 and 2025. To date, we've deployed approximately $530 million towards our goal, including announced acquisitions in Washington, the Carolinas and Mississippi. With that, I'll now turn to fourth quarter business results, starting with Timberlands on Pages 7 through 10 of our earnings slides. Excluding special items, Timberlands contributed $77 million to fourth quarter earnings. Adjusted EBITDA was $143 million and results across all Timberlands regions were comparable to the third quarter. Turning to the Western domestic market, log demand and pricing faced downward pressure at the outset of the fourth quarter as mills adjusted to a softening lumber market and worked through elevated log inventories. As the quarter progressed, lumber takeaway improved slightly and log supply decreased seasonally. Despite lower log prices during the quarter, our average domestic sales realizations were slightly higher compared to the third quarter, largely driven by an increased mix of grade logs. Our domestic sales volumes were lower in the fourth quarter as we shifted volume to China to capture higher-margin opportunities. Per unit log and haul costs were moderately higher and forestry and road costs were seasonally lower. Our fee harvest volumes were slightly lower compared to the third quarter. Moving to the Western export business. In Japan, despite ongoing consumption headwinds, inventories of European lumber imports have largely normalized and the Japanese log market returned to a more balanced state in the fourth quarter. As a result, our average sales realizations for export volumes to Japan were comparable to the third quarter. Our Japanese sales volumes were slightly lower in the fourth quarter and continued to be impacted by reduced shipments to a customer that sustained fire damage at one of its sawmills in the third quarter of last year. That said, this customer has implemented plans to recover most of the lost production and we continue to shift volume to other customers in Japan. As a result, we expect to increase our export volumes into the Japanese market in the first quarter. In China, log supply into the region has adjusted to lower consumption levels and the market was largely balanced in the fourth quarter. As a result, our average sales realizations for export volumes to China were comparable to the third quarter. Given steady demand from our Chinese customers, coupled with moderating market conditions in Western domestic market, we significantly increased our sales volumes into China in the fourth quarter. Turning to the South. Southern sawlog and fiber markets softened slightly in the fourth quarter, largely in response to ample log supply, elevated mill inventories and reduced demand for finished goods. Despite these market dynamics, demand for our logs remained steady, given our delivered programs across the region. As a result, our average sales realizations and fee harvest volumes were comparable to the third quarter. Per unit log and haul costs were also comparable and forestry and road costs were seasonally lower. Turning now to Real Estate, Energy and Natural Resources on Pages 11 and 12. For the full year, Real Estate and ENR generated $320 million of adjusted EBITDA, slightly higher than our revised full year guidance. In the fourth quarter, the segment contributed $50 million to earnings. Adjusted EBITDA was $67 million, a $27 million decrease compared to the third quarter, largely driven by the timing and mix of properties sold. Average price per acre increased from the prior quarter and remains elevated compared to historical levels as we continue to see stable interest from buyers 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. As shown on Page 23, our full year adjusted EBITDA was $47 million. This represents a 9% increase compared to 2022 and a 114% increase since the inception of this business in 2020. For 2023, we achieved solid contributions from conservation, mitigation banking and renewables and demand for these businesses continues to grow. In addition, we achieved notable milestones in our forest carbon business in 2023, including the approval of our pilot project in Maine and the monetization of the initial credits from this project. These credits were sold in the fourth quarter at a strong price and demonstrate our commitment to offering only the highest quality credits to the market. Looking forward, we expect the new issuance of credits from our Maine project later this year. Further, we're developing additional forest carbon projects within our U.S. timberlands. We anticipate receiving approval on 2 projects in the U.S. South in early '24 and intend to monetize additional credits in the voluntary market this year. Turning to our carbon capture and sequestration business. We continue to see solid progress being made on the projects we've announced with Oxy Low Carbon Ventures and Exxon and both are expected to be online in late 2025 or 2026. Moving forward, we continue to advance discussions with high-quality CCS developers on portions of our Southern U.S. acreage and expect to announce additional agreements in the future. As we look back over the last several years, I'm extremely proud of the progress that we've made in our Natural Climate Solutions business and the leadership we've demonstrated along the way. We were the first company in our space to embark on this journey in a comprehensive manner and had delivered notable accomplishments across all of our NCS businesses. And in the process, we built a world-class team with deep technical expertise and a strong commercial focus. We've laid the foundation to develop and advance our NCS offerings in-house, allowing Weyerhaeuser to capture the vast majority of the economics associated with these opportunities. And we've quickly established a peer-leading position in emerging carbon markets. As we think about the future, we remain focused on growing our NCS business to $100 million of EBITDA by year-end 2025 and we see significant future upside as markets continue to develop, particularly in carbon and renewables. And with the work we've already completed and the prospects of advancing NCS across our expansive timberland holdings, we have a lot of conviction that there is no company in this space with the capabilities or asset base to deliver on this value creation opportunity at scale like Weyerhaeuser. So now moving on to Wood Products on Pages 13 through 15. Wood Products contributed $105 million to earnings before special items in the fourth quarter. Adjusted EBITDA was $159 million, a 52% reduction from the third quarter, largely driven by lower commodity pricing. Starting with lumber. Fourth quarter adjusted EBITDA was a $34 million loss. Weaker product pricing was the primary driver as the framing lumber composite posted its lowest quarterly average in a number of years. Our average sales realizations decreased 14% compared to the third quarter. This was driven by cautious buyer sentiment and ample lumber supply in the North American market. That said, buyer sentiment and product pricing started to improve toward the end of the year, following stronger-than-expected housing starts data and positive signals from the Fed on the trajectory of interest rates. Our fourth quarter performance was further impacted by a decrease in production levels which resulted in lower sales volumes and higher unit manufacturing costs. This was largely driven by a combination of taking additional holiday downtime at our Pacific Northwest mills, a period of downtime at our mill in British Columbia and operating challenges at certain facilities. Market conditions were particularly challenging in the Northwest in the fourth quarter, given the more rapid decline in lumber pricing compared to log prices. As we enter 2024, market conditions are starting to improve and we expect stronger performance from our lumber business in the first quarter. Adjusted EBITDA for OSB was $73 million, a decrease of $45 million compared to the third quarter, primarily due to lower product pricing. Benchmark pricing for OSB began the quarter on a downward trajectory but stabilized by the end of October and increased through year-end. This improvement was largely driven by lean inventories, supply limitations and a resilient demand from new home construction activity. As a result, our OSB pricing exited the quarter at a higher level than where we entered. However, our fourth quarter average realizations decreased by 17% compared to the prior quarter. Our sales volumes and fiber costs were comparable to the third quarter and unit manufacturing costs were moderately lower. Engineered Wood Products delivered $104 million of adjusted EBITDA, a decrease of $21 million compared to the third quarter. Sales realizations for most products decreased slightly as supply and demand continue to rebalance in certain markets. I would note, however, that pricing remains quite healthy on a historical basis. Sales volumes were lower for most products compared to the third quarter, driven by seasonally lower demand and improving supply across the EWP market. Unit manufacturing costs were slightly lower in the fourth quarter and raw material costs increased primarily for OSB web stock. In Distribution, adjusted EBITDA decreased $15 million compared to the third quarter, largely driven by a decrease in commodity realizations and seasonally lower sales volumes. With that, I'll turn the call over to Davie to discuss some financial items and our first quarter and 2024 outlook.

Devin Stockfish:

Thanks, Davie. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets and touch briefly on our multiyear targets. Starting with housing. Despite elevated mortgage interest rates for most of the year, the housing market remained resilient in 2023, particularly in the single-family segment. This was supported by a limited inventory of existing homes on the market, combined with the homebuilder's ability to offer mortgage rate buydowns and other incentives and underpinned by a strong overall demand for housing. Given the tailwinds from last year, along with improving mortgage rates and a more favorable macro environment, our outlook for single-family housing demand in 2024 is more optimistic relative to this time last year. And that aligns with what we are hearing from our homebuilder customers. We are, however, somewhat less optimistic about the multifamily segment in the near term, largely driven by the recent and upcoming influx of multifamily units entering the market. As a reminder, single-family construction is a much more important demand driver for our business than multifamily. All in all, we're more positive on the housing setup for 2024 and believe we should see an uptick in demand for our products. And our longer-term view on housing fundamentals continues to be very favorable, supported by strong demographic trends and a vastly underbuilt housing stock. Turning to repair and remodel. Activity in the fourth quarter remained steady and barring significant weather disruptions, we expect a similar level of repair and remodel demand in the first quarter. As for 2024, we believe the underlying demand fundamentals are incrementally more positive compared to last year, supported by otherwise prospective homebuyers choosing to remodel in lieu of purchasing a new home and a higher mortgage rate environment, combined with a healthier economy. And based on recent trends, we think activity will be more heavily weighted toward the Pro segment versus DIY. Looking beyond 2024, most of the key drivers supporting healthy repair and remodel demand remain intact, including favorable home equity levels and an aging housing stock. Finally, I'd like to provide an update on the progress we've made against the multiyear targets we announced during our Investor Day in September of 2021. As highlighted on Slide 21, we've made notable advancements on all fronts. Starting with our portfolio, we've more than -- we're more than halfway to our $1 billion Timberlands growth target and we've increased Natural Climate Solutions EBITDA by 114% since the inception of that business. In terms of our operating performance, we've made progress against all of our OpEx priorities and have captured $77 million of margin improvements over the last 2 years. Additionally, through the third quarter of 2023, we delivered peer-leading EBITDA margins across all of our Wood Products businesses and are number one in EBITDA per acre in Western Timberlands. On the ESG front, we're making progress on reducing our greenhouse gas emissions and have committed to net zero emissions by 2040. And finally, we continue to demonstrate our ongoing commitment to disciplined capital allocation by increasing our quarterly dividend by more than 5% annually and returning nearly $4.6 billion of cash to shareholders based on our results from 2021 through 2023. We're incredibly proud of these accomplishments, all of which have made Weyerhaeuser a stronger and more valuable company. Looking forward, we remain committed to driving continued improvements across each of these areas and are well positioned to achieve our strategic targets by year-end 2025. So in closing, our performance in 2023 reflects solid execution across our businesses. As we enter 2024, we're encouraged by resiliency in the housing market and maintain a favorable long-term outlook for the demand fundamentals that will drive growth for our businesses. Our balance sheet is exceptionally strong and we remain focused on serving our customers and driving long-term value for shareholders through our unrivaled portfolio, industry-leading performance, strong ESG foundation and disciplined capital allocation. So with that, I think we can open it up for questions.

Susan Maklari:

Just start with the outline that you gave, framing the housing outlook for this year was helpful. And when you think about Weyerhaeuser's positioning relative to that, can you talk about the ability to ramp your production across the different product categories? Where do you think you're sort of best able to really capture the benefits of that lift, especially perhaps if some of the R&R activity comes back this year? And then any thoughts on the channel inventories across the different products and how they're positioned going into the spring?

Susan Maklari:

Okay, that's helpful. And then you mentioned the $77 million of OpEx that you have realized in the last 2 years. As you think about 2024, any thoughts on some of the initiatives you'll be focused on, perhaps areas that you are planning to do certain initiatives in? Can you just give us some color on that?

Susan Maklari:

That's great. And good luck with everything.

George Staphos:

Congratulations on the year overall. My two questions, I wanted to maybe piggyback, it's a good segue from Susan's question. So certainly, there's been a lot of progress in Wood Products and in lumber in particular, over the years through black at the bottom. Yet it was interesting that, in fact, lumber did have a bit of a loss here in the fourth quarter. Obviously, at pricing headwinds, you had some seasonality, yet there are some other issues as well in terms of maybe some additional downtime relative to normal. But tell us how you think about maybe the need to go back to black at the bottom and see if there's a need for more significant work, given what you said to Susan's question about the fact there's been more inflation. How should we think about that, Devin?

George Staphos:

Appreciate the thoughts on that, Devin and certainly, we'll look to mark the progress. My other question, again, is on the lumber side but in this case, EWP and Engineered Product. So can you talk about why you're seeing, I guess, realization is flat to down? I don't want to paraphrase poorly but that was my take on your commentary, looking out into 1Q. I realize it's a regional market, you get sometimes some imbalances but what's your view on the year relative to supply-demand, your operating stance and how that will translate overall into commercial realizations?

Operator:

Our next question comes from Anthony Pettinari with Citi.

Devin Stockfish:

Sure. Well, when we look back at 2023, I think the year as a whole is pretty typical in terms of transaction volume, somewhere in that $2.5 billion mark. Last year was a little bit more heavily weighted to the back half of the year. We saw more activity as we got towards the end of 2023. In terms of the overall appreciation, you can look back just really over the last several years. It wasn't that long ago were $2,000 an acre for good timberlands in the South was pretty typical. Those values have increased pretty substantially. We've seen examples of really high-quality timberlands in the South going as much as $4,000 an acre and it's not atypical to see above-average properties going in the high-two’s [ph]. So we've seen a pretty strong value appreciation in U.S. Southern Timberlands prices. Same thing for the West, I would say, just as an example. As we think about 2024, still very early in the year. There aren't a whole lot of transactions in the market right now. That's not unusual in January. But as we think about the year as a whole, we're expecting a pretty typical year, anywhere between $2 billion and $3 billion of transaction value for the year. I would expect those deals to continue to be very competitive. Still seems to be a lot of interest in this asset class. And in terms of who we're going to be competing for deals, it's going to, I'm sure, be the same cast of characters. The TMOs will be active, the timber REITs, I assume, will be into some of those deals, maybe not quite as much, given some of the announcements from some of our competitors but I suspect they'll still be having their toe in the water to some extent. But then I think you're also going to continue to see some of these new entrants, some of the alternative entities that are looking for carbon values or others that haven't historically been active. So we're expecting it to continue to be competitive. We'll be very active as we have been over a number of years. We'll continue to look for opportunities to improve the value of our asset but at the same time being disciplined to make sure that we pay the right price for those assets.

Devin Stockfish:

Sure. Well, the reference there from that mill closure was with respect to some new regulations in Oregon that came into full implementation on January 1 of this year. And the reality is Oregon was already a very tensioned wood basket and with these new regulations which I'll say just by the way, these regulations are really just bringing Oregon closer to the regulations in Washington. So it's -- we've done business in Washington for a long time under those regulations and we'll be just fine under these new regulations. But the reality is it's going to make Oregon somewhat more tensioned than it already was. And so fiber supply will be challenged for certain participants depending on the geography. For Weyerhaeuser, we're in a beneficial position in that we have our own fee timberlands. And so I don't anticipate any issues with fiber availability for our mills. But it may ultimately push the price of logs up in that market as there's less timber supply across the stable manufacturing base.

Kurt Yinger:

I just had 1 question. Can you maybe talk a little bit more about what you're seeing in terms of European lumber imports over the second half of the year? And in addition to that, we've heard at least that there's been a growing amount of imported LVL showing up as well. How are you thinking about that potentially impacting the EWP market in '24 and longer term, I guess, the potential that European competitors could try to, I guess, become bigger participants in the domestic market here?

Operator:

Our next question is from Matthew McKellar with RBC Capital Markets.

Devin Stockfish:

Sure. Well, we certainly learned some things going through that project. That's why we called it a pilot project. I think the key things from my standpoint are number one and we certainly saw this, I think, in the price that we were able to get with these initial carbon credits, quality matters. And so we put in the time upfront to build out the internal team and expertise to do these things right. And I think that will certainly serve us well. These are complicated. And so again, that expertise to be able to navigate the -- both the development but also the interactions with the third-party auditors and the ACR, that process, having people that really know what they're doing serves you well and makes it more efficient. And I think we've learned a number of things that will make that process go much more quickly going forward. I do think there's still an opportunity to build out some of the infrastructure, particularly around third-party auditors for the amount of carbon credits that we expect to be coming to market in the years to come. We're going to need more infrastructure to ensure that, that can be done efficiently. But the good news is, as we get through this project, if you bring quality projects to the market, we think there's a lot of demand. And so we're really pleased with where we are. We're building out the pipeline. Two projects we expect to get approved in the first half. We've got 2 or 3 more in the pipeline. We expect to be monetizing additional credits this year and those just continue to build. Each project you get layers on top of the prior ones and you build out a nice revenue stream over time. So I think we're really well positioned and in good shape heading into 2024.

Devin Stockfish:

No. We still have a high degree of conviction about the value of timberlands over time and our ability to generate strong returns off of that asset. So just a reminder, that $1 billion was really just a reflection of year-over-year through our programmatic M&A activities, we think we will, on average, bring in about $250 million of acquisitions. So there's no magic to that $1 billion. We're going to continue to buy timberlands today, tomorrow, years from now. That's just our core business. We're also always going to be optimizing. And so from time to time, you'll see us trim the portfolio here and there. I think this FIA transaction was a great example of that. We picked up some really strong mature timber that's going to generate nice cash flow close to our other operations, close to our mills, opportunities to create synergies there and divested some land which was fine land. It was just -- it was a little bit more scattered in upstate South Carolina, wasn't near other operations, so just weren't able to provide some of the synergies that we can provide in other places. So those kinds of transactions will happen from time to time. It's pretty unique to be able to do those buy-sell transactions concurrently. When you find those opportunities, we're certainly happy to entertain those. But on balance, we still expect to be a net acquirer over time because we think the value of timberlands is going up and we think we do a good job running them and continue to generate returns.

Michael Roxland:

Congrats on the year. Just 1 quick question on EWP. I just want to get some color on order files and how extended they may be into 1Q, particularly as you mentioned, Devin, that those filters are actively seeking products ahead of the spring construction season. So where do order files stand at present? And can you comment on where your EWP operating rate was in 4Q? I think you called out a high 70s range in 3Q.

Michael Roxland:

Appreciate that. And this even for the order files, I mean, how far do they extend in 1Q thus far? Is it February, March? I mean, how many weeks out do they extend, particularly given -- can you comment around the strong interest from the builders?

Michael Roxland:

Perfect. And then just one quick question on Timberland, especially on pulpwood. I want to get your thoughts around mill closures, line closures that happened in terms of number of containerboard mills have closed, the number of pulp lines have been taken offline permanently. You have Enviva going through a restructuring. So would love to get your thoughts on pulpwood demand, obviously plus valuable inflection but nevertheless, it helps with shorter retention, helps with near-term cash flow. So how do you think about rotations, harvest planning and the like, given the changing end market dynamics?

Michael Roxland:

And good luck in the year.

Ketan Mamtora:

Devin or Davie, can you talk a little bit about maybe just a couple of key projects that you have in Wood Products from a CapEx standpoint?

Ketan Mamtora:

Understood. That's helpful. And then just 1 more question around capital allocation, Devin. As you sort of look to 2024 and beyond, I mean, it's been for a couple of years that you are on this sort of the new approach to capital allocation. Any sort of update around how you guys are thinking about supplemental dividend versus share repurchases? And sort of as you look at the different options, sort of how do you think about one over the other?

Operator:

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

Operator:

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

Operator:

Greetings, and welcome to Weyerhaeuser Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday Weyerhaeuser reported third quarter GAAP earnings of $239 million or $0.33 per diluted share, a 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 6 through 9 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 nontraditional timber owners came to market. Despite this dynamic, domestic log markets remained fairly balanced as mills maintain steady demand, driven by higher pricing and takeaway of lumber early in the quarter, and mills building log inventories to mitigate potential supply risks and the peak 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 elevations [ph], 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 continue 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 and 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 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 flex 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 sawlog 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 remain 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 lowered due to Mix. Turning now to real estate, energy and natural resources on Pages 10 and 11. Real estate and ENR 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 property 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 and 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 have 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 continued 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 Products 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 disruptions 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 macro economic 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 this -- 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 an 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 webstock. 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 Davie to discuss some financial items in our fourth quarter outlook.

Devin Stockfish:

Thanks, Davie. 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 home builders 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 under built 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 and 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 ageing 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.

George Staphos:

Hi, thank you. Good morning, everybody. Thanks for the details. I wanted to …

George Staphos:

Good morning. I wanted to spend the first couple questions on wood. And the first one on EWP, Devin, if you could. So 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 operating at that same stance. Has there been any developments specific to Weyerhaeuser on EWP that's led to the extended lead times? Have you been able to pick up share, say, in distribution that in turn has fed into your demand in DWP. 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 Weyerhaeuser done on a manufacturing basis has been 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 there's 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?

George Staphos:

Thanks, Devin. My last one, and I'll turn it over. If we go to Slide 8 in the upper left hand corner when we look at realizations for the West. And obviously, it's not a new development, it's been occurring. But I guess the question I had is, if we go back to Q2, what 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 2 to 4 quarters. Thanks and good luck in the fourth quarter.

George Staphos:

Thanks, Devin. I will turn it over.

Operator:

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

Devin Stockfish:

Good morning.

Kurt Yinger:

I just -- good morning. I just want 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 repurchases versus acquisitions. And then somewhat relatedly, if you were to continue to see that NAV discount, why then -- 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.

Kurt Yinger:

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 widened us?

Kurt Yinger:

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 kind of Japanese export volumes over the next couple of quarters?

Kurt Yinger:

Okay. Well, appreciate the color guys, and good luck here in Q4.

David Wold:

Thanks, Kurt.

Anthony Pettinari:

Good morning. So you're expecting flattish quarter-over-quarter realizations in 4Q in the South. And I'm just -- I guess, first question, is there any mix impact there? Or is that sort of like-for-like pricing. And then second, prices for southern logs have been kind of drifting lower for the past 4 or 5 quarters. Are you seeing any signs there that give you confidence in stabilization or be 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?

Anthony Pettinari:

Okay. That's very helpful. And then just with regards to the -- we have seen a number of kraftliner [ph] mills that have gotten shut down in the South and I guess one in Washington State. Is that something I guess, that has a specific impact to Weyerhaeuser. I mean it sounds like it may have impact to some of your competitors. I'm just wondering what the potential impact is to you, if any?

Anthony Pettinari:

Got it. Got it. And then just maybe shifting gears to Wood Products and maybe a similar question on lumber. With random lengths around 375, are you seeing or do you anticipate any kind of supply response maybe were below cash cost for some of the higher cost producers? And then I guess 1 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 I don't know if you just have any more kind of broad comments about kind of lumber supply with prices where they are.

Anthony Pettinari:

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

Operator:

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

Devin Stockfish:

Good morning, Susan.

Devin Stockfish:

Yes, I mean our view on what's going to happen with housing and I'll just caveat that, that there's obviously a lot of variables at play, but when we talk to the homebuilders, 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 weather 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 into 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 help getting some of those new homebuyers 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 continue to -- 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 were massively under built. 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 is 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.

Devin Stockfish:

Yes. 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 inventory. 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 AWP, 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.

Devin Stockfish:

Sure. Yes. I mean we are really pleased with this first carbon credit project. It's not a big number in and of itself, but we learned a lot and I think we are building the foundation to scale this. And so 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, these just continue to build. So each of these projects will have annual credit releases. So part of how we are 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 for us 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.

Devin Stockfish:

Thank you.

Michael Roxland:

Thank you, Devin, Davie, and Andy for taking my questions. First one, 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 will be done slightly and therefore, that's why product pricing should be stable? I'm just trying to reconcile a little bit of a discrepancy between the two comments.

Michael Roxland:

Got you. Thank you. Still [indiscernible] 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 your -- how you operate in 3Q, did you do that maybe more in 3Q because you were slow to adjust your operating posture so in order to make up to maybe -- or to be more competitive with your peers that you decided to lower prices more aggressively to make up for "less volume"?

Michael Roxland:

Got it. Got you. Appreciate it. And one last question just on EWP. Just can you comment where your operating rate was in 3Q. I think in the last call, you mentioned that you have a low 70 -- low mid-70 type operating rate in 2Q and then you had a 50% in 1Q. So where was it in 3Q? Where do you think it will be in 4Q?

Michael Roxland:

Got it. Thank you very much.

Paul Quinn:

Yes. Thanks very much. Good morning, guys. Just a question of [indiscernible] 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?

Paul Quinn:

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 million over the 20 years, obviously, comes out to lower than the 32,000 initials. So is that a straight line decline? And then when do you think about monetizing those credits?

Paul Quinn:

Great. That's all I have. Best of luck.

Operator:

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

Devin Stockfish:

Sure. I think it's -- there are kind of puts and takes there, Mark. 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 are 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, 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 to some extent, higher interest rates can also be a little bit of a headwind there. So some puts and takes. Our view is, overall, we are expecting that market to remain solid. And I think you've kind of seen few different views on this, whether it's up slightly or down slightly, 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, 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 material recession or some other event that adds an additional headwind there.

David Wold:

Sure, Mark. Yes, this is Davie. We are always looking at ways to ensure we are maximizing shareholder value and how we generate cash and allocate that capital and like I said earlier, we are 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 of timberlands, our view is that the value of timberland is only going up over time and recent transactions certainly demonstrate we are not the only one with that viewpoint. And so that's why we've got that target to acquire $1 billion of 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.

David Wold:

Yes. I mean we are 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.

David Wold:

Yes, 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.

Devin Stockfish:

Yes. 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 are 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 are thinking about in the South as well. There are different dynamics in terms of the growth rate of trees, et cetera. And so the biometrician work is a little different. But really from a high-level, there's not a material difference in the way we are thinking about those projects versus the ones up in the Northeast.

Devin Stockfish:

Right. Thank you.

Ketan Mamtora:

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 has eased 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?

Ketan Mamtora:

Got it. That's helpful. And Devin, have you worked through all of that inventory from part of the year [ph] spike.

Ketan Mamtora:

Got it. Perfect. And, Davie, 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?

Ketan Mamtora:

Perfect. Now that's very helpful. I'll turn it over. Good luck.

Devin Stockfish:

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

Operator:

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 speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported second quarter GAAP earnings of $230 million or $0.31 per diluted share on net sales of $2 billion. Excluding special items, we earned $238 million or $0.32 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 Weyerhaeuser timber and mill operations. With a mature age class and well stock timber inventory, we expect these timberlands to generate strong cash yields. Additionally, the acquisition offers incremental real estate and natural climate solution 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 Spur logs into the Japanese market later in the year. In China, log markets softened in the second quarter in response to an influx of log supply from New Zealand combined with the 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 flex 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 sawlog 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 market, in products. Given favorable operating conditions, our thinning activity increased in the second quarter, resulting in a higher mix of fiber locks. 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 ENR 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 May. 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 mill 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 I-joist products. That said, our average sales realizations were lower for most products as supply and demand continue 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 Davie to discuss some financial items and our third quarter outlook.

Devin Stockfish:

Thanks, Davie. 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 and 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 to sign 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 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 is 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. And 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.

George Staphos:

Thank you everyone and good morning. Thanks for the details.

George Staphos:

How you doing Devin? I want to start off on SG&A, and I guess, relatedly, all 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 at '24, '25 that you'll need to manage against that or maybe building and we'll see a little bit more movement to the upside there in future years? What do you think about that?

David Wold:

Sure, Devin. 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.

Devin Stockfish:

Sure. Well, I'll start with the sawlog question in the south. And I think we've seen over the last several years, some uplift on sawlog pricing. And 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 sawlog 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 sawlog 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. We're 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 a typical to see a little downward pressure on log prices just because in the summer months, and 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 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 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 is 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.

Operator:

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

Devin Stockfish:

Good morning.

Kurt Yinger:

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 has perhaps played in some of the pricing strength that we've seen in the last two to three months?

Kurt Yinger:

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, 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?

Kurt Yinger:

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

Operator:

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

Devin Stockfish:

Good morning.

Susan Maklari:

My first question is, Devin, can you talk just a bit about the production levels and the inventory that you're seeing at the mills just across lumber as the builders are gearing up and adding that 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?

Susan Maklari:

Yes. Okay. That's very helpful color. And then I guess, as you do think about some of the dynamics that are going on in the lumber market from both a supply and demand perspective, how do you think about where pricing can go as we think about the back half of this year and probably even in 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 a ceiling in terms of the upside potential around the pricing?

Susan Maklari:

Yes, okay. I appreciate all the thoughts, Devin. Thank you. And good luck with everything.

Operator:

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

Devin Stockfish:

Yes. 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 will catch up over time. So there will be a several week lag on the upside and the flip side of that is there's also a several weeks lag on the downside. So we ultimately get it. It's just a timing question. And for us, as we think about the quarter, there's a fair amount of leverage there, it's $8 million of EBITDA per quarter for every $10 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.

Devin Stockfish:

Yes, that's generally right.

Devin Stockfish:

Yes, 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. OSB is not as reliant on the R&R market. So it's a little bit more focused on the single-family construction, which has continued to be pretty strong. So absent, 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.

Devin Stockfish:

Yes. So 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.

Devin Stockfish:

Yes, thank you.

Anthony Pettinari:

Good morning. Just following up on the Mississippi deal, I think it transacted at kind of somewhat of a premium to some 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 you could maybe touch on, I guess, the real estate and ENR 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 the 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?

Anthony Pettinari:

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 economics in the Northern region or 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 carbon projects are getting more feasible or more attractive and 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.

Anthony Pettinari:

Okay, that's very helpful. I'll turn it over.

Operator:

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

Devin Stockfish:

Yes. So we're not providing the specific acreage really for a couple of 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 -- 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 -- we'll 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.

Devin Stockfish:

Well, it depends on what you think pricing is going to be $30,000, yes, mid-20s is kind of a good way to think about it in terms of what we've seen lately in 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.

Devin Stockfish:

Yes, there will be some. Now obviously, we're picking areas which have economics where that's supported by 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 that offset makes the most sense. But yes, there will be some offsetting impact to timber revenues where we do carbon projects.

Devin Stockfish:

All right. Thank you.

Ketan Mamtora:

Thank you and good morning. First question, Devin, you talked about 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 world and in lumber and how they compare for this time of the year versus historical average?

Ketan Mamtora:

Understood. Got you. And then coming back to wildfires. I mean, are your mills in Alberta back up to? I thought I heard you say that you all took some downtime at two of your three mills. Are they back up running kind of fully? Or are there some restrictions whether related to the log decks or anything else there?

Ketan Mamtora:

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

David Wold:

Thanks, Ketan.

Michael Roxland:

Thank you, Devin, Davie, Andy for taking my questions. Very good quarter.

Michael Roxland:

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 sort of market conditions and inclement weather so have you seen a ramp on the West more than the South. But just help us figure out how that demand improvement has been broken up by region?

Michael Roxland:

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

Michael Roxland:

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

Michael Roxland:

All right. Thanks very much and good luck in the second half.

Operator:

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

Operator:

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

Operator:

Greetings, and welcome to Weyerhaeuser First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] It is now my pleasure to introduce your host, Mr. Andy Taylor, Vice President of Investor Relations. Thank you, Mr. Taylor. You may now begin.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported first quarter GAAP earnings of $151 million or $0.21 per diluted share on net sales of $1.9 million. Adjusted EBITDA was $395 million, a 7% increase over the fourth quarter of 2022. These are solid results, and I’m pleased with the operational and financial performance delivered by our team despite various market and weather-related challenges throughout the quarter. Turning now to our first quarter business results. I’ll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $120 million to first quarter earnings. Adjusted EBITDA was $188 million, a 25% increase compared to the fourth quarter. In the West, adjusted EBITDA increased $33 million compared to the fourth quarter, largely driven by increased sales volumes in domestic and Chinese markets and lower per unit log and haul costs. These favorable results were partially offset by lower sales realizations. Turning to the Western domestic market. Demand and pricing for domestic logs faced downward pressure at the start of the first quarter. Mills reduced consumption in response to lower pricing and takeaway of finished products and we’re carrying elevated log inventories. As the quarter progressed, log consumption increased as end market demand improved, but log supply was constrained by consistent winter weather conditions. This dynamic drove log inventories to lower levels and cause log pricing to stabilize. For the quarter, our average domestic sales realizations were significantly lower than the fourth quarter. Our fee harvest and domestic sales volume as well as per unit log and haul costs improved in the first quarter as we return to full run rate operations following the work stoppage in the fourth quarter. First quarter harvest activity included a portion of the deferred volume resulting from the work stoppage, and we remain on track to capture the majority of the deferred harvest volume in 2023. Forest and road costs were also seasonally lower. Moving to our Western export business. Log markets in Japan continued to soften in the first 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 moderately lower compared to the fourth quarter, and our sales volumes were comparable. In China, log inventories at the ports declined during the quarter and daily takeaway increased as construction activity improved following the Lunar New Year and in response to the recent lifting of pandemic-related restrictions. As a result, log demand from our customers remained solid in the first quarter. Our sales volumes increased significantly compared to the fourth quarter and we intentionally flexed additional volumes to China to take advantage of improving market conditions in the first quarter. Our average sales realizations were slightly higher compared to the fourth quarter aided by improved ocean freight rates and a favorable exchange rate. Turning to the South. Adjusted EBITDA for Southern Timberlands increased $4 million compared to the fourth quarter. Despite reduced log consumption in response to lower finished product pricing and demand, southern sawlog and fiber markets remain fairly balanced during the first quarter as log supply was constrained by wet weather conditions. As a result, our average sales realizations were comparable to the fourth quarter. Our fee harvest volumes increased slightly despite the adverse weather conditions. Per unit log and haul costs were slightly lower in the first quarter, and forestry and road costs were slightly higher. Adjusted EBITDA in the North was comparable to the fourth quarter. Turning to Real Estate, Energy and Natural Resources on Pages 10 and 11. Real estate and ENR contributed $53 million to first quarter earnings and $89 million to adjusted EBITDA. First quarter EBITDA was $43 million higher than the fourth quarter primarily due to a significant increase in real estate acres sold, partially offset by a decrease in royalty income from our Energy and Natural Resources business. Similar to prior years, our real estate activities in 2023 and are more heavily weighted towards the first half of the year. Average price per acre decreased compared to the fourth quarter due to the mix of properties sold but remained elevated compared to historical levels, as we continue to benefit from steady demand for HBU properties. Despite broader macroeconomic headwinds, buyers continue to seek the safety of hard assets, resulting in high-value transactions with significant premiums to timber value. Moving to Wood Products on Pages 12 through 14. Wood Products generated $95 million of earnings in the first quarter and $148 million of adjusted EBITDA. First quarter adjusted EBITDA was a 25% reduction from the fourth quarter, largely driven by continued softening in wood products pricing. Regarding the lumber and OSB markets, benchmark prices for both products entered the first quarter showing signs of stabilization after receding in the back half of 2022. Pricing for both products increased slightly through early February in response to stronger-than-expected demand for housing and buyers replenishing lean inventories. The increase was more pronounced for lumber as supply concerns weighed on the market following a series of mill curtailment announcements, particularly in British Columbia. As the quarter progressed, overall buyer sentiment remains cautious. As adverse weather impacted homebuilding in several regions and in response to ongoing concerns about inflation and the economy, despite lean inventories, orders were limited to necessity purchases through quarter-end. And benchmark prices for both products were generally range bound. I would note, however, that prices for both products have trended higher as we’ve moved into the second quarter. Adjusted EBITDA for our lumber business was comparable to the fourth quarter. Both the framing lumber composite pricing and our average sales realizations decreased 9% in the first quarter. Our sales and production volumes increased significantly versus the fourth quarter which was impacted by the work stoppage at our Northwest mills. Reliability also improved across the system. With increased production in the quarter, unit manufacturing costs improved significantly. Log costs were comparable to the fourth quarter. OSB adjusted EBITDA decreased by $32 million compared to the fourth quarter, primarily due to the decrease in commodity pricing. Our average sales realizations decreased by 20% in the first quarter, largely in line with OSB composite pricing. Sales volumes were significantly higher as production volumes increased from less planned downtime for annual maintenance and transportation networks improved following adverse weather conditions late in the fourth quarter. Unit manufacturing costs and fiber costs improved moderately during the quarter. Adjusted EBITDA for Engineered Wood Products decreased by $28 million compared to the fourth quarter due to softening demand for EWP products. As a result, our sales and production volumes and average sales realizations were lower for most products in the first quarter. That said, we have seen a recent uptick in our order activity and our current realizations remain above pre-pandemic levels. Unit manufacturing costs were comparable to the fourth quarter and raw material costs decreased primarily for OSB web stock. Adjusted EBITDA for distribution was comparable to the fourth quarter as higher volumes and lower operating costs were offset by a decrease in realizations for EWP and commodity products. With that, I’ll turn the call over to Davy to discuss some financial items and our second quarter outlook.

Devin Stockfish:

Thanks, David. 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 is largely unchanged, and we still anticipate a somewhat more challenging backdrop in 2023, compared to the last couple of years. We’ve clearly seen some softening from the peak levels of 2022 as home buyer sentiment remains cautious. That being said, there have been some positive signs lately that the housing market is holding up better than we anticipated at the beginning of the year. Specifically, we’ve seen improvements in home builder sentiment, an increase in new home sales, and an uptick in single family starts over the last couple of months. Additionally, the labor market and household balance sheets are generally in good shape and inventory of existing homes for sale remains well below historical levels. Putting this all together, we continue to believe that underlying housing demand is solid. As we saw in the first quarter, there are buyers willing to step back into the market in response to lower mortgage rates and home builder incentives. Ultimately, we’ll need to see further rate reductions combined with a stable to improving U.S. economy before the housing market fully returns to the levels of the past few years. However, not withstanding any near-term headwinds, we continue to maintain a positive and constructive longer-term view on housing fundamentals supported by strong demand, favorable demographic trends, and a significantly under-built housing stock. Turning to repair and remodel, where activity remained fairly stable in the first quarter and continued to be supported by steady demand from the professional segment. Demand from the do-it-yourself segment has largely normalized a pre-pandemic levels. Looking forward, we expect customer demand to be bolstered to some degree by prospective home buyers choosing to remodel in lieu of purchasing a new home in a higher mortgage rate environment. Lower commodity building product prices may also support repair and remodel activity in the near-term. And in any event, we continue to have a bullish longer-term outlook for repair and remodel demand supported by strong home equity levels and an aging housing stock. In closing, we delivered solid operational and financial performance in the first quarter. We remain as focused as ever on operational excellence in supporting our customers to drive industry-leading margins. In addition, we remain committed to returning cash to shareholders. During the quarter, we increased our base dividend by 5.6% and returned more than $830 million to shareholders through base and supplemental dividend payments, as well as share repurchase activity. Looking forward, we remain constructive on the longer-term demand fundamentals that will drive growth for our business notwithstanding the current macroeconomic headwinds. Our financial position is exceptionally strong, and we are focused on delivering superior operating performance across our unmatched portfolio of assets, as well as enhancing shareholder value through disciplined capital allocation. So with that, I think we can go ahead and open it up for questions.

Anthony Pettinari:

Good morning.

Anthony Pettinari:

Devin, as you look at Southern log prices, are you seeing any regional trends worth calling out and I guess specifically, over the past few years as Southern log prices have seen some strength I think we saw maybe stronger price appreciation in some of these coastal regions versus inland regions. Now that log prices appear to be kind of moderating a bit. I’m wondering, are you seeing those coastal regions holding price better or ultimately are they may be giving up kind of more of the gains that they’ve had and maybe acting with a little bit more volatility? I don’t know if there’s any trend that you would call out. I’m just kind of curious what you’re seeing and maybe how your portfolio is positioned there.

Anthony Pettinari:

Okay. That’s super helpful. And then just on Natural Climate Solutions, I don’t know if there’s any kind of update you can give us in terms of level of interest and engagement and maybe how you’re tracking towards that $100 million EBITDA target for 2025. Or if there’s any kind of specific projects or work streams that you feel like are moving faster or slower than expected.

Anthony Pettinari:

Okay, that’s very helpful. I’ll turn it over.

Operator:

Our next question is from Ketan Mamtora with BMO Capital Markets. Please proceed with your question.

Devin Stockfish:

Good morning.

Ketan Mamtora:

First question just related to Anthony’s earlier question. Devin, any update on the main carbon offset project, how that’s coming along and when do you anticipate kind of – sort of incremental information around that?

Ketan Mamtora:

Got it. And Devin, when you say very near future, I would still assume that to be kind of 2023, is that fair?

Ketan Mamtora:

Got it. And then just switching to capital allocation. I’m curious kind of your approach towards share purchases, especially in the context of broader capital allocation. In a year like 2023 where cash generation will be kind of hit by lower both product prices. Obviously, you guys have laid out the base and the supplemental portion. I’m just curious kind of how do you approach share purchases here?

Ketan Mamtora:

All right. Now that’s helpful perspective, I’ll turn it over. Good luck.

David Wold:

Thank you.

Susan Maklari:

Thank you. Good morning, everyone.

David Wold:

Good morning.

Devin Stockfish:

Yes. On balance, we’ve seen pretty solid demand. I would say, just for context, Q1 is always a little bit softer from the DIY segment just because people aren’t doing R&R projects in the northern regions this time of year. I would say in the south, we’ve actually seen the activity up a little bit year-over-year as we feed into the big box retailers. It’s been a little lagging in the west, I would say, year-to-date, but that’s starting to pick up. So on balance, we’re still expecting a very solid year from the DIY segment. I don’t think it’s going to be at the same levels that we saw during the peak of the pandemic, but certainly very strong relative to pre-pandemic levels.

David Wold:

Sure. Well, at a high level, I think the benefits of this OpEx program that we’ve been undertaking for a number of years are really reflected in the Q1 numbers as you said in a very challenging market, we were still able to deliver positive margins across all of our businesses. And I think just from a relative operating performance standpoint, that’s really, really served us well and has been a core part of our operating strategy for quite some time. We are progressing, I think, quite well to that $175 million to $250 million target. And I would say, I’m particularly pleased with the progress we made last year. We generated $40 million of OpEx in an environment where we saw historically high levels of inflation. And so that was quite a headwind to navigate through. I think this year as we see some of the turnover starting to go back to maybe a more normal level and inflation comes down, I feel very good about the tailwinds that we’ll have from an OpEx standpoint. And I think it’s just a real testament to the teams that we have all across the organization that are staying focused on improving how we operate every day, trying to innovate everywhere we can and serving our customers to make sure that we’re not just maintaining industry level – industry leading margins, but we’re growing that over time. So really pleased with the efforts there.

Devin Stockfish:

Sure. Well, I think as we look across the key cost elements of each of those businesses, the labor piece has remained elevated. I don’t think it’s increasing at the clip that we’ve seen over the last several years, but it still remains at an elevated level. But besides labor, I would say on balance, we are seeing some progress in having that inflationary pressure kind of back off a bit, whether it’s fuel, energy, resins really across the board we’ve seen some of the fiber costs come down. So we are seeing some of those inflationary pressures start to wane and I think that will be a tailwind for us as we get through the year as well.

Devin Stockfish:

Sure. Thank you.

Kurt Yinger:

Great. Thanks and good morning everyone.

Kurt Yinger:

I wanted to start out on the EWP business. I mean, it’s been a really nice source of stability kind of in spite of volatility in commodity markets. Realizations there held in better than we expected. Looks like you’re expecting some additional pressure in Q2, but could you talk about how you’re thinking about profitability there over the next couple quarters and maybe give a little bit more color on what you’re seeing on the volume side after maybe some destocking issues the last couple quarters?

Kurt Yinger:

Got it. Make sense. And then just second on southern log pricing. I guess as you look over the next year, do you think we’re kind of in a situation where maybe you see kind of a slow bleed in realizations absent or real inflection in demand? Or from where you sit today, any kind of confidence in the idea that things could really level out in the near-term at all?

Kurt Yinger:

Got it. Okay. Appreciate all the detail, Devin, and good luck here in Q2, guys.

David Wold:

Thanks, Kurt.

Paul Quinn:

Yes. Thanks very much. Good morning guys. Just following-up on this real estate, energy, natural resource, especially the natural climate solutions looking for the extra color on the carbon project. But where are we at with the – you signed two deals of a carbon storage. Just wondering how that permitting is going for those companies that you’re involved with?

Paul Quinn:

Okay. Thanks for that. And then just switching over to wood products. If I look at 2023 whole year, what are we tracking for lumber volumes? Is this – last year was down, are we going to go back to 2021 levels? And especially on the OSB side as well, it looks like you’re tracking at record levels for 2023.

Paul Quinn:

All right, that’s all I had. Best luck.

Operator:

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

Devin Stockfish:

No. You hit on it exactly, Mark. It’s just a function of when you have a three to five week order file, it takes time for the current prices that are reflected in Random Lengths to flow through to realization. So there’s a lag on the way up, but then there’s also a lag on the way down, so it nets out to be the same, it’s just a timing issue.

Devin Stockfish:

Yes. Well, that’s a really good question, Mark. I think from our standpoint, we have 7 million acres across really all of the major markets across the south. Unparalleled diversification. I think generally speaking, we have peer leading scale in every market. So, I think as we move forward in a world where we think saw logs are going up, I think we’re really well positioned going forward. And as you know, there’s just been a lot of new capacity coming into the south. And I think – and we’ve seen this in markets where new capacities come in that’s pushed up saw log prices. So as we think about how does that impact our business as a whole going forward, I think it’s positive. First on the timberland side, we are a net seller of logs. So on balance, we generally sell between 40% to 50% of our grade fee logs in the south to our internal mills. So that means the remainder of those logs go to third-party customers. So higher saw log prices in the south will have a net benefit to warehouser on those third-party logs. Now obviously, higher log prices also have an impact on wood products manufacturing as that’s a key input cost. But I think again, the integrated model that we have is going to help us in that respect. So the manufacturing side as those saw log prices increase over time those logistics and efficiency benefits that our manufacturing operations enjoy today on the fee timber that we supply is going to become even more important in maintaining industry leading margins. And you can just look to the Pacific Northwest for an example of that. So I think on balance, we feel very good about that. Obviously, there are regional differences, but I would say outside of the Southeast, we have manufacturing operations in every other wood basket. So, most of those dynamics will play out very similarly. And I think, all in, if you want to look at log prices and where they’re going, I think, with our business to scale the integrated nature, we’re going to be the premier investment vehicle to leverage increasing southern sawlog prices into the future.

Devin Stockfish:

We do. So generally speaking, our internal mills are going to get 50% of their logs from our fee timber, and then they will buy the remaining 50% from third parties.

Devin Stockfish:

Correct. Yes.

Operator:

Our next question is from Buck Horne with Raymond James. Please proceed with your question.

Devin Stockfish:

We certainly have seen an uptick in particularly the European lumber hitting the U.S. market. And I’ll speak to Japan here in just a moment as well. I think that’s a function really of a couple different things. First, if you look back over the last couple of years, clearly the lumber pricing dynamic in the U.S. made it a very attractive place to send wood. And so even overcoming the logistics and transportation costs, it was a margin positive move to get lumber from Europe into the U.S. market. Even as lumber prices have come down in the U.S., I think to some extent it’s still probably the best margin opportunity for some lumber because the European demand has really come down with all of the dynamics that are going on there. And so, I think you’re going to see European imports come down a little bit in 2023, probably not dramatically, however, until you start to see the European economy and European demand pick up. We did see in Japan a pretty significant slug of lumber hitting that market at the end of 2022. And as Davie mentioned, that has put a little bit of pressure on the Japanese market for our customers and our log deliveries. We have started to see the European volume coming into Japan Wayne [ph]. And so we expect that excess inventory of European lumber to work down here in the second quarter. And we should be back into a more normalized position as we get into the third quarter. I think over the long term though, Buck, the reality is with the beetle infestation issue that they’ve had in Central Europe, that volume is rapidly becoming less viable, I think as the Russian imports of lumber into Europe. Assuming that those don’t come back in a material way in the near future. The overall dynamic is going to be the Europeans will have to keep more lumber in Europe in a normalized circumstance. And so I think this is a short-term issue that will resolve itself in the not too distant future.

Devin Stockfish:

Yes. There has certainly been a lot of new capacity coming into the South. But we’ve also seen a lot of capacity coming out of BC. I suspect there will be more to come. If you just step back and look at the overall amount of new lumber capacity into the U.S., it’s really not a significant amount over the last several years. Now we’re continuing to see new mills come in and new announcements, although that’s probably slowed just a little bit over the last six to nine months because of what’s going on in the broader economy. But I think a good way to think about it is, you’re going to see 1 billion, 1.5 billion board feet come into the South more or less every year for the next little bit. But I think you’re going to see a comparable amount come out of British Columbia just given what’s going on and the dynamic there. So net North American lumber editions, I’m not sure it’s going to be all that much really.

Devin Stockfish:

Yes. Thank you.

Operator:

Our next question is from George Staphos with Bank of America. Please proceed with your question.

Devin Stockfish:

Yes, George. So, maybe I’ll take China first and then comment briefly on the lumber piece. From a China standpoint, the latest published numbers from an inventory standpoint in China were down. However, what we saw on the ground in April is a number of ships that were coming over from New Zealand with wood that had been delayed post cyclone. And so I think the inventories in the next published number are going to be up a bit. And I think we’ve also seen some very low quality European logs in that market that they’re trying to get rid of more or less at fire sale prices. And so I think here in the very near term, it’s just going to be a little bit softer environment as they work through some of that inventory. That being said, the takeaway has really started to pick up here as we’ve come out of the Lunar New Year. I think as we get out past this period of working through some of this inventory that support at the moment, we’re feeling pretty good about the back half of the year in China. I think that will be a nice flex opportunity for us out of the Pacific Northwest. On the lumber side and Davie may have the specific numbers in terms of the Q4 impact. But I would say beyond the strike impact, the one thing I would point out is just as we get into an environment where, as I mentioned earlier, turnover is starting to lessen a little bit more stability. We’ve got the transportation networks that are starting to get a little bit more, I would say healthy and so. On balance, the business just ran better overall in Q1. And I think that’s really again a testament to the work that our teams are doing and what’s still a relatively challenging environment.

George Staphos:

So Davie on a going forward basis, obviously, there’s going to be seasonality and – but if we hold pricing constant, this is pretty much a good baseline for operations and for our own margin forecast on a going forward basis, would that be fair?

George Staphos:

Understood. Very good performance. Thanks guys. Good luck in the quarter.

Operator:

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

Operator:

This concludes today’s teleconference. You may disconnect your lines at this time. And we thank you for your participation.

Operator:

Greetings, and welcome to the Weyerhaeuser Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported full year GAAP earnings of $1.9 billion or $2.53 per diluted share on net sales of $10.2 billion. Excluding special items, our full-year 2022 earnings totaled $2.2 billion or $3.02 per diluted share. Adjusted EBITDA totaled $3.7 billion for the year. For the fourth quarter, we reported GAAP earnings of $11 million or $0.02 per diluted share on net sales of $1.8 billion. Excluding an after-tax charge of $160 million for the special items, we earned $171 million or $0.24 per diluted share for the quarter. Adjusted EBITDA was $369 million. This is a 37% decrease from the third quarter and was largely driven by further softening in Wood Products markets as cautious sentiment continued to weigh on the near-term housing and macroeconomic outlook. I’ll begin this morning by expressing my appreciation to our employees for their strong execution and performance in 2022. Notwithstanding a number of supply chain disruptions and dynamic market conditions over the course of the year, our teams operated safely, continued to serve our customers and drove meaningful improvements across our businesses. Through their efforts, we delivered our second highest annual adjusted EBITDA on record and are well positioned to navigate a more challenged market environment entering 2023. Additionally, as highlighted on page 20 of our earning slides, we generated more than $2.3 billion of adjusted funds available for distribution in 2022, again demonstrating the strong cash generation capability in combining our unmatched portfolio of assets with industry-leading operating performance. We announced yesterday that our Board of Directors declared a supplemental cash dividend of $0.90 per share, payable on February 27th to holders of record on February 15th. When combined with our quarterly base dividends of $0.72 per share, we’re returning total dividends to shareholders of $1.62 per share. Including $550 million of shares repurchase during the year, Weyerhaeuser is returning $1.75 billion of total cash to shareholders based on 2022 results, or 75% of 2022 adjusted FAD, which is in line with our annual targeted payout range of 75% to 80%. As summarized on page 21, we’ve now completed the second full year of our new cash return framework. Upon payment of the supplemental dividend, we will have returned more than $3.8 billion in total cash to shareholders based on 2021 and 2022 results, through a combination of cash dividends and share repurchase. We continue to believe this framework will enhance our ability to drive long-term shareholder value by returning meaningful and appropriate amounts of cash back to shareholders across a range of market conditions and deliver an attractive total dividend yield to our shareholders. Moving forward into 2023, our cash return commitment will continue to be supported by our sustainable quarterly base dividend, which we intend to grow by 5% annually through 2025. As outlined in our cash return framework on page 19, we plan to supplement our base dividend with an additional return of cash, as appropriate, to achieve our targeted annual payout of 75% to 80% of adjusted FAD. And as demonstrated in 2021 and 2022, we have the flexibility in our framework to return this additional cash in the form of a supplemental cash dividend, or opportunistic share repurchase. With that, I’ll now turn to our fourth quarter business results. I’ll begin with Timberlands on pages 7 through 10 of our earnings slides. Timberlands contributed $86 million to fourth quarter earnings. Adjusted EBITDA was $150 million, an $18 million decrease compared to the third quarter. This was largely driven by lower sales realizations in the West. For the full year, Timberlands adjusted EBITDA increased by 13% compared to 2021. These were strong results, and I am extremely proud of the focus and resiliency demonstrated by our teams in 2022. Turning to our western Timberlands operations. Domestic log market softened at the outset of the fourth quarter, driven primarily by lower lumber pricing and ample log supply in the system. This drove domestic log pricing to lower levels early in the quarter. As the quarter progressed, log supply into the market became more constrained, resulting from a seasonal reduction in log availability. This dynamic resulted in a temporary period of log price stability into December. For the quarter, our average domestic realizations were moderately lower than the third quarter. Our fee harvest and domestic sales volumes were higher, as the business quickly returned to full run rate operations following the resolution of our work stoppage. We plan to capture the majority of the deferred harvest volume from the work stoppage in 2023. Forestry and road costs were seasonally lower compared to the third quarter and per unit log and haul costs were comparable. Turning to our export markets. In Japan, demand for our logs was strong in the fourth quarter as our key customers sought to replenish lean inventories resulting from our work stoppage. That said, our export sales volumes to Japan were slightly lower as work stoppage related impacts to our export program were disproportionately higher in the fourth quarter, compared to the third quarter. Our average sales realizations were significantly lower as broader log market softened in Japan, due primarily to an oversupply of European lumber imports, as well as lower consumption driven by reduced housing activity. Log demand from our China customers was solid in the fourth quarter, and our export sales volumes increased significantly compared to the lower levels in the third quarter, when we intentionally kept more volume in the domestic market to capture higher margin opportunities. Our average sales realizations were significantly lower in the fourth quarter, as broader Chinese log markets softened due to lower consumption resulting from COVID disruptions and challenges in the Chinese real estate market. Moving to the south. Southern Timberlands adjusted EBITDA increased slightly compared to the third quarter. Similar to the last several quarters, notwithstanding adequate log supply and softening finished product pricing, southern sawlog and fiber markets remained fairly stable during the fourth quarter. Log demand was steady as mills continued to carry higher inventory levels to mitigate potential risks from supply chain and weather challenges. As a result, our sales realizations were comparable to the third quarter. Fee harvest volumes were slightly higher as weather conditions remained generally favorable for most of the quarter. Forestry and road costs decreased slightly, and per unit log and haul costs were comparable to the third quarter. On the export side, our southern program to China remains paused due to ongoing phytosanitary rules imposed by Chinese regulators. While it’s unclear when this issue will be resolved, we continue to have a positive longer term outlook for our southern export business to China. And in the interim, we will continue to grow our export business into India and other Asian markets. In the north, adjusted EBITDA increased slightly compared to the third quarter, due to significantly higher sales volumes as weather conditions were favorable. Our sales realizations decreased moderately. Turning to Real Estate, Energy and Natural Resources on pages 11 and 12. For the full year, Real Estate and ENR generated $329 million of adjusted EBITDA, slightly higher than our revised full year guidance, and 11% higher than 2021. This was driven primarily by exceptionally strong demand for HBU properties in 2022 as well as robust energy and natural resources activity for much of the year. In the fourth quarter, the segment contributed $24 million to earnings. Excluding a $10 million noncash impairment charge, resulting from the planned divestiture of legacy coal assets, the segment earned $34 million in the quarter. Adjusted EBITDA was $46 million, a decrease of $14 million from the prior quarter, primarily due to a reduction in real estate acres sold. Although HBU demand has moderated somewhat in response to broader macroeconomic concerns, we continue to see steady interest from buyers seeking the safety of hard assets in an inflationary environment. Notably, we delivered our highest average price per acre for all of 2022 on our land sales in the fourth quarter. These are high value transactions with significant premiums to timber value. I’ll now make a few comments on our Natural Climate Solutions business. As shown on page 13, full year adjusted EBITDA from this business was $43 million, a 13% increase compared to 2021. Growth during the year was primarily driven by conservation activity, with ongoing contributions from our mitigation banking and renewable energy businesses. In addition, we achieved notable milestones in our emerging carbon businesses in 2022, including the announcement of our first two carbon capture and storage agreements, one of which was announced in the fourth quarter in partnership with Denbury. Similar to our agreement with Oxy Low Carbon Ventures announced earlier in 2022, the Denbury project will take several years to begin production, and we expect both projects will come on line in 2025 or 2026. Moving forward, we continue to advance discussions with high-quality developers of carbon capture and storage on portions of our Southern U.S. acreage and expect to announce additional agreements in the future. Turning briefly to forest carbon offsets, we’re nearing completion of our pilot project in Maine and expect third-party approval soon. This project serves as a proof of concept for Weyerhaeuser and positions us well to advance additional forest carbon projects in 2023. With these exciting developments, we continue to see multiyear growth potential from our Natural Climate Solutions business and maintain our target of reaching $100 million per year of EBITDA by the end of 2025. Moving to Wood Products on pages 14 through 16. Wood Products contributed $147 million to fourth quarter earnings and $197 million to adjusted EBITDA. Fourth quarter adjusted EBITDA was a 50% reduction from the third quarter, largely driven by continued softening in Wood Products markets and lower product pricing. For the full year, our Wood Products business generated over $2.7 billion of adjusted EBITDA, and our engineering Wood Products business established a new annual EBITDA record. Additionally, our distribution business generated the highest annual EBITDA in over 15 years. These are outstanding results, and I’m proud of our team’s ability to deliver this level of performance, notwithstanding numerous challenges in 2022. Turning to some commentary on the Lumber and OSB markets. Benchmark prices for Lumber and OSB entered the fourth quarter showing signs of stabilization after falling for much of the third quarter. As the quarter progressed, both markets exhibited cautious buyer sentiment, resulting from a softening housing market in addition to broader concerns about the economy and inflation. Buyers maintained lean inventories and limited orders to necessity purchases through year-end. This drove benchmark prices lower for both, Lumber and OSB in the fourth quarter. As a result, the framing lumber composite pricing decreased by 24% compared to the third quarter and the OSB composite pricing decreased by 20%. That said, benchmark pricing for both projects -- products stabilized in January as buyers reentered the market to replenish lean inventories. Adjusted EBITDA for our lumber business decreased by $80 million compared to the third quarter. Our average sales realizations decreased by 11% in the fourth quarter with relative outperformance compared to the benchmark, resulting primarily from our regional and product mix. Our sales and production volumes decreased significantly compared to the third quarter. These decreases resulted from a combination of the work stoppage-related impacts in the Northwest, adverse weather conditions in December and challenged reliability at several mills during the quarter. As a result, unit manufacturing costs increased significantly during the quarter. Log costs were modestly lower, primarily for western logs. Specific to our Northwest mills, which resumed operations in November following the work stoppage, much of the lumber we sold in the fourth quarter was manufactured using logs purchased in the third quarter when log prices were higher. As a result, margins compressed and are expected to remain lower until we work through the higher-cost log inventories and log prices in the Northwest adjust to reflect current lumber pricing levels. Adjusted EBITDA for our OSB business decreased by $47 million compared to the third quarter, primarily due to the decrease in commodity pricing. Our average sales realizations decreased by 16% in the fourth quarter. Production volumes were comparable. However, sales volumes decreased slightly, resulting from weather-related disruption challenge -- weather-related transportation challenges in Canada late in the quarter. Unit manufacturing costs decreased moderately and fiber costs were slightly lower in the quarter. Engineered Wood Products adjusted EBITDA decreased by $56 million compared to the third quarter. This result is directly tied to recent softening in demand for EWP products which are primarily used in single-family home building applications. Although we often see demand for Engineered Wood Products slow somewhat during the winter months, the broader slowdown in the housing market in Q4 caused more of a pullback than ordinarily would be the case. As a result of this dynamic, our sales volumes decreased for all products compared to the third quarter. Production volumes were also lower as we elected to take temporary holiday downtime at several EWP facilities during the quarter. Our sales realizations decreased for all products, except for I-joist, which were comparable to the third quarter. Unit manufacturing costs were comparable in the fourth quarter, and raw material costs were moderately lower, primarily for OSB web stock. In Distribution, adjusted EBITDA decreased by $18 million compared to the third quarter, largely driven by lower sales volumes, primarily for EWP products. With that, I’ll turn the call over to Davie to discuss some financial items and our first quarter and 2023 outlook.

Devin Stockfish:

Thanks, Davie. As we begin to wrap up this morning, I’ll make a few brief comments on the housing and repair and remodel markets. Residential construction activity has clearly softened from the peak levels of 2022, particularly in the single-family segment. As we enter 2023, buyer sentiment remains cautious for new and existing homes and is being driven by numerous ongoing headwinds. Most notable is the affordability challenge brought about by increased mortgage rates, combined with significant increases in home prices over the last two years. In addition, we believe buyer psychology is being influenced by uncertainty related to the trajectory of mortgage rates, general concerns about the economy and falling home prices in many markets. As a result, we anticipate a more challenged housing market compared to the last couple of years, particularly in the first half of 2023. That being said, there are some signs recently that the environment may be improving. Mortgage rates have ticked down from recent highs. Homebuilder sentiment improved in January and mortgage application activity has picked up over the last several weeks. Additionally, the labor market remains fairly strong overall and household balance sheets are generally in good shape. There are still plenty of people who want a home and can still get a mortgage, but many buyers are likely to remain on the sidelines until we see some improvements, but at the very least some stabilization in certain macroeconomic and housing-related trends. I will note, however, that despite what may be a period of choppiness in the near term, our longer-term view on the housing fundamentals continue to be very favorable, supported by strong demographic trends and a vastly underbuilt housing stock. Turning to repair and remodel. Activity in the repair and remodel market remained fairly stable in the fourth quarter and continue to be supported by steady demand from the professional segment. Demand from the do-it-yourself segment continued to soften from the elevated levels of the last couple of years and has returned to a more normalized pre-pandemic level. In the near term, we expect stable demand from the repair and remodel segment, albeit perhaps at a slightly lower level than what we’ve seen over the last couple of years. Looking out beyond 2023, most of the key drivers supporting healthy repair and remodel demand remain intact and support our more bullish long-term outlook, including favorable home equity levels and an aging housing stock. Now, before we move into questions, I’d like to provide an update on the progress we made in 2022 against the multiyear targets we set out during our Investor Day in September of 2021. As highlighted on slide 22, we’re progressing well on all fronts. Last year, we deployed approximately $300 million on Timberland acquisitions, including our Carolinas transaction. We grew our Natural Climate Solutions EBITDA by 13% compared to 2021 and announced our first two carbon capture and storage deals, and we remain on track to grow this business to $100 million of EBITDA by year-end 2025. Last year, our teams captured approximately $40 million of margin improvements across our businesses and also made meaningful progress against our other OpEx priorities. I’m extremely pleased with this result, considering the inflationary pressures we experienced in 2022. We made progress against our 2030 greenhouse gas emissions reduction target. And finally, we demonstrated our ongoing commitment to disciplined capital allocation by increasing our quarterly dividend by 5.9% and returning $1.75 billion to shareholders, based on 2022 results. So, in closing, our performance in 2022 reflected solid execution across all of our businesses. Entering 2023, our balance sheet is exceptionally strong, we have a competitive cost structure, and we are well positioned to navigate through a range of market conditions. We’ll remain focused on servicing our customers and driving long-term value for shareholders through our unrivaled portfolio, industry-leading performance, strong ESG foundation and disciplined capital allocation. So with that, I think we can open it up for questions.

Susan Maklari:

Thank you. Good morning, everyone. My first question is, can you perhaps give us some more details on the Wood Products business based on the comments of a pickup as we came into the first couple of weeks of this year? Can you talk a bit about the supply and demand conditions on the ground as we go into the spring and the builders are obviously ramping up a bit, trying to get things closed and trying to have inventory on the ground for the selling season, and then, the opportunities for Weyerhaeuser within that, given your cost structure relative to some of your peers?

Operator:

Our next question comes from the line of George Staphos with Bank of America.

Devin Stockfish:

Sure. Thanks, George. Well, with respect to your first question and that’s primarily, I think, a question about the Pacific Northwest. The dynamic is really being driven right now by lumber prices. So, as you say, I do think we’re going to see a pickup in export activity out of the Pacific Northwest, both to Japan and China, particularly coming out of the Lunar New Year period, we’re expecting our exports to China to really ramp back up. And so, that’s going to be a nice healthy offtake and we’re going to see more volume going to the export market out of the Northwest. And so, ordinarily, you would see that tension things up and support pricing. But the reality is in the domestic market, log prices are going to have to be within a range where the manufacturers can still generate a profit. And frankly, until you see those log prices come down a little bit given where lumber prices have been, that’s been a real challenge. And so, I think ultimately, what’s going to be the governor on pricing in the Northwest is really what happens with lumber prices. Now, if you were to see lumber prices start coming back up as we enter the spring building season and some of the weather issues in California resolve, so you see more takeaway out of that important market, to the extent lumber prices come up, then I think you’ll see log prices follow. It continues to be a very tension wood basket. Regardless of lumber prices, there’s just a shortage of log supply in the Pacific Northwest, and that will ultimately be reflected in log prices, particularly as we see exports pick up. But again, you’re just not going to see that to the extent that lumber prices stay at a lower level. So, that’s the answer on the log side. Just in terms of the Natural Climate Solutions business and tensioning log markets, I think, candidly, we’re still a ways away from that. The primary tool for doing that is going to be on the forest carbon side. I do think over time that is going to be a big opportunity, not just for us but for other landowners. But we’re still in the early innings, I think, of that market developing. You can read the commentary on it. I think as a whole, the market is still figuring out exactly how these carbon markets are going to work. So, that’s still probably got a little bit of time before that has any real material impact. And frankly, I do think just remember, there’s lots of forest land in the United States. So I think that’s probably still a ways out before that becomes a real issue.

Anthony Pettinari:

Devin, in lumber, you talked about, I think, the very large number of curtailments that we’ve seen in BC. And I was wondering, in aggregate, do you have a sense if there are still kind of meaningful curtailments to go, or has that maybe sort of run its course and was more sort of a seasonal -- the seasonal actions with lumber, maybe back above 400, could we see some of that capacity coming back? I was just wondering if you could kind of talk about how the dynamic in BC could play out this year, assuming we’re somewhere close to current lumber prices.

Anthony Pettinari:

Okay. That’s very helpful. And then just following up on George’s question on Natural Climate Solutions. If you look at the kind of the work streams and the different activities there, whether it’s wind or solar or forest carbon or CCS, is there a sense that sort of partner interest and adoption is maybe progressing faster than expected or maybe slower than expected if you look at those different categories compared to when you kind of first unveiled those targets at your Analyst Day? And are there any sort of obstacles or pain points as you pursue some of these projects? Just curious if there’s any additional color there.

Operator:

Our next question comes from the line of Ketan Mamtora with BMO Capital Markets.

Devin Stockfish:

Yes. So, a couple of things I would highlight. Part of our program, and this has been the case with the exception of our Dierks project, our Millport project and the Holden project that’s ongoing currently. The vast majority of our projects are not really big enormous capital projects, they’re replication projects that are -- whether it’s a merchandiser, a new gangsaw, a new CDK, I mean, those are the kinds of projects that we’re really doing across the system. And so it’s all about going in mill by mill according to a multiyear road map, finding the roadblocks and bottlenecks and taking those out so that we can drive down costs, improve reliability, drive efficiencies and then obviously, there’s some come along volume that is a part of that as well. So, it’s not any particular big project other than Holden, which we did start up the sawmill at the end of last year, we’ll be starting up the planer mill later this year. So, that project is going well. But other than Holden, there’s not any particular project that I would really highlight. It’s just a number of projects, all of which are largely replications of things that we’ve already done in other facilities.

Devin Stockfish:

I think that’s potentially the case around the margins. We’ve certainly seen more European lumber coming into the market. So, on a percentage basis, year-over-year, it might look like a lot. But relative to the overall North American consumption, it’s still a pretty small percentage. And so, even if we do see a little bit of a pickup in the near term, I don’t think it’s going to fundamentally impact the overall supply-demand dynamic. The one thing I would say is, over time, I would expect that European lumber supply to go down somewhat for a couple of reasons. Number one, with the beetle kill and the fires, et cetera, that we’ve seen across Central Europe, there are a number of years that you’re going to see elevated harvest levels to work through that salvage. But ultimately, that fiber supply is going to go away. And then the second piece being just with the bans on the Russian and Belarus lumber coming into Europe, if Europe is in a normal state, you would expect more of that European lumber to have to stay domestic. Now obviously, that’s not the case because of the general economic conditions in Europe right now. So you still have, I think, a fair bit of that lumber coming into the U.S. But in any event, over the longer term, I would expect that to moderate, if not go down.

Mark Weintraub:

Thank you. One question, and I’m certainly not projecting that this would be the case. But if markets were very weak in a given year and it ended up that your FAD wasn’t at a level where even at 75%, you would meet the base dividend, would you still meet that? Or again, just it’s not even in the contemplation universe right now, so you haven’t really assessed that question.

Mark Weintraub:

Sure. And then just philosophically, is it fair to say then that if there were for whatever reasons, there was this short-term issue that led to a shortfall that you would cover it with the high degree of confidence you have that over time, it’s a very, very manageable number, is that fair?

Mark Weintraub:

Two other quick ones. One, Devin, you talked about price realizations, Pacific Northwest and kind of the drivers there for the Timber business. In the South, we’ve seen obviously, packaging demand has also been quite weak recently. And you laid out kind of some of the challenges in housing. Is that just a much stickier in pricing framework? So, what do you expect to see in the U.S. South for realizations as the year proceeds?

Mark Weintraub:

And lastly, just real quick. So, we have seen more of a bounce in lumber than OSB. Is that just because it overshot more and you’re getting some more of the supply response in BC, or -- any other thoughts as to why that’s happened to date and any perspective you have kind of going forward?

Operator:

Our next question comes from the line of Mike Roxland with Truist Securities.

Devin Stockfish:

Yes. Well, I mean, the short answer is yes. I think as they come out of the COVID restrictions, that will create more opportunity. But just for a little more context, China has been an interesting market of late. There have been a lot of puts and takes. Demand clearly has been down primarily as a result of the COVID lockdowns, but also just a broader shakeup in the real estate industry in China. So, I’d say on balance, log demand, lumber demand in China has been down of late. But there have also been a lot of supply impacts as well. So with the Russian log ban, the Australian log ban, I think you’re seeing some of the European log flow from the salvage activity start to wane a little bit. So, there have been, I think, impacts on both sides of the ledger. For us specifically, we’ve got long-term customers. The demand for us was actually higher than the volume that we sent there last year. And as we’ve said, that was really just a function of capturing the better margin opportunities domestically. As those two have come a little bit more into balance, freight costs have come down, we are anticipating ramping up our China volume into Q1. And that’s -- I think that would be the case regardless of what’s going on in China, just because our customers need that wood. But I do think coming out of the Lunar New Year in China, you’re going to see log and lumber demand pick up. They’ve been in a relative soft spot for a while. So, I think there’s going to be plenty of opportunity for us to ramp up our export volumes to China.

Devin Stockfish:

Yes. Well, in repair and remodel, I think there are a number of variables at play. And to some extent, it makes it a little bit harder to forecast than normal. I do think most of the drivers behind strong repair and remodel that we’ve seen over the last several years are still in place. You’ve got homeowners with a lot of equity. You’ve got an aging housing stock. A lot of these older houses are smaller and have different layouts than some of the newer homes. So, I think that provides an incentive for homeowners to upgrade and add on to existing older homes. I think the other dynamic that’s somewhat new with so many people having refinanced mortgages at lower rates to the extent that keeps them in existing house rather than going out and purchasing a new home at a higher mortgage, I think that could be also a catalyst for more repair and remodel activity. Now, of course, as you mentioned, historically, buying and selling a home is one of the times people often do repair and remodel projects. And so, that could be a little bit of a headwind to the extent that activity dies down a little bit. So, lots of puts and takes. But I think we’re still expecting solid repair and remodel activity this year, albeit probably a little bit lower than we’ve seen over the last couple of years. But we’re still seeing good activity. Now, to your question about how did that trend in the fourth quarter, I mean there’s always a little bit of seasonality when you get into the cold months. You’re not going to be having people build decks in December like they would be in the spring. So, there’s a seasonality impact. But on balance, we’re still seeing solid demand and would expect that to continue in 2023.

Paul Quinn:

Just one question, just to sneak it under the hour on lumber. You’ve got the goal of growing it by 5% a year, and I appreciate the strike impacted and sales volumes were down a little bit over 5% in ‘22. But in the U.S. South, was your production up 5% in ‘22?

Operator:

Our next question comes from the line of Kurt Yinger with D.A. Davidson.

Davie Wold:

Yes. You bet, Kurt. So, we’re constantly evaluating how we think about share repurchase, the dynamic process, looking at all the factors, really, it comes back to weighing all the options available to us and allocating the capital in a way that creates the most long-term value for shareholders. So, as you know, we were active in 2022. We did $550 million of share repurchase, progressing well against our overall authorization. And as we’ve demonstrated, we’ve got the ability with our cash return framework to allow us to supplement the base with either the cash dividend or share repurchase. So, looking ahead to 2023, our process for evaluating it remains the same. I will note, of course, that with our cash return framework, to your point, the amount of cash committed to return to shareholders is going to flex up or down year-to-year based on the amount of FAD generated. But really, as we think about it from a framework perspective, from how we evaluate it, all that remains consistent, and we’ll continue to assess repurchases along with all the other priorities available to us and report back to you quarterly on our activity.

Devin Stockfish:

Yes. Well, as you know, the EWP market is most closely tied to single-family housing. And so, as we’ve seen that market slow, it has had an impact on EWP demand and you could see in our quarterly numbers in terms of production, we did take some extra holiday downtime to try to better match that. So, I think as we think about pricing generally, it’s always trying to balance market share, margins, operating posture, et cetera. We did take -- we did implement a targeted price reduction in EWP. We’ll kind of see how the rest of the quarter plays out to determine what that pricing trajectory looks like. Probably not going to give specifics on the pricing just for competitive reasons, but I would note, we’re still obviously above pre-pandemic levels. And to the extent that we see housing start to pick up again, we feel like we’re in a really good competitive position with our Engineered Wood Products.

Susan Maklari:

Thank you. Devin, I wanted to talk a little bit about Timberlands, the overall kind of sentiment there. As we think about the cyclical versus the secular trends coming into this year, what is the overall appetite and sentiment there for those assets? And are you seeing any differences by region?

Susan Maklari:

Okay. Thank you.

Operator:

Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.

Operator:

Greetings, and welcome to the Weyerhaeuser Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Andy Taylor, Vice President of Investor Relations. Thank you, Mr. Taylor. You may begin.

Devin Stockfish :

Thanks, Andy. Good morning, everyone, and thank you for joining us. Yesterday, Weyerhaeuser reported third quarter GAAP earnings of $310 million or $0.42 per diluted share on net sales of $2.3 billion. Adjusted EBITDA totaled $583 million in the third quarter. This is approximately 52% lower than the second quarter and was largely driven by further softening in lumber and OSB pricing as cautious sentiment weighed on the near-term housing and macroeconomic outlook. Additionally, and to a lesser degree, third quarter results were also impacted by the work stoppage in our Washington and Oregon wood products and timberlands operations. The work stoppage commenced on September 13 and impacted our 4 lumber mills in the Northwest as well as a portion of our Western Timberlands operations. I'm pleased to report that as of last night, we've resolved the work stoppage, and we'll begin resuming operations next week. I want to acknowledge how important these jobs are to our employees, their families and our communities and how difficult this situation has been for all involved. We appreciate everyone who worked diligently over many months to come to an agreement that is fair and competitive for our employees, and importantly, that we believe is sustainable for our company throughout the business cycle. With the work stoppage resolved, we're focused on welcoming our employees back, supporting our customers and returning to full operating capacity in the Northwest as quickly as possible. We currently expect to ramp up to full operating posture over 7 to 10 days after returning to work. With that, I'll now turn to our third quarter business results. I'll begin the discussion with Timberlands on Pages 5 through 8 of our earnings slides. Timberlands contributed $107 million to third quarter earnings. Adjusted EBITDA totaled $168 million, a $3 million increase compared to the year ago quarter. And third quarter EBITDA decreased by $51 million compared to the second quarter. This was largely driven by lower sales volumes in the West, resulting from -- stoppage late in the quarter as well as lower average realizations in the West, partly due to less export volume being shipped in the quarter. Turning to the Western domestic market. Despite lower lumber pricing, log markets remained fairly stable in the third quarter as log demand was steady and log supply in certain areas was somewhat constrained by harvest and haul capacity. Although Weyerhaeuser did not experience these challenges, the impacts kept log markets tensioned for most of the quarter. As a result, our third quarter domestic sales realizations were comparable to the second quarter. Notwithstanding favorable weather conditions, our fee harvest and domestic sales volumes decreased compared to the second quarter as a result of the work stoppage that commenced in mid-September. It's worth noting that our Western log and haul activities are operated by a combination of Weyerhaeuser employees and outside contractors. As a result, a portion of our contract harvest and haul operations continued through the work stoppage. Our forestry and road costs were seasonally higher compared to the second quarter, and per unit log and haul costs were lower. Turning to our export markets. In Japan, demand for our logs softened somewhat in the third quarter due to a number of factors, including an increase of European lumber imports into Japan. Japanese log sales volumes decreased significantly compared to the second quarter due to the timing of shipments, combined with the reduction in log export activity resulting from the work stoppage. Sales realizations were slightly lower in the quarter. In China, demand for our logs softened modestly in the third quarter due to the ongoing impacts from disruptions in the Chinese real estate market as well as pandemic-related lockdowns. Despite softer demand, log inventories at the Chinese ports declined steadily from the elevated levels reported earlier in the year, as log supply headwinds persisted. These include restrictions on Australian log imports, Russia's ban on log exports and a reduction in European wood flow into China. Average sales realizations for our China export logs decreased moderately compared to the second quarter, and sales volumes were significantly lower as we continue to intentionally shift volume to the domestic market to capture better margin opportunities. Our third quarter sales volumes to China were further impacted by a reduction in log export activity resulting from the work stoppage. Moving to the South. Southern Timberlands’ adjusted EBITDA was comparable to the second quarter and year ago quarter. Despite adequate log supply and softening finished product pricing, Southern sawlog and fiber markets remained stable for the majority of the third quarter as mills maintain steady demand to mitigate risks from ongoing supply chain challenges. As a result, our sales realizations were comparable to the second quarter. Fee harvest volumes were also comparable as weather conditions were better than expected in certain geographies and affected our harvest activity for a portion of the third quarter. Forestry and road costs were seasonally higher and per unit log and haul costs were comparable to the second quarter. On the export side, our log exports to China out of the U.S. South remain paused due to ongoing rules imposed by Chinese regulators to address potential phytosanitary concerns on imported pine logs. As a result, we continue to redirect logs to domestic mills in the India market during the third quarter. We continue to view this as a temporary headwind and maintain a positive longer-term outlook for our Southern export business to China and other Asian markets. In the North, adjusted EBITDA increased slightly compared to the second quarter due to significantly higher sales volumes resulting from the seasonal increase in harvest activity that is typical in the third quarter. Our sales realizations were comparable. Turning to real estate, energy and natural resources on Pages 9 and 10. Real Estate and ENR contributed $48 million to third quarter earnings and $60 million to adjusted EBITDA. Third quarter adjusted EBITDA was comparable to the year ago quarter, but $47 million lower than the second quarter, primarily due to a reduction in real estate acres sold partially offset by an increase in royalty income from our Energy and Natural Resources business. Similar to recent years, our 2022 real estate activity has been heavily weighted toward the first half of the year. Although activity is moderating in response to broader macroeconomic uncertainty, we continue to see steady demand for HBU properties as buyers continue to seek the safety of hard assets, resulting in high-value transactions with significant premiums to timber value. Regarding our Natural Climate Solutions business, we continue to engage with high-quality developers for renewable energy and carbon capture and storage opportunities across our acreage. And we're encouraged by the recent passage of the Inflation Reduction Act, which should drive incremental demand for these markets and further support our Natural Climate Solutions growth strategy. Additionally, we continue to advance our forest carbon pilot project in Maine and are well positioned for project approval over the next few months. Moving to Wood Products on Pages 11 through 13. Wood Products contributed $344 million to third quarter earnings and $395 million to adjusted EBITDA. Third quarter adjusted EBITDA was $517 million lower than the second quarter, largely driven by the decrease in lumber and OSB pricing during the quarter. Starting with the lumber and OSB markets. Benchmark lumber and OSB prices entered the third quarter having stabilized from significant declines earlier in the year as buyers reentered the market to bolster lean inventories. Buyer sentiment improved slightly following a brief decline in mortgage rates and in response to solid June housing starts data. This dynamic continued through most of July, resulting in a steady increase in benchmark pricing for both products. By early August, buyer sentiment once again turned cautious resulting from rapidly rising mortgage rates, housing affordability concerns and in response to unfavorable July housing starts data. Buyers remain cautious through the end of the quarter, largely limiting orders to necessity purchases. While OSB prices stabilized in September, lumber prices moved gradually lower throughout the end of the quarter. Although for context, it's important to note that lumber and OSB prices each remained at healthy levels on a historical basis. Adjusted EBITDA for our lumber business decreased by $271 million compared to the second quarter. Our average sales realizations decreased by 28%, while the framing lumber composite pricing decreased by 30%. Our sales and production volumes decreased moderately compared to the second quarter largely driven by the impact of the work stoppage at our Washington and Oregon mills. Unit manufacturing costs were higher during the quarter and log costs decreased moderately. Adjusted EBITDA for our OSB business decreased by $231 million compared to the second quarter. Our average sales realizations decreased by 41%, while the OSB composite pricing decreased by 44%. Our sales and production volumes decreased slightly compared to the second quarter due to downtime for planned annual maintenance. Third quarter sales volumes were further impacted by ongoing rail challenges in Canada. Unit manufacturing costs were higher in the quarter and fiber costs were comparable. Engineering Wood Products adjusted EBITDA decreased by $7 million compared to the second quarter. Sales realizations were higher for most products in the third quarter, and we remained on allocation for most products throughout the quarter. Sales and production volumes were lower for most products due to downtime for planned annual maintenance. Sales volumes were further impacted by ongoing transportation challenges in Canada and labor constraints at certain facilities. Unit manufacturing costs were higher in the third quarter, and raw material costs were significantly lower primarily for OSB web stock. In distribution, adjusted EBITDA decreased by $7 million compared to the second quarter, largely driven by lower sales volumes for EWP and Specialty Products. Despite the quarter-over-quarter reduction, this was the strongest third quarter adjusted EBITDA result on record for our distribution business. With that, I'll turn the call over to Davie to discuss some financial items and our fourth quarter outlook.

Devin Stockfish:

Thanks, Davie. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Over the last several months, we've continued to see softening in new residential construction activity from the peak reported in April, particularly in the single-family segment. There have been notable reductions in new and existing home sales and home builder sentiment has turned more negative. Consequently, we expect near-term housing outlook to remain less favorable compared to the last couple of years, largely driven by several ongoing headwinds, including a rapid increase in mortgage rates, housing affordability challenges, high inflation and growing concerns about the economy. That all being said, homebuilder backlog should offer some additional support for building activity and wood products demand for the remainder of 2022 and into early 2023. And longer term, we continue to have a favorable view on housing fundamentals, given strong demographic trends, a significantly underbuilt housing stock, a healthy labor market and solid household balance sheets. Turning to repair and remodel. Despite softening in the housing market, repair and remodel activity remained fairly stable in the third quarter and continue to be supported by steady demand from the professional segment. Demand from the do-it-yourself segment has continued to come off the recent pandemic peaks returning to a more normalized pre-pandemic demand level. Although lower home sales activity ordinarily would be a drag on repair and remodel spending, we may, in fact, see some incremental spend on repair and remodel projects as homeowners elect to invest in remodeling projects in their existing homes if they're priced out of purchasing a new home in this more challenged mortgage rate environment. This should provide near-term support for additional repair and remodel activity, especially from the professional segment. Further, we remain optimistic on longer-term fundamentals supporting the repair and remodel segment, including an aging housing stock and favorable home equity levels. We expect these dynamics to support steady repair and demand for the balance of 2022 and into next year with activity levels comparable to pre-pandemic levels. In closing, we delivered solid results across our businesses in the third quarter despite increasing macroeconomic headwinds. And I'm incredibly proud of the continued focus and resiliency demonstrated by our teams. Their collective efforts have generated year-to-date adjusted EBITDA of $3.3 billion and adjusted funds available for distribution of $2.4 billion. Although near-term market conditions have moderated, we maintain a constructive longer-term outlook for the demand fundamentals that support our businesses. Looking forward, our balance sheet is exceptionally strong. We have a competitive cost structure and we are very well positioned to navigate through a full range of market conditions. We remain focused on serving our customers and driving long-term value for our shareholders through an unmatched portfolio of assets, industry-leading performance and disciplined capital allocation. Now before we move to questions, I would like to briefly provide some details to help quantify the work stoppage impacts to our third quarter results and fourth quarter outlook. I'm sure that would have been a question, so we'll just go ahead and cover that now. Starting with Timberlands, it is important to note that the decrease in volume during this period is merely deferred, not lost. We will capture this deferred volume over the next year or so. And in the meantime, that volume will continue to grow on the stump. Additionally, I'd point out that in any given period, we have a base level of spend for items such as forestry, silviculture and roads that we maintain to ensure that we capture long-term value. So we've continued to incur those costs during the course of the work stoppage, which means our margins will be significantly lower during this period, but margins will then increase above typical levels in the future period when we ultimately harvest that volume. Taking all of that into consideration, the work stoppage resulted in approximately 360,000 tons of deferred volumes in the third quarter compared to our original plan. This translated to an EBITDA impact of approximately $25 million. But again, most of that will be recovered in future periods when the deferred log volume is harvested next year. Looking ahead to the fourth quarter, we expect Western Timberlands EBITDA will decrease by approximately $50 million from the third quarter, with approximately half of that decrease attributable to deferred volume from the work stoppage and the other half due to expected lower average sales realizations during the quarter due to general market conditions. We expect approximately 500,000 tons of deferred volumes in the fourth quarter resulting from the work stoppage. For Wood Products, the work stoppage lowered production volumes by approximately 60 million board feet in the third quarter, and we expect around 170 million board feet of impact in the fourth quarter. Given the more rapid pace of price erosion in lumber versus logs in the West, which compresses margins until log prices adjust accordingly, the last lumber production in September and October hasn't had a material impact on EBITDA in the third or fourth quarters. So with that, I think we can go ahead and open it up for questions.

Susan Maklari :

My first question, Devin, is you talked a little bit about some deflation in the input costs and wood products that you started to see in the quarter, and it feels like that could continue into the end of the year. As we do think about the cost structure coming down and given what is going on in housing broadly, can you talk about the ability to hold some of that price that you've seen in your EWP business over the last couple of years and perhaps what that could mean for profitability as we think about going through '23?

Susan Maklari :

That's helpful. And then moving over to Timberlands. You talked about the fact that overall demand there remains pretty healthy. Can you just talk about how you're thinking of valuations as we go into next year? And the supply-demand dynamics as we think longer term about what is going on with Timberlands and obviously, the tie-in there with Natural Climate Solutions?

Susan Maklari :

Okay. And then I'm going to squeeze 1 more in, which is just you mentioned, obviously, you've stepped up the buyback activity this year. You still have some more room remaining on the current authorization. Any thoughts on how you're thinking of continued buybacks given where the stock is trading relative to some of the other alternatives for capital?

Susan Maklari :

Good luck with everything.

Anthony Pettinari:

On the impact from the strike, the deferred volumes that you discussed on the timberland side, is it accurate to say that the volumes that you lost in 3Q and 4Q of this year will mostly be recovered in 3Q and 4Q of next year? Or is it something that we could see more in the first half of the year? Or just wondering if there's any kind of finer point you can put on sort of the cadence of ultimately recovering those volumes over the next year?

Anthony Pettinari:

Okay. That's helpful. And then just a lot of materials companies have talked about a large buildup of customer inventories that have become kind of an impediment and negatively impacted demand. It might take a couple of quarters to work through. I think on the log side, you said mill customers have ordered pretty fully to compensate for supply chain issues. I'm just -- if I got that right. I'm just wondering, do you see any risk of if supply chain eases quickly that, that kind of inventory build becomes maybe a bit of a headwind for demand into the end of the year or in early '23? And then just maybe if you could -- maybe contrast that with inventory situation in Wood Products, especially lumber, that would be helpful.

Anthony Pettinari:

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

George Staphos:

Thanks for the details. Can you hear me okay? First question, and you talked about this during Davie's remarks, the ability for the company to flex its capital return with the parameters and guardrail that you have around your policy and strategy. Could you talk a bit about where you see the potential maybe to slow the regular dividend increase. We know the goal is 5% per year over time, given what could be a bit of a cyclical pullback in your markets over the next year? Or at this juncture, you feel that given what you know and recognizing it's a Board decision that 5% growth seems pretty reasonable, no matter where we are in the cycle? How would you have us think about that?

George Staphos:

Next question, and I had I mean, obviously, we're going again through a bit of a downturn directionally, it wouldn't be a surprise. But nonetheless, can you give us a bit more color in terms of what is happening with log realizations, why they're declining on the West, recognizing that Weyerhaeuser doesn't dictate the market with the work stoppages that would have deferred and did, some of the harvest that would have been available in the market and the logs that would have been available in the market. So help me understand why even with the stoppage at least from your vantage point, some supply constraints, we're seeing log pricing and realizations down in the West and kind of what's going on there?

George Staphos:

And last one, and I'll turn it over. Can you give us a bit more color in terms of export markets, what we're seeing in terms of fourth quarter right now, why you would be -- if you would be positive on export, again, particularly from the West, recognizing that we're going through a global slowdown. China obviously got its issues and housing remains perhaps less able to tension so you have this potential supply. What's your outlook for export out of the West realizations and what's happening right now? Good luck in the quarter.

George Staphos:

Thank you, Devin. Good luck.

Mike Roxland :

Just a quick 1 on guidance for timber prices in the U.S. South. You mentioned that you're expecting flat U.S. South timber pricing. Is that a deliberate or stumpage basis? What I'm trying to get at is I'm trying to get a sense of what's happening to underlying timber prices themselves. Timber market South and others have noted declining stumpage prices over the last 2 quarters. And that's following a number of quarters, even years where stumpage has gone up. So I'm just trying to get a sense of your guidance relative to -- your guidance relative to, I guess, stumpage pricing.

Mike Roxland :

Got it. I appreciate the clarification. But it would be fair to say with stumpage coming down, obviously, that could put pressure on the delivered prices at some point as well, particularly if you noted that whole and harvest cost will be coming down. So I think what do you think is driving the -- looking at the -- is decline in stumpage pricing a function of what we're seeing in the overall housing market and some looseness in wood products. And how do you think that ultimately plays out to delivered pricing as well?

Mike Roxland :

Got it. That makes sense. Just 1 quick final question. Just on order files. Last quarter, you mentioned with respect to OSB, that order file was normal, a little longer lumber and that EWP was an allocation. Given what's transpiring over the last couple of months, where do they stand now?

Mike Roxland :

Got you. Good luck for the balance of the year.

Mark Wilde:

Devin, I just want to say an opening. I mean a $395 million quarter in Wood Products is quite remarkable when you look back historically. So we're down a lot, but it's still a rather remarkable level, I think, by any standards. My question is first on the timberland side, can you just remind us in the West what your ability is to kind of flex just year-to-year kind of depending on market conditions. I know you want to continue to generate cash to cover that base dividend. You want to have some stability in terms of your contractors and keeping them employed. But what is your ability to kind of dial up and dial down depending on where the log market is?

Mark Wilde:

Okay. And the other question I had is just you produce lumber up in BC, you produce lumber in the Pacific Northwest. You produce lumber kind of across the [indiscernible]. I wondered if you could just give us a sense of how you see kind of regional profitability at the moment and also what you see kind of happening to those costs because low costs are coming down in BC and they're coming down in the Pacific Northwest, and it looks like that's probably going to carry into the first quarter.

Mark Wilde:

Okay. That's helpful. Good luck in the fourth quarter and next year.

Operator:

Our next question is from Mark Weintraub with Seaport Research Partners.

Devin Stockfish:

Yes, Mark, and you've been around the industry for a long time, so you'll appreciate this answer. I mean it's hard to give a value on a typical acre because they vary so much depending on stocking, depending on percentage planted pine versus markets, et cetera. So it's hard to give you a specific dollar value. But what I will say, and I think you can see this in the deals that have been done over the last 12 to 18 months, we've definitely seen the values of timberlands going up. We've seen certainly some deals that are going north of $2,000 an acre, that a few years ago where you would have said maybe were $1,700 an acre deals. We've seen some mid-2000, high 2000 kind of deals lately that a few years ago would have been closer to that, too. So we've certainly seen some real, I think, price appreciation in the value of timberland deals, particularly, I would say, quality deals. When you see good, high-quality timberlands deals come to market. Those are getting very, very strong valuations these days.

Devin Stockfish:

Yes, Mark. I think at a high level, I'm not sure it fundamentally changes how we think about things. We have been actively managing the portfolio and that is on the sell side and the buy-side for a number of years. We are always looking for opportunities to improve the portfolio. And so when we have a buyer that is willing to pay us substantially more than we think the asset is worth, then we're happy to do those deals on the sell-side. And that cash can be used for any of the capital allocation priorities that we have, whether that's additional timberland acquisitions, share repo, debt paydown, all of those things. So to the extent that this gives us an opportunity to create some capital to redeploy in other areas, that's certainly an opportunity for us. I will say just as a baseline, our view is that, in general, timberland values are going to go up over time. And there are a variety of reasons why we think that, whether it's our view on log prices over time, but really as much as anything on all of the alternative values that you can drive across timberland ownership. And so that also goes into the consideration as we think about the longer-term price appreciation of some of these assets.

Paul Quinn:

Maybe just start in your Natural Climate Solutions. You mentioned your forest curbing pilot project in approvals over the next couple of months. What does that involve? And can you quantify any kind of potential economic upside from that?

Paul Quinn:

Okay. Great. And then on Wood Products, I mean, Mark pointed at the $395 million in adjusted EBITDA, but I know that over half of that comes from from EWP and distribution, which is typically late cycle, how sustainable is that momentum that you're seeing in EWP? And why are you guiding for volumes lower in Q4?

Paul Quinn:

Okay. And then just slipping a bonus question. Just on OSB, you've got cost significantly lower going forward. Just wondering why that is.

Mark Wilde:

Sorry, on your guidance for OSB, you have costs significantly lower in the manufacturing side. I'm just wondering what that pertains to.

Paul Quinn:

Yes. Sorry, Devin. I confused you. I'm talking about the OSB segment itself, the manufacturing cost of OSB. You've got that going down in Q4. Just wondering why.

Operator:

Our final question is from Kurt Yinger with D.A. Davidson.

Devin Stockfish:

Yes. On the Timberland side, I would say the biggest driver overall has been fuel cost. That is something that plays in both on the haul side but also on the logging side. So that's had a real impact from a cost standpoint. To the extent that we see fuel costs come down over the next year to 18 months, that certainly will be a positive for us on the cost side. Beyond that, we've got a whole host of initiatives that are focused on driving down costs, whether it's -- we've got a transportation initiative to drive higher loaded mile, we've got a number of automation mechanization projects going on across timberlands to try to reduce overall labor cost. So we're always focused on that. But I would say in the near term, probably the biggest opportunity from a magnitude standpoint is around fuel costs.

Operator:

We have reached the end of the question-and-answer session. I would like to turn the floor back over to Devin Stockfish for closing comments.

Operator:

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

Operator:

Greetings, and welcome to the Weyerhaeuser Second Quarter 2022 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. [Operator Instructions] 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.

Devin Stockfish:

Thanks, Andy. Good morning, everyone, and thank you for joining us. Today, I'm very pleased to welcome David Wold to the call. David became our Chief Financial Officer in May. He previously served as our Chief Accounting Officer and brings 20 years of significant accounting, financial and strategic acumen to the CFO role. He's demonstrated outstanding leadership since joining Weyerhaeuser in 2013, and I'm excited to have Dave on our senior leadership team and to partner with them as we execute on our long-term strategy. This morning, Weyerhaeuser reported second quarter GAAP earnings of $788 million or $1.06 per diluted share on net sales of $3 billion. Adjusted EBITDA totaled $1.2 billion in the second quarter. We delivered strong results across each of our businesses, and I'd like to thank our teams for their exceptional work and continued focus as we continue to navigate dynamic market conditions. Through their collective efforts, we've generated year-to-date adjusted EBITDA of $2.7 billion, our strongest first half EBITDA results on record. Turning now to our second quarter business results, I'll begin the discussion with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $153 million to second quarter earnings. Adjusted EBITDA totaled $219 million, a decrease of $28 million from the prior quarter. In the West, adjusted EBITDA decreased by $21 million compared to the first quarter. Western domestic log market softened slightly in the second quarter as mill inventories recovered at the outset of the quarter and lumber prices declined considerably from elevated levels earlier in the year. As a result, our second quarter domestic log sales realizations were moderately lower compared to the first quarter, but remained high relative to historical pricing levels. While log supply in the Western system was ample at the outset of the quarter, it became constrained by unseasonably wet weather as the quarter progressed, which drove mill inventories to below target levels by quarter end, particularly in Oregon. These adverse weather conditions resulted in a moderate reduction in our fee harvest volumes compared to the first quarter. Forestry and road costs were seasonally higher, and per unit log and haul costs increased significantly in the second quarter as we transition into higher elevation logging units. Turning to our export markets. In Japan, demand for our logs remained strong in the second quarter. Lumber imports from Europe into Japan continue to be restricted by ongoing global shipping challenges for most of the quarter. This dynamic continued to drive increased market share for our customers and robust demand for our logs. As a result, our Japanese sales realizations were moderately higher compared to the first quarter. Our sales volumes increased significantly, resulting from strong demand and timing of ships. In China, log inventories at the ports declined slightly in the second quarter, resulting from improved takeaway as pandemic-related lockdowns started to ease. Imports of lumber and logs into China continue to be limited by global logistical challenges and port congestion. Additionally, log supply into China continues to be impacted by restrictions on Australian logs, Russia's recent ban of log exports to China and disruptions of European wood flow resulting from the Russia-Ukraine conflict. As a result, demand for our Western logs remained favorable in the quarter, and our sales realizations for China export logs increased moderately. Our sales volumes to China, however, decreased significantly as we continue to intentionally shift volume to the domestic market to support our domestic customers and capitalize on favorable margin opportunities. Moving to the South, Southern Timberlands adjusted EBITDA decreased by $5 million compared to the first quarter. Notwithstanding weakening lumber and OSB pricing and a seasonal increase in log supply. Southern sawlog markets remained favorable during the second quarter as mills maintained elevated inventories to mitigate risks from ongoing transportation challenges. Fiber markets experienced a similar dynamic. As a result, our sales realizations increased slightly compared to the first quarter. Our fee harvest volumes were moderately higher as seasonal weather patterns transitioned to drier conditions. Forestry and road costs were seasonably higher and per unit log and haul costs increased significantly, primarily for fuel-related costs. Turning to our Southern export business. Our log exports to China remain temporarily paused due to the new phytosanitary regulations on pine logs put in place last year by Chinese regulators. We remain optimistic that this headwind for pine exports to China will be transitory and still maintain a constructive longer-term outlook for our Southern export business to that market. In the meantime, we continue to redirect logs to domestic mills in the U.S. South and look to grow our India export market. In the North, adjusted EBITDA decreased by $2 million compared to the first quarter due to significantly lower sales volumes associated with seasonal spring breakup conditions, partially offset by significantly higher sales realizations for most products. Turning to real estate, energy and natural resources on Pages 10 and 11, real estate and ENR contributed $65 million to second quarter earnings and $107 million to adjusted EBITDA. Second quarter adjusted EBITDA was $9 million lower than the first quarter, primarily due to the timing and mix of properties sold, but was $16 million higher than a year ago quarter. Notwithstanding the recent macroeconomic headwinds, we continue to capitalize on favorable demand for HBU properties, as buyers seek the safety of hard assets in an inflationary environment, resulting in high-value transactions with significant premiums to timber value. Now for a brief comment on Natural Climate Solutions. Following our announced agreement with Oxy Low Carbon Ventures in March for our first carbon capture and storage project in Louisiana, we continue to advance discussions with high-quality developers as this market continues to emerge. Additionally, we continue to make progress on our forest carbon pilot project in Maine and are working towards project approval by year-end. Moving to Wood Products on Pages 12 through 14. Wood Products contributed $863 million to second quarter earnings and $912 of adjusted EBITDA. Compared to the first quarter, adjusted EBITDA decreased by $321 million as lumber and OSB prices declined considerably from elevated levels earlier in the year, THESE are outstanding results considering the ongoing supply chain headwinds faced by our teams in the second quarter. Starting with the lumber and OSB markets, benchmark lumber and OSB prices entered the second quarter on a downward trajectory as demand for homebuilding and repair and remodel soften and buyers remain lean inventories given uncertainty in the markets. Despite lean inventories throughout the channel, sentiment was cautious as buyers assess downside risk of elevated price levels and were reluctant to build inventories in a dynamic pricing environment. By late April, benchmark pricing for both products stabilized as buyers took steps to replenish inventories to prepare for the spring building season and in response to strong April housing starts data. This dynamic continued through mid-May, at which point, buyer sentiment once again turned cautious resulting from rapidly rising mortgage rates, housing affordability concerns and the prospects of a possible recession. This drove benchmark prices downward through late June before stabilizing at the end of the quarter as buyers reentered the market to bolster lean inventories. Despite the substantial reduction in lumber and OSB prices during the quarter, benchmark prices for both products remain elevated compared to pre-pandemic historical averages. Adjusted EBITDA for our lumber business decreased by $289 million compared to the first quarter. Our average sales realizations decreased by 25% in the second quarter, while the framing lumber composite pricing decreased by 32%. Our sales volumes increased significantly due to seasonal inventory draw downs and improved production. Log costs increased slightly, primarily for Canadian and Southern logs and unit manufacturing costs were slightly higher during the quarter. Adjusted EBITDA for our OSB business decreased by $60 million compared to the first quarter. Our average sales realization decreased by 14% in the second quarter while the OSB composite pricing decreased by 34%. This relative outperformance was largely a result of order files that lag rapidly declining OSB prices. Our sales volumes increased slightly, resulting from improved production. Unit manufacturing costs were moderately higher in the quarter and fiber costs were comparable. Engineered Wood Products adjusted EBITDA increased by $37 million compared to the first quarter and established a new quarterly EBITDA record. Sales realizations were significantly higher for most products, and we continue to benefit from previously announced price increases for solid section and I-joists products. This was partially offset by significantly higher raw material costs, primarily for OSB web stock. Production volumes were significantly higher for most products as veneer supply improved. As a result, sales volumes increased for most products in the second quarter. In Distribution, adjusted EBITDA decreased by $24 million compared to the first quarter, primarily due to lower margins resulting from the commodity price correction. The distribution team did a terrific job in managing inventories in this dynamic pricing environment. With that, I'll turn the call over to Davy to discuss some financial items and our third quarter outlook.

Devin Stockfish:

Thanks, Dave. Before wrapping up this morning, I'll make a few comments on the housing and repair and remodel markets. Second quarter housing starts averaged 1.65 million units on a seasonally adjusted basis, a 4% reduction compared to the first quarter. While April housing starts reached the highest monthly level since 2006, activity softened as the quarter progressed. Housing permits in the second quarter averaged 1.73 million units, a 7% reduction compared to the quarter. As we look out at the rest of the year, we do expect some softening in residential construction relative to earlier in the year, primarily as a result of the rapid increase in mortgage rates, ongoing housing affordability concerns, high inflation and concerns over a possible recession. We've already started seeing impacts from these headwinds with the reduction in new and existing home sales in recent months and through the most recent homebuilder sentiment data. However, as always, context is important. To that end, I would note that we are still expecting housing starts and demand for wood products to be above pre-pandemic levels in 2022 despite these near-term challenges. Homebuilders have a significant backlog of houses to complete and we expect this backlog will support construction activity in the back half of 2022. And importantly, we remain constructive longer term on housing demand fundamentals given favorable demographic trends of significantly under-built housing stock, a healthy labor market and solid household balance sheets. Turning to repair and remodel, where activity remained fairly stable quarter-over-quarter and continue to be supported by favorable demand from the professional segment. Demand from the do-it-yourself segment softened slightly in the second quarter as consumer sentiment turned cautious resulting from the recent macro uncertainties. That said, as the housing market enters a period of relative softening, this should result in more people remaining in their existing homes. And with healthy household balance sheets favorable home equity and an aging housing stock, we continue to expect steady demand from the repair and remodel segment with activity above pre-pandemic levels. In closing, our teams are delivering strong operational and financial results. Year-to-date, we've generated $2.7 billion of adjusted EBITDA and $1.9 billion of adjusted funds available for distribution. Looking forward, we remain constructive on long-term demand fundamentals that support our businesses, notwithstanding the recent macroeconomic headwinds. Our financial position is exceptionally strong and we remain committed to serving our customers and delivering industry-leading operating performance across our businesses. We are very well positioned to navigate these dynamic market conditions and to generate long-term value for our shareholders. And with that, I think we can open it up for questions.

George Staphos:

Three questions for me, and I'll turn it over. And congratulations again, Dave. First off, on the acceleration of equipment with extended lead times, just trying to get at what exactly is happening that you're now able to accelerate the -- it sounds like the deliveries on machinery where there had been an extended lead time is something happening in the supply chain where that's improving? Secondly, again, related to wood, is there anything out of the ordinary with the maintenance you're doing in OSB in the third quarter, if you could talk about what's going to be going on at the mills that we should be aware of if there's any way to sort of quantify what the production loss might be? And then lastly, can you give us a quick update on Maine, where you stand now with the stage gating in terms of the audits and certification. I know you said you want to be ready by the end of the year, but if you can sort of fill in a little bit more color there, that would be great? Good luck in the quarter.

George Staphos:

And then lastly on Maine.

Operator:

Our next question is from Susan Maklari with Goldman Sachs. Please proceed with your question.

David Wold:

Thank you. Great to be here.

Devin Stockfish:

Yes. Well, great question. Obviously, there's been a lot of commentary around what's going on with the housing market. We can get into that in further detail if you'd like. But certainly, I think we are seeing some slowing. As we think about heading into this period of some choppiness in the housing market, I think the key takeaway is we've been preparing our business for just this situation for a number of years. All the work that we've done around OpEx and cost control to have industry-leading performance, the work we've done to get the balance sheet in a really good place, the variable dividend structure. All of these things give us a lot of flexibility if we run into a period of softness. Now our personal view is we'll probably see some softening. I'm not sure it's going to last all that long because we still feel pretty good about the underlying fundamentals with the under-billed housing stock and all the other things we've been talking about for a number of years. But if we do see a period of softening, we'll continue to operate our business well, focus on cost, focus on OpEx and innovation to make sure that we protect our margins as much as possible and serve our customers. So we'll see what happens from a housing standpoint, but I think we're really well positioned if we do see some softening.

Devin Stockfish:

Yes. If you're talking about Timberlands transactions in particular, I think the answer is no, things really haven't changed. We're still seeing very strong demand for Timberland transaction. I think you've seen that in some of the deals that have been announced lately, we're seeing very strong pricing for Timberland assets. I think that's really a function of a few different things. First of all, historically, Timberlands have been a good place to be in an inflationary environment. So there may be some of that. But I think more importantly, there's just a view that the longer-term value in Timberland assets is there. And you've seen really over the last 12 to 18 months, the values that people are paying for Timberland deals continues to go up. And I think it's just a reflection of interest in the asset class. So notwithstanding some of the choppiness we've seen and some of the uncertainty we've seen in the markets generally, that really hasn't flowed through to the Timberlands transactions.

David Wold:

Yes, Sue, you bet, this is Davy. As we've said in the past, we think about share repurchase as a useful tool to return cash to shareholders under the right circumstances, specifically when we see it as the best option for creating long-term shareholder value. So, yes, that increase to our authority of $1 billion last fall, that gives us more flexibility to buy back stock when we see good opportunities there. So, we did repurchase $138 million in Q2 at an average price of $36.23 per share, and we'll continue to look at those opportunities moving forward. We've progressed overall bigger picture against that $1 billion authorization. We've done $333 million year-to-date. So, we're -- cumulative to date since we announced that authorization. So, we're making steady progress against that. We'll continue to assess those share repurchases along with all the other options we have for cash deployment, and we'll report out on that share repurchase activity quarterly.

Mark Weintraub:

Devin, if we do go through a period of softer markets in wood products because of housing, what are some of the other factors that you think might make where pricing and profitability for your business stabilize, different than maybe what it might have previously beyond some of these internal measures that you've taken, in particular, I'm thinking about high costs in BC. Is that going to be a factor do you think in the future being different than what five years ago, let's say, how things might have played out in a softer supply-demand environment?

Mark Weintraub:

Okay. And kind of maybe a small question, but -- so the CME is going to be launching a new futures contract. Does that -- is that going to matter for your business at all, do you think? And also, why might there not be anything for Southern Pine?

Devin Stockfish:

And on the Southern Yellow Pine Point, Mark, I do think that's going to be down the road. They've talked about thinking about that. They're just kind of -- they're doing this one first, and they'll look at Southern Yellin down the road.

Mike Roxland:

Just want to get a sense for you to what you're seeing in your order books at present, especially wood products specifically, any shortening, less committed orders, more purchases? And the reason I'm asking is, again, go back to home building, you've seen a notable pickup in the homebuilder cancellation rates. And as a result of that, you're also -- you're seeing more homes being placed in the market by billers just in one of products. So I'm wondering if what the home builders are seeing was actually trickling into your order book at present for wood products.

George Staphos:

Got you. How far do they typically the order books, in terms of line of sight.

Mike Roxland:

Got you. I appreciate it. One just quick follow-up -- second question. Just wondering if you could help us frame how you're thinking about harvest slowing housing demand environment? And if I think about the -- Great Recession, nothing we're headed there. But during the Great Recession, if I recall correctly, Weyerhaeuser reduced its harvest by over 30%, I think in the 2009, 2010 time frame, your peers did something similar. And as a result, post Great Recession, you had a very slowly improving housing environment. And long story short, you're dealing with a situation in the U.S. South that goes today where timber there's excess timber on this and it still hasn't been worked through fully just given the that occurred during that period of time. So I'm wondering if you can help us think about if we do get into a recession, I mean we're there right now, we're in a recession based on GDP numbers yesterday. But if it gets even more severe, how you plan to harvest to avoid a repeat of what happened during the Great Recession?

Operator:

Our next question comes from Kurt Yinger with D.A. Davidson. Please proceed with your question.

Devin Stockfish:

Yes. Well, great question. I think the answer is really it depends on a number of different factors. There's no question that in the West, you do see a stronger correlation between log prices and lumber prices. Obviously, a sawmill is not going to pay a log price that causes them to go cash negative. So there is definitely a correlation between log prices and lumber prices. But there are two other dynamics at play that also weigh in on that. One of which is just the very tight supply demand dynamic that's going on in the West. There's -- it's a highly tensioned wood basket. And so typically, you're going to see log prices stay pretty close to that level where mills can still make some profit. And the other piece, as you mentioned, is just the export market. That is a big market for us. We send a fair number of logs over to the Japan market and depending on domestic conditions also to China. So those three things really work in unison to set log prices. So the way I would think about it as we roll into 2023, regardless of what's going on in the economy, it's still going to be a tension wood basket. We still anticipate having good demand from our export customers. And so I think the way it will play out is you'll see log prices stay as strong as they can to still allow mills to make some level of profit. So we're still expecting a good solid market in 2023, even if you do see a little bit of a softening in the economy.

Devin Stockfish:

Yes. Well, first, just a shout out to our EWP team. They're doing just a remarkable job running that business. It's been a really good run. We've had a lot of demand for EWP products. And so that's really translated into great profitability in that business. As we look forward, you're absolutely right. That product line is much more tailored to single family. And so to the extent you see some softening there, clearly, that will have some impact. But I do think just for perspective, that is a market where the supply of EWP has been pretty short, and that's resulted in a lot of shortages for our homebuilder customers. And so to some level or to some extent, there's a little bit of room just to catch up to have that supply meet demand, even if you see single-family tick down a little bit. The other thing I would just mention is during this period where there's been such a shortage of engineered wood products, you have seen builders converting into 2x10, 2x12s, open web, and so there's still some opportunity for EWP if housing softens a bit to go take some of that market share back. So absolutely, it is tied to single family, but I think even with a softening housing environment, the EWP business is still going to be pretty strong in 2023.

Paul Quinn:

Just a couple of questions. Just -- and welcome aboard, Davy. Just Devin, just you had performance of Wood Products in the last couple of years here. Is there any issues around your REIT test?

Paul Quinn:

Okay. And then back to the Investor Day in '21, you had wanted to grow your lumber production by about 5% annually. Is that going to happen in 2022 here?

Paul Quinn:

Okay. And then what really needs to happen to accelerate and fully develop your Natural Climate solutions initiative?

Operator:

Our next question comes from Mark Wilde with Bank of Montreal. Please proceed with your question.

Devin Stockfish:

Yes, Mark. I mean, again, I'll say we look at share repurchase as a useful tool in the right circumstance. So -- we're fortunate to have a lot of levers, whether it be M&A, investing in the business, paying down debt, base and variable dividend payments, we think share repurchase can be an important element of our capital allocation mix. A lot of it is going to depend on our ability to look at that acquisition target and the patients that we'll need as we are disciplined as we pursue those Timberland acquisitions and evaluating all the options that are available to us to create shareholder value over time.

David Wold:

Sure. Yes. I mean, as you'd expect, we've got a view on the intrinsic value of the Company, and that's informed by a number of factors. It's -- importantly, it's based on our long-term view of the Company. So, we've got some thoughts on that that we look at, and we're always evaluating all the opportunities available to us, and it's going to depend on the events and circumstances that are in place at the time and the opportunities that are available to us. But we'll continue to be disciplined in all of those options and weighing them opportunistically.

Devin Stockfish:

Yes, Mark. So a couple of thoughts here. I do think that this view, there's an ESG play embedded within Timberlands is playing into discount rates and just the overall interest in the asset class. And you can see that around the margin, certainly with some of the private equity-like capital that's coming into the space. You see JPMorgan buying Campbell. Things of that nature, I think, are very much related to ESG, carbon, natural climate solutions, those kinds of opportunities. The thing that makes it hard to really quantify the impact of that on discount rates is you're also seeing money come in from all over the globe, where the discount rates people look for in Europe are a little different maybe than you would think in the U.S. So some of that gets a little muddied, but I think you're absolutely right directionally that ESG has lowered the discount rates people are using. In terms of giving you the range, I would still say kind of 4.5 to 5.5 is normal. But that being said, we've certainly seen some transactions lately, at least from our math, that seem to be pushing those discount rates quite a bit further. And particularly when you see some non-traditional type buyers come into the market, some of those discount rates can get really low. So, I think you are seeing on balance discount rates go down a bit in some of the transactions we've seen lately.

Devin Stockfish:

Yes. Well, Mark, I'm probably not going to speculate on future pricing, but I will offer just a couple of directional comments on that. I think the big reason why you've seen this pricing dynamic is in a reasonably strong demand environment, there's just not enough EWP supply to go around. And so you take that, coupled with the fact that some of the input costs for EWP, so think OSB, web stock, resin, some of these other input costs have also gone up quite a bit. That's really just translated into a very strong pricing environment. And as I mentioned earlier, we're still on allocation across all of our products. Now obviously, as we go forward, this product feeds primarily into single-family, although I will say just as an aside, I do think there's lots of opportunity for EWP to find market share in commercial multifamily, some of the other focus on CLT, that kind of thing. There's more market opportunity for EWP. But even just a single family, if that goes down, that supply and demand dynamics will play out and impact pricing, but the underlying issue of EWP being in relatively short supply, unless you saw housing just fall off a cliff, I think that's more or less still going to be the case going forward.

Buck Horne:

Appreciate squeezing me in. There's just continue to be -- seems like announcement after announcement about more expansions and new sawmill capacity coming into the U.S. South and some of which certainly have some pretty big price tags associated with that when you think about the capacity per 1,000 board feet. It seems like there's a really big disconnect right now in terms of how the private market is viewing valuations for U.S. South sawmill capacity versus kind of what's implied in the public market right now. Do you think that presents any opportunities for M&A or industry consolidation going forward?

Buck Horne:

Okay. I appreciate those thoughts. Lastly, just for me, fire-related risks this year, has the wet weather out West really mitigated the impact for fires this year? How do you think that may shape up as we move through the summer?

Operator:

We've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Devin Stockfish for closing comments.

Operator:

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.