Weyerhaeuser Company (NYSE:WY) Q1 2024 Earnings Call Transcript

Weyerhaeuser Company (NYSE:WY) Q1 2024 Earnings Call Transcript April 26, 2024

Weyerhaeuser Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Weyerhaeuser First Quarter 2024 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.

Andy Taylor: Thank you, Rob. Good morning everyone. Thank you for joining us to discuss Weyerhaeuser's first quarter 2024 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer; and Davie Wold, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

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. Turning now to our first quarter business results. I'll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $80 million to first quarter earnings. Adjusted EBITDA was $144 million, which was comparable to the fourth quarter. In the West, adjusted EBITDA increased by $3 million compared to the prior quarter.

Starting with the Western domestic market. Adverse weather conditions in January temporarily impacted log supply and demand across the region. As the quarter progressed, log supply in the system increased as weather conditions improved. Several recent mill curtailments, primarily in Oregon, also added to log availability in the region. Despite this dynamic, the market remained fairly balanced due to healthy log demand and improvements in lumber pricing. As a result, pricing for our logs was comparable to the fourth quarter. That said, our average domestic sales realizations decreased slightly, largely driven by a lower percentage of grade logs in our mix. For the quarter, our domestic sales volumes were significantly higher as we strategically shifted logs to domestic customers.

Fee harvest volumes were moderately higher and per unit log and haul costs were significantly lower as we made the seasonal transition to lower elevation and lower-cost harvest operations. Forestry and road costs were seasonally lower. Moving to our Western export business. Log markets in Japan were stable in the first quarter. Despite ongoing consumption headwinds, demand for our logs remained steady as our customers benefited from lower volumes of competing European in lumber imports. As a result, our average sales realizations for export volumes to Japan were comparable to the fourth quarter. Our sales volumes were moderately lower due to the timing of vessels. In China, log inventories at the ports grew in the first quarter as a result of reduced consumption during the Lunar New Year holiday and increased log imports from New Zealand.

However, log takeaway improved as the quarter progressed. Despite steady demand for our logs, our sales volumes into China were significantly lower in the first quarter as we intentionally flexed log sales to the domestic market. Our average sales realizations were slightly higher compared to the fourth quarter. Turning to the South. Adjusted EBITDA for Southern Timberlands decreased by $4 million compared to the fourth quarter. Southern sawlog markets moderated somewhat in the first quarter, largely in response to elevated mill inventories and ample log supply. In contrast, Southern Fiber markets were stable in the first quarter as supply and demand trended to a more balanced state. Given these dynamics, our average sales realizations were comparable to the fourth quarter.

Per unit log and haul costs were also comparable and forestry and road costs were seasonally lower. Our fee harvest volumes decreased slightly in the first quarter. In the North, adjusted EBITDA increased by $1 million compared to the fourth quarter as sales realizations increased moderately. Fee harvest volumes were moderately lower in the first quarter, largely driven by the early onset of spring breakup conditions. Turning to our real estate, Energy and Natural Resources on Pages 10 and 11. Real estate and ENR contributed $60 million to first quarter earnings and $94 million to adjusted EBITDA. First quarter EBITDA was $27 million higher than the fourth quarter, primarily attributable to an increase in real estate acres sold. Average price per acre decreased compared to the fourth quarter due to the mix of properties sold, but remained elevated compared to historical levels.

We continue to benefit from solid demand for HBU properties, resulting in high-value transactions with significant premiums to timber value. Now, for some comments on our Natural Climate Solutions business. In February, we announced an exploratory agreement with Lapis Energy to pursue carbon capture and sequestration projects across five potential sites in the U.S. South. The agreement represents a unique opportunity to scale our CCS offerings. To-date, we've entered into three CCS agreements covering up to seven sites across our Southern Timber holdings. And we remain focused on developing new projects and intend to enter into additional agreements over the next few years. Turning to Forest Carbon. On the heels of our first approved project in Maine, we're advancing two projects in the U.S. South that are expected to be completed later this year.

Combined, these three projects are expected to generate over 100,000 credits in 2024, and we intend to sell these credits into the voluntary market. Looking forward, we have several additional projects in the development pipeline and continue to see strong demand for high-quality credits. Lastly, I'll make a few comments on the progress we're making on our Renewable Energy business with a specific focus on solar. Given our unmatched portfolio in the U.S. South, we are uniquely positioned to drive meaningful value across our land base as demand for large-scale solar development increases. In total, we've signed over 60 agreements for potential solar projects covering more than 100,000 acres across 11 states. Notably, we recently signed sizable agreements in Georgia and Mississippi, and currently have several projects in late stages of development with one expected to be operational later this year.

We've been very selective in choosing the counterparties to these agreements and have built an outstanding portfolio of projects with experienced and successful developers and utilities. Looking forward, we continue to see strong demand as this market continues to develop and we expect to sign additional agreements over the next several years. Moving to Wood Products on Pages 12 through 14. Wood Products contributed $128 million to first quarter earnings. Adjusted EBITDA was $184 million, a 16% increase from the fourth quarter. Starting with lumber. First quarter adjusted EBITDA was a $5 million loss, but improved by $29 million compared to the fourth quarter, largely driven by a slight increase in sales realizations. Adverse weather conditions in January and cautious buyer sentiment weighed on the lumber market at the outset of the first quarter.

As the quarter progressed, demand signals improved slightly, particularly for Western SPF and Douglas fir species. This drove modest pricing improvements through mid-March. In contrast, Southern lumber markets faced persistent headwinds during the quarter, given weather-related challenges, a moderation in demand, and ample supply of finished products. For the quarter, our average sales realizations increased by 4% compared to the fourth quarter, largely in line with the framing lumber composite. Our sales volumes decreased slightly, partially driven by winter weather disruptions early in the quarter. Unit manufacturing costs increased slightly and log costs were slightly lower. OSB adjusted EBITDA increased by $14 million compared to the fourth quarter, primarily due to an increase in product pricing.

Benchmark pricing for OSB was relatively stable through February, but increased significantly in March. This improvement was largely driven by lean inventories, supply limitations and resilient demand from new home construction activity. As a result, our average sales realizations increased by 4% compared to the fourth quarter, while the average OSB composite pricing increased by 13%. 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 slightly higher in the first quarter and unit manufacturing costs improved. Fiber costs were slightly higher. Adjusted EBITDA for Engineered Wood Products decreased by $18 million compared to the fourth quarter.

Primarily due to a decrease in average sales realizations as previously determined price adjustments took effect in certain markets. Our sales volumes for solid section products were comparable to the fourth quarter, while I-joist volumes were lower. Both unit manufacturing and raw material costs increased for most products in the first quarter. A couple of things worth noting for context regarding our Engineered Wood Products in Q1. First, we did ship somewhat higher EWP volumes to customers in the fourth quarter of last year after having been on allocation for most of 2023. And consequently, customer inventories were slightly elevated entering the new year. Also, while single-family construction activity remained resilient, we experienced the typical seasonal pattern in EWP demand in the first quarter.

That all being said, we expect healthy demand from the single-family segment as we get further into the spring building season. As a result, we anticipate higher sales volumes and stable sales realizations from our EWP business in the second quarter. In distribution, adjusted EBITDA increased by $4 million compared to the fourth quarter largely driven by an improvement in commodity realizations and margins. With that, I'll turn the call over to Davie to discuss some financial items and our second quarter outlook.

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.

This is in line with our commitment to grow our sustainable base dividend by 5% annually through 2025. During the quarter, we also returned $102 million to shareholders through the payment of our supplemental dividend, which was associated with our 2023 financial results. First quarter share repurchase activity totaled approximately $50 million. And as of quarter end, we have completed nearly $800 million of repurchase under our $1 billion authorization. Looking forward, we will continue to leverage our flexible cash return framework and repurchase shares opportunistically when we believe it will create shareholder value. First quarter results for our unallocated items are summarized on Page 15. Adjusted EBITDA for this segment decreased by $22 million compared to the fourth quarter partially attributable to changes in intersegment profit elimination and LIFO.

Looking forward, key outlook items for the second quarter are presented on Page 18. In our Timberlands business, we expect second quarter earnings and adjusted EBITDA will be slightly higher than the first quarter of 2024. Turning to our Western Timberlands operations, we expect steady to increasing log demand in the domestic market in the second quarter as mills respond to improving lumber takeaway as we get deeper into the spring building season. That said, log supply is expected to increase as weather conditions improve seasonally. On balance, this should translate to a fairly stable domestic log market. As a result, we expect our domestic sales realizations to be comparable to the first quarter. We anticipate our fee harvest volumes will be moderately higher given seasonally favorable operating conditions in the second quarter.

Forestry and road costs are expected to be higher as we enter the spring and summer months and per unit log and haul costs are also expected to be higher. Moving to the export markets. In Japan, we anticipate stable log markets and steady demand from our customers in the second quarter. As a result, we expect our average sales realizations for export volumes to Japan to be comparable to the first quarter. Our sales volumes are expected to increase, largely due to the timing of vessels. In China, we expect a modest increase in construction activity and log consumption following the Lunar New Year holiday. And given steady log demand from our strategic customers, we expect to significantly increase our sales volumes into China in the second quarter.

Our average sales realizations are expected to be comparable to the first quarter. Moving to the South. Log inventories were elevated at the outset of the second quarter, and log supply is expected to increase seasonally. As the quarter progresses, we expect sawlog demand to remain relatively stable and fiber demand to soften in response to increased annual maintenance outages. On balance, takeaway for our logs is expected to remain steady given our delivered programs across the region. As a result, we expect our sales realizations will be comparable to the first quarter. Our fee harvest volumes and forestry and road costs are expected to be higher due to drier weather conditions that are typical in the second quarter and we anticipate comparable per unit log and haul costs.

In the North, our sales realizations are expected to be moderately higher than the first quarter and fee harvest volumes are expected to be significantly lower given spring breakup conditions. Turning to our Real Estate, Energy and Natural Resources segment. As Devin mentioned, we are still seeing solid demand for our real estate properties, and we continue to expect a consistent flow of HBU transactions with significant premiums to timber value. For the second quarter, we expect adjusted EBITDA will be comparable to and earnings will be approximately $10 million lower than the first quarter of 2024 due to the timing and mix of real estate sales. For the full year, we maintain our adjusted EBITDA guidance of approximately $320 million for the segment, which includes a year-over-year increase in contributions from Natural Climate Solutions as we continue to advance toward our 2025 target for that business.

For our Wood Products segment, we expect second quarter earnings and adjusted EBITDA will be slightly higher than the first quarter of 2024, excluding the effect of changes in average sales realizations for lumber and OSB. This is largely driven by improved sales volumes across our Wood Products businesses and favorable cost for lumber. I will note that we do expect demand for Wood Products to remain healthy, supported by improving housing and repair and remodel activity as we move further into the spring. As shown on Page 19, our current and quarter-to-date average sales realizations for lumber are slightly higher than the first quarter average. That said, the framing lumber composite has trended lower over the last several weeks. For OSB, our current and quarter-to-date average sales realizations are significantly higher than the first quarter average.

As Devin mentioned, our extended order files result in a lag effect for OSB realizations. As a result, most of the OSB price improvement that we saw in March will be captured in our second quarter realizations. For our lumber business, we expect higher production and sales volumes in the second quarter and moderately lower unit manufacturing costs. Log costs are expected to be slightly lower. For our OSB business, we anticipate sales volumes to be moderately higher than the first quarter with comparable unit manufacturing costs. Fiber costs are expected to be slightly higher in the second quarter. In our Engineered Wood Products business, we anticipate higher sales volumes across all products. Our average sales realizations are expected to be comparable to the first quarter.

Raw material costs are expected to be higher primarily for OSB web stock. For our Distribution business, we expect adjusted EBITDA to be higher compared to the first quarter due to increased sales volumes and stronger commodity realizations. With that, I'll now turn the call back to Devin and look forward to your questions.

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.

For the first quarter, housing starts averaged 1.4 million units on a seasonally adjusted basis with single-family starts holding up well. However, we do think homebuilding activity in the first quarter was impacted to some degree by various weather events across the U.S. So, the spring building season has been a little slower to kick into high gear. As we move deeper into 2024, we're still expecting healthy demand for housing, particularly in the single-family segment. That's consistent with what we are hearing from our homebuilding customers. On longer term, our view on the housing fundamentals continues to be very favorable, supported by strong demographic trends and a vastly under billed housing stock. Turning to repair and remodel. Activity has been a little softer to start off the year, particularly in the do-it-yourself segment.

Moving forward, we expect R&R activity to pick up somewhat as weather conditions improve and continue to believe that demand will ultimately be supported by prospective homebuyers that elect to remodel in lieu of purchasing a new home in the current rate environment. And beyond 2024, most of the key drivers supporting solid repair and remodel demand remain intact including favorable home equity levels and an aging housing stock. So in closing, we delivered solid results across our businesses in the first quarter. We also continue to make progress toward our multiyear targets by increasing our quarterly base dividend and signing our third CCS agreement. Looking forward, we're encouraged by the strong underlying fundamentals that will drive long-term growth for housing and repair and remodel demand and natural climate solutions.

And given our unmatched portfolio of assets, we're uniquely positioned to capitalize on these opportunities well into the future. Our balance sheet is exceptionally strong, and we remain focused on driving peer-leading performance across our businesses, serving our customers and delivering superior long-term value and returns for our shareholders. With that, I think we can open it up for questions.

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