Weyerhaeuser Company (WY) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Solid Q2 Performance: Weyerhaeuser reported solid Q2 earnings with GAAP earnings of $173 million or $0.24 per diluted share on net sales of $1.9 billion. Adjusted EBITDA increased by 16% over the first quarter.
• Timberlands Acquisition: Announced the acquisition of approximately 84,000 acres of high-quality timberlands in Alabama for $244 million, expected to generate leading cash flow within the Southern Timberlands business.
• Progress on Timberlands Growth Target: The company is on track to reach $1 billion of strategic timberlands acquisitions by the end of 2025.
• Stable Demand in Key Markets: Despite market challenges, demand for Weyerhaeuser's logs remained stable in Western domestic and export markets, including Japan and China.
• Growth in Natural Climate Solutions: Signed additional agreements for potential solar projects, covering more than 130,000 acres across the U.S. South, and advancing several Forest Carbon projects expected to generate over 100,000 credits in 2024.

Pessimistic Highlights

• Lumber Market Challenges: The lumber market faced significant challenges, with soft pricing as the primary headwind, leading to a $8 million loss in adjusted EBITDA for the lumber segment.
• Downward Pressure on Log Prices: In the Western domestic market, log prices faced downward pressure due to elevated log inventories and a softening lumber market.
• Curtailment of Operations: The decision to indefinitely curtail operations at the New Bern, North Carolina sawmill due to its challenged cost structure and limited integration with fee timberlands.
• Production Reduction: Weyerhaeuser expects to reduce lumber production by 5% to 10% in the third quarter due to current market conditions.

Company Outlook

• Timberlands Earnings Decline: Third quarter earnings and adjusted EBITDA for Timberlands are expected to be $20 million to $30 million lower than the second quarter, largely due to lower sales volumes and realizations in the West.
• Real Estate and ENR Segment: Earnings for the third quarter are expected to be approximately $10 million lower, and adjusted EBITDA approximately $30 million lower than the second quarter due to the timing and mix of real estate sales.
• Wood Products Segment: Third quarter earnings before special items and adjusted EBITDA are expected to be lower compared to the second quarter, with lumber and OSB facing stable but cautious buyer sentiment.

Q & A Highlights

• Q: Can you talk a bit more about how you arrived at the 5% to 10% range for lumber production reduction in the third quarter? (Susan Maklari, Goldman Sachs)

  A: The 5% to 10% reduction is based on balancing supply with customer demand, maintaining the right inventory levels, and driving the most earnings in the current environment. The New Bern mill had a unique situation, but outside of that, it's about balancing demand and inventory. (Devin Stockfish)

• Q: What do you think right now, industry operating rates are within the south in lumber? (George Staphos, Bank of America Merrill Lynch)

  A: Production is certainly down relative to a normalized condition, with treated lumber and multifamily demand being down as well. It's hard to dimension exactly, but production across the U.S. South is reduced. (Devin Stockfish)

• Q: For the latest timberland acquisitions in Alabama, do you see additional Natural Climate Solutions revenues? (Amir Patel, CIBC Capital Markets)

  A: While it's limited in terms of what we're underwriting today for upside, we continue to see a lot more opportunities than originally anticipated, including in the Natural Climate Solutions business. (David Wold)

• Q: Can you talk about your expectations for the U.S. OSB market for the rest of the year? (Matthew McKellar, RBC Capital Markets)

  A: Q3 is expected to be comparable to Q2 from a volume standpoint, with new capacity coming online in Q4. However, the ramp-up period for new capacity will take some time, and annual maintenance downtime may mitigate some of the new volume coming to market in Q4. (Devin Stockfish)

• Q: Can you give a sense when those options expire for the 70 solar projects, and when you might expect to start seeing more cash coming in related to those deals? (Mark Weintraub, Seaport Research Partners)

  A: Solar development will start coming online this year, with the first one in the back half of this year. The pipeline will grow over time, and cash flow will hit our income statement, but the process takes a while. (Devin Stockfish)

• Q: Is there any way to quantify the fixed cost reduction you might see from New Bern? And what are your expectations for lumber EBITDA in 3Q? (Anthony Pettinari, Citi)

  A: The New Bern mill is relatively small, so fixed cost reductions will be immaterial in the broader context. If lumber pricing holds where it's at today, 3Q lumber EBITDA might be relatively comparable to 2Q. (David Wold)