Weyerhaeuser Company — 2024 Q1

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.

Yes, sure. With respect to the specific economics at this point, we're not prepared to release that, we're really working on signing up new contracts. And I think just from a competitive positioning standpoint for not to do that at this point, we will obviously at some later date. It's going to be a growing component of NCS. The NPV uplift on doing a solar project is always going to be the right answer relative to timber multiple uplift on NPV. So you're going to sign those up as often as you can. The challenges with many of the NCS businesses is just the time line to get these things hooked into the grid. We're signing up pretty healthy number of agreements. We're building up a really nice pipeline.

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.

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.

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.

Yes. We're focused on leasing activity. We think that provides the best long-term value.

Yes. I mean we may have minor disagreements in terms of the specific numbers, but directionally, I think what others are talking about aligned with how we're thinking about it, at least for quality projects. I think the differentiator for us, Mark, is really a couple of things. One, particularly on the forest carbon development, we are doing more of that work internally, so we get to keep more of the economics. And then just from a scale standpoint, we have the opportunity to participate maybe at a larger level. But directionally, in terms of NPV uplift, I think those are generally in the ballpark, at least in our view.

Yes. I mean it is a multiyear process. So you have to go through the process of, first, we provide certain geologic information, but the counterparty is going to do their work and their analysis on that. There's a permitting process as we all know. In the U.S., permitting is very challenging. And so that's a process that has to be worked through either at the EPA level as the one in Mississippi or at the state level now that Louisiana has gotten primacy from EPA. That's a lengthy process that has to be undertaken. Then there's the process of actually building the injection facility on site and the pipeline development. So all of that work does take a bit of time and frankly, probably has taken a little bit more time than we had anticipated when we rolled out these targets initially back in 2021. But again, ultimately, we think this is going to be a healthy business for us. We think the demand is definitely there, but you just have to work through the process. But the beauty is once it's up and running, it's a recurring revenue stream for decades.

Yes, that's accurate.

Yes, it's probably another 100,000, 75,000 acres over and above that just because 3 of the 5 sites that are part of that Lapis agreement were not part of our initial estimate and so I think that has expanded the potential opportunity zone. I will say just a cautionary note with respect to the acreage references, since we will continue to manage the above-ground land base on those projects outside of a very small sliver for the pipeline and the injection site. It's not necessarily the greatest proxy for how much underground space. We use that just to kind of help dimension. Ultimately, each of these sites will have their own poor space availability. But we do think that the opportunity with Lapis is a nice way to continue to expand our potential opportunities within the CCS space.

Yes. I mean it's really hard to do that, Mark, because each one it's going to be different. So I'd be hard-pressed to give you sort of a rule of thumb number since each one is going to be differential.

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.

Yes.

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.

Sure. Well, a couple of things going on last year in '23. First of all, I think we are still struggling to get fully staffed up across our mill set. I think we are in a much better place today than we were a year ago. So that's number one. Number two, if you remember back at the beginning of 2023 with where mortgage rates were going, I think our view was that it was going to be a much more challenging housing environment. And so we made a decision to pull back a little bit on production to align with what we thought was going to happen in the housing market. Now obviously, that's not how things turned out.

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.

But I will just reiterate the point. That all being said, once these come on, you have a 30-year recurring revenue that just increases with every year and you've got escalators for inflation. So it's a wonderful revenue stream once they're up and running.

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.

Sure. Maybe I'll break it down by some of the key components. From a single-family residential construction, that's particularly true for the bigger builders. I mean I think they've been remarkably nimble and resilient in managing through this environment. They're still going to build. I think they figured out how to build through this higher rate environment. So I think they're doing just fine. I do think on the multifamily segment, you have seen more interest rate sensitivity. I think that's the one I would highlight really more so than others that has been impacted by the higher interest rate environment and the inflationary dynamic at play right now. I would just point out, as you think about multifamily, one, obviously, single-family is a more important market for us than multifamily.

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

Sure. Yes, the timing lag is accurate. Typically, price actions can be anywhere from 30, 60, 90 days to come to effect depending on the specific dynamic with that customer. So you have seen -- and that's kind of the Q1 story is some of those prior actions taking full effect in Q1. With respect to the fiber cost or input costs, that's primarily an OSB web stock comment with I-joist, you're right about that. I do think as that price moves up, does that take some of the lower-cost competitors trying to take market share, that puts a little bit more pressure on them. Do remember that for us, the OSB web stock comes from our internal mills. And so to the extent you see higher web stock pricing for EWP or cost for EWP, that means you're getting it on the other side with OSB.

Sure. Our expectation at this point is it's going to be a pretty typical year, somewhere in the $2 billion to $2.5 billion range for total transactions. We haven't seen a lot of big transactions hit the market this year. There is a larger package, I think, up in Northern Washington, Northwest Washington right now, I think that's on the market. But I do think you're still seeing a strong interest in the asset class, particularly for moderate to high-quality Timberland packages. The only thing that we've really seen, and this was true towards the end of late last year as well, maybe a little bit of less aggression on lower-quality packages. We've seen a few no sale transactions here of late. But nevertheless, I think for quality packages, you're still seeing a lot of interest and pricing has been very strong.

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.

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

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.

Yes. I mean for quality packages, you're seeing very strong pricing. Anything in that Washington, Oregon, area, at least kind of in the key manufacturing regions within those 2 states, very, very strong pricing. I think in the South, we're continuing to see good strong pricing again in markets where you have the decent supply/demand dynamic with mill availability. I do think you're still seeing people try to get their arms around how to underwrite carbon, but there's no question that, that is playing a part in how people value Timberlands really in most key regions. And I think that will continue to be the case. I think it's important to note, as you think about underwriting that carbon optionality, we're still kind of in the early stages of pinpointing what those numbers are going to look like.

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.

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