Weyerhaeuser Company (WY) — Q4 2022 Earnings Call Transcript

Thank you, Melissa. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser’s fourth quarter 2022 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.

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 earnings 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 repurchased 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 online 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 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 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.

Thank you, Devin, and good morning, everyone. I will be covering key financial items and fourth quarter financial performance before moving into our first quarter and full year 2023 outlook. I’ll begin with key financial items, which are summarized on page 18. We generated $167 million of cash from operations in the fourth quarter, bringing our total for the year to more than $2.8 billion, our second highest full year operating cash flow on record. As Devin mentioned, we are returning $1.75 billion to shareholders based on 2022 results, which includes $550 million of share repurchases. Fourth quarter share repurchase activity totaled $146 million, and we have approximately $375 million of remaining capacity under the $1 billion share repurchase program we announced in the third quarter of 2021. We will continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. Turning to the balance sheet. We ended the year with approximately $1.6 billion of cash and cash equivalents, of which $662 million is earmarked for the supplemental dividend we announced yesterday that will be paid in February. Our balance sheet remains strong with ample liquidity, and we ended the year with approximately $5 billion of gross debt. Fourth quarter results for our unallocated items are summarized on page 17. Unallocated adjusted EBITDA increased by $16 million compared to the third quarter. This increase was primarily attributable to changes in intersegment profit elimination and LIFO, as well as benefits resulting from lower-than-expected health care expenses and increased discount rates on workers’ compensation obligations. In the fourth quarter, we completed the purchase of a group annuity contract, which was approximately $420 million of our Canadian pension liabilities to an insurance carrier. The contract purchase was funded from our Canadian pension plan assets with no company cash contribution required. As a result of the transaction, the fourth quarter special items included a $205 million noncash pretax settlement charge. This transaction is the latest in the series we have executed to reduce our pension plan obligations. Since we began these efforts in 2018, our pension obligations have decreased from $6.8 billion to $2.3 billion as of year-end 2022. Key outlook items for the first quarter and full year 2023 are presented on pages 23 and 24. In our Timberlands business, we expect first quarter earnings and adjusted EBITDA will be slightly higher than the fourth quarter. Beginning with our Western Timberland operations, domestic log markets entered the first quarter showing continued signs of softening as a result of lower pricing and takeaway of finished products, along with elevated log inventories at mills. Regional log supply has improved compared to the fourth quarter and is expected to remain ample for the majority of the first quarter, notwithstanding winter weather disruptions. As a result, we expect our domestic log sales realizations to be significantly lower compared to the fourth quarter. Our fee harvest and domestic sales volumes are expected to be significantly higher in the first quarter as we have returned to full run rate operations following the work stoppage, which affected one month of operations in the fourth quarter. Per unit log and haul costs are expected to be moderately lower as we make the seasonal transition to lower elevation and lower-cost harvest operations. Forestry and road costs are expected to be significantly lower due to the seasonal nature of these activities. Moving to the export markets. Demand for our logs remained steady as customers in Japan and China work to build finished product inventories in preparation for seasonally stronger construction activity in the second quarter. We expect to significantly increase our export sales volumes to both markets compared to the fourth quarter, which was affected by one month of reduced export activity resulting from our work stoppage, but we also expect to shift additional volume to China to take advantage of higher-margin opportunities. That said, our export sales realizations are expected to be slightly lower in the first quarter as broader log markets continue to soften, resulting from the headwinds Devin previously mentioned. In the South, we expect log demand to remain fairly steady in the first quarter, although grade and fiber markets are showing signs of slight softening as we enter 2023, particularly fiber markets in the East. As a result, we expect our sales realizations to be slightly lower compared to the fourth quarter. Fee harvest volumes are expected to be slightly lower due to seasonally wet weather in the first quarter. Per unit log and haul costs and forestry and road costs are expected to be comparable to the fourth quarter. In the North, fee harvest volumes and sales realizations are expected to be slightly lower in the first quarter. Turning to our full year harvest plan. For 2023, we expect total company fee harvest volumes to increase to approximately 35 million tons. In the West, we anticipate our harvest volumes will be moderately higher than 2022 as we plan to capture the majority of the deferred harvest volumes resulting from our work stoppage. We expect our Southern harvest volumes to increase moderately compared to 2022 as we resume a more normalized level of activity following reduced harvest levels resulting from adverse weather conditions, primarily in the third quarter of 2022. We expect our Northern harvest volumes will be slightly higher year-over-year. Turning to our Real Estate, Energy and Natural Resources segment. As Devin mentioned, HBU demand has moderated somewhat in response to broader macroeconomic concerns. That said, we are still seeing steady demand for our real estate properties, and we continue to expect a consistent flow of transactions with significant premiums to timber value. We expect full year 2023 adjusted EBITDA of approximately $300 million for this segment. Consistent with previous years, we anticipate our real estate activity will be heavily weighted towards the first half of the year. Basis as a percentage of real estate sales is expected to be approximately 35% to 45% for the year. First quarter earnings before special items are expected to be approximately $10 million higher than the fourth quarter, while adjusted EBITDA is expected to be approximately $35 million higher, primarily due to the timing and mix of real estate sales. Turning to our Wood Products segment. As Devin mentioned, buyer sentiment remains cautious. That said, benchmark prices for Lumber and OSB have stabilized in January as buyers reentered the market to replenish lean inventories. Excluding the effect of changes in average sales realizations for Lumber and OSB, we expect first quarter earnings and adjusted EBITDA will be moderately higher compared to the fourth quarter. For lumber, we expect higher production and sales volumes in the first quarter and significantly lower unit manufacturing costs as we resumed operations in our Northwest mills following the work stoppage in the fourth quarter. We also anticipate improved reliability across the system. Log costs are expected to be moderately lower, primarily for Western logs. For OSB, we expect sales and production volumes to be moderately higher in the first quarter due to less planned downtime for annual maintenance and improved transportation networks following extreme winter weather in December. We expect fiber costs and unit manufacturing costs to be lower compared to the fourth quarter. As shown on page 25, our current and quarter-to-date average sales realizations for Lumber and OSB are both moderately lower than the fourth quarter averages. For Engineered Wood Products, we expect significantly lower sales realizations in the first quarter, resulting from softening demand for EWP products. Sales volumes are expected to be slightly lower for solid section products while I-joist sales volumes are expected to be moderately higher. We anticipate significantly lower raw material costs, primarily for OSB web stock. For our distribution business, we are expecting lower adjusted EBITDA in the first quarter due to lower margins for all products. I’ll wrap up with some additional full year outlook items highlighted on page 24. Our full year 2022 interest expense was $270 million. This represents a $43 million reduction from the prior year, largely due to the strategic refinancing transaction we completed in the first quarter of 2022. For full year 2023, we expect interest expense will be unchanged at approximately $270 million. Turning to taxes. Our full year 2022 effective tax rate was approximately 20%, excluding special items. For first quarter and full year 2023, we expect our effective tax rate will be between 12% and 14% before special items based on the forecasted mix of earnings between our REIT and taxable REIT subsidiary. For cash taxes, we paid $566 million for full year 2022, which was slightly higher than our tax expense, excluding special items, due to the timing of Canadian tax payments. We expect our 2023 cash taxes will be comparable to our overall tax expense. For pension and post-employment plans, the year-end 2022 funded status improved by approximately $100 million, primarily due to higher discount rates compared to year-end 2021. Excluding our fourth quarter settlement charge, our noncash, non-operating pension and post-employment expense was approximately $50 million in 2022. We expect to record a similar total at approximately $50 million of expense in 2023. Cash paid for pension and post-employment plans in 2022 was $24 million. In 2023, we do not anticipate any cash contributions to our U.S. qualified pension plan, and our required cash payments for all other plans will be approximately $25 million. Turning now to capital expenditures. Our full year 2022 capital spend totaled $462 million plus $6 million of capitalized interest. We expect total capital spend for 2023 will be approximately $440 million, which includes $110 million for Timberlands, inclusive of reforestation costs, $315 million for Wood Products, and $15 million for planned corporate IT system investments. I’ll now turn the call back to Devin and look forward to your questions.

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 continues 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 continued 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.

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?

Yes. Good questions, Sue. I mean, look, we have seen a little bit of a pickup here really over the last few weeks on the Wood Products side. I think that’s a reflection of a few things. Number one, going into the end of the year, most buyers really had very low inventories. And I think that was just a reflection of a lot of concern over what was going to be happening in the housing market. So inventory levels were really low going into the end of the year. We’ve seen a few, I think, green shoots on the housing side, whether it’s the new home sales numbers, albeit down quite a bit from last year, up month-over-month. You’ve seen homebuilder sentiment pick up a little bit. So, I think there’s maybe a little bit more optimism than there was perhaps a month ago. And so, that’s driving a little bit of sentiment. I think the other piece of it, which is probably even more impactful, is just on the supply side. We’ve seen a fair bit of curtailment activity over the last few months up to another action this week from one of our competitors. And so, I think that’s driving things to be a little bit more in balance. I do think we’re probably still several weeks, if not a month, from really seeing a meaningful pickup from spring building activity. I think we’ll have a better sense as we get deeper into February as how that’s shaping up. But overall, it’s certainly been a tougher period over the last several months. But as we head into the spring building season, we start to see mortgage rates tick down. I think we’re optimistic that it will be a little bit better than it was expected, even just a few months ago. In terms of our cost structure, that’s really been, I think, one of the true success stories at this company over the last several years. The work that we’ve done around OpEx just year after year after year driving improvements has put us in, I think, a very good competitive position from a cost standpoint, which is always important, and we’re always focused on it, but particularly when you have these market dips, it becomes very important. So I think we’re really well positioned with the scale, the cost structure that we have in place to navigate through market conditions, regardless of what they end up being for the first half of the year.

Congratulations on the good end to the year. My two questions are around timber. There was a lot of discussion as we go into the year on I think you mentioned high-margin opportunities in China, some opportunities in Japan as well, yet there also seem to be some headwinds in terms of the market activity and ultimately, what will be realizations. Could you give us a bit more color, Devin and Davie, in terms of what we should take away in terms of the realization outlook, and why in timber in the export markets on the west? And I ask, particularly given that, at least from the day that we see and certainly there’s a lag on it, exports to China on softwood are down quite a bit? My second question is can you talk a bit about the prospects for Climate Solutions to tension the timber markets, where would you expect to see the most impact and when and from which of your Climate Solutions business is in terms of ultimately helping support timber pricing in the future? Thank you, guys. And good luck in the quarter.

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.

Devin, you mentioned the significant number of curtailments we've seen in British Columbia. Do you have an overall sense of whether there are still substantial curtailments expected, or if we have mostly seen the end of that trend, possibly indicating more seasonal adjustments in the lumber market? With prices potentially rising above 400, could we anticipate some capacity returning? I would appreciate your insights on how the situation in British Columbia might develop this year, given the current lumber prices.

Yes. Well, look, I’ll just say at the outset, it’s hard for me to comment specifically on the cost structure of my competitors. So, I’ll just offer some broad commentary because we obviously do have some operations in BC. And I think certainly, we’ve seen a fair amount of capacity curtailment. I don’t think that was unexpected, just given the higher cost structure that you see in British Columbia now. A variety of reasons for that, and we’ve discussed that in the past. I think the curtailment activity is just going to be dependent on where lumber prices go. I think for where we were for much of the fourth quarter, particularly at the end of the year, it would be very challenging for the economics to make sense in British Columbia. Now, we’ve seen prices come up just a little bit. As you know, the log price adjustment mechanism does happen quarterly, so that will adjust down a little bit. But, it remains a very high-cost region to manufacture lumber. And so, lumber prices are going to have to stay well north of probably the historical averages for the economics to work in that geography. And I’d say too in the Pacific Northwest for that matter. The log cost to lumber ratio that we’ve seen recently has been pretty challenging for the Pacific Northwest. And so, I suspect there are a number of producers that have been challenged in this environment as well. So, until you see lumber prices go up or log prices go down, the economics are challenging, and you could see continued curtailment activity.

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.

Yes. I would say, on balance, the interest level has gone up since we first announced this target. And that’s really true across the board, whether you’re talking about conservation, mitigation with all the infrastructure activity that’s going to happen over the next several years, there’s going to be a lot of need for mitigation banking, carbon capture and storage, particularly with the 45Q tax credit going up to $85, solar wind, forest carbon. There’s really a very significant amount of interest across all of those categories. The challenge is the time line to get these things to come to fruition. And that’s true, particularly when you talk about the renewables; you think about solar. The demand for solar is off the chart. The challenge is every one of these projects has to go through a local permitting process and to get tied into the grid. And there’s just way more activity than there is administrative support to make that happen. So, the time line for these things, carbon capture and storage, et cetera, it’s just going to take time for these things to come to fruition. But I would say our confidence in the opportunity set in Natural Climate Solutions is higher today than it was when we announced these targets in 2021. It’s just the timeline. That’s the big question.

Thank you, and good morning. Within your sort of the Wood Products CapEx outlook that you talked about for 2023, can you talk about sort of two or three key projects that you have for this year?

Yes. I want to highlight a couple of things. Most of our projects, except for the Dierks, Millport, and ongoing Holden projects, are not large capital undertakings; they are replication projects. Whether it's a merchandiser, a new gangsaw, or a new CDK, these are the types of projects we are implementing across the system. The focus is on addressing each mill according to a multiyear plan, identifying and removing roadblocks and bottlenecks to reduce costs, enhance reliability, and increase efficiencies. Additionally, there is some volume growth associated with these efforts. Other than the Holden project, which started up the sawmill at the end of last year and will see the planer mill start later this year, there are no significant projects to emphasize. Instead, there are numerous projects, mostly replicating what we have previously accomplished in other facilities.

Got it. That’s helpful, Devin. And then, just very quickly, we are starting to see kind of more European lumber make its way into the U.S. Do you think that there is more room for that to grow in 2023?

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.

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.

Yes. When we established the dividend framework, we considered various scenarios to determine the level of the base dividend, and we are confident in our ability to sustain it. Our strategy ties the base dividend primarily to our Timberlands, Real Estate, Energy, and Natural Resources segments. For instance, the Carolinas acquisition enhances our confidence in our capacity to increase that base over time. Additionally, our efforts in the Natural Climate Solutions sector aim to raise that target, supported by our ongoing commitment to operational excellence and innovation. Thus, we believe we can consistently meet our dividend obligations moving forward.

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?

Yes, absolutely.

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?

Yes, Mark. You’re completely right. The pricing dynamics in the South are much less volatile compared to the West, so we don't expect to see significant fluctuations in pricing from quarter to quarter or year to year in that region. Looking ahead to 2023, especially in the first half, I anticipate some moderation in pricing, likely a slight decline. This is due to a couple of factors. Firstly, we are observing a softening in end-market pricing, which applies to both the Wood Products and pulp and paper sectors. However, a more significant issue is that the South has experienced a general urgency among mills to maintain high inventory levels of logs over the past couple of years to mitigate risks associated with supply chain issues, such as trucking and logging capacity. This urgency has supported pricing during that time. While I don’t believe there is an oversupply of logging or hauling capacity in the South, it has eased somewhat. Therefore, I expect prices to decline slightly across the South in the first half, but overall, we still project that pricing there will increase over time due to capacity additions and other drivers that have been pushing prices up in the last few years.

We have observed more of a rebound in lumber compared to OSB. Is this primarily because lumber went through a larger decline, and are we seeing more of a supply response in British Columbia? Do you have any other insights on why this has occurred and what your outlook is moving forward?

Yes. I mean, I think that’s exactly right, Mark. I think it’s largely a function of the supply response. OSB is a little different. Unlike Lumber, where you can take a few shifts here, a few ships there, OSB is pretty lumpy in terms of capacity coming on and off, and you just haven’t really seen that. So, I think that’s really the primary difference.

Thank you, Devin, Davie, and Andy for addressing my questions. I wanted to understand your views on China and the potential for exports, especially now that China has lifted its COVID restrictions. Do you see a possibility for increased demand in the country with these changes?

Yes, the short answer is yes. As China moves past the COVID restrictions, it will create more opportunities. Recently, China has been an interesting market with many fluctuations. Demand has clearly decreased mainly due to the COVID lockdowns, but also because of broader disruptions in the real estate sector. Overall, log demand in China has been down lately, but there have also been significant supply impacts. With bans on Russian and Australian logs, the flow of European logs from salvage activities has also started to decline. There have been effects on both supply and demand. For us, we have long-term customers, and our demand was actually higher than what we shipped to China last year. This was primarily a result of focusing on better margin opportunities domestically. As those factors have balanced out, along with a reduction in freight costs, we expect to increase our export volume to China in the first quarter. This will likely happen regardless of the situation in China, as our customers require that wood. I believe that after the Lunar New Year, we will see an uptick in log and lumber demand in China, which has been relatively soft for some time. Therefore, I anticipate ample opportunities for us to increase our export volumes to China.

Got you. I appreciate the information. Regarding the repair and remodel markets, you mentioned this quarter that it has performed quite well so far in the professional segment. Historically, there is a connection between single-family housing starts and repair and remodel activity, with repair and remodel typically following housing starts by a few quarters. Do you have any insights into the trend of repair and remodel in the fourth quarter? Is the activity consistently steady, or has it started to decline as the quarter went on? Also, given all the repair and remodel work that has taken place over the past few years while people have been working from home, what gives you confidence that repair and remodel activity will continue at a high level moving forward?

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 the 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.

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?

Yes, it wasn’t. And when we talk about that multiyear goal and so just to reiterate, that’s getting to 5.7 billion board feet by the end of 2025. We are doing the work year-to-year through our capital programs to get to that level. Now year-to-year, the production will vary depending on what’s going on. And you look at what happened last year between COVID, the strike, a number of other issues that we dealt with last year with supply chain, labor, et cetera, we did see our production volume reduce year-over-year. But, the underlying projects that build the capacity within the system to accommodate 5.7 billion, we’re still on track for that and expect to get there. But again, year-to-year, it will just depend on what the market dynamics are in terms of actual production.

Great. Thanks, and good morning, everyone. Just starting on the share repurchase side. I mean, do you expect to take your foot off the gas at all given what’s likely to be a much leaner at least near term on the cash generation front to kind of ensure you can accrue some cash for a supplemental dividend next year, or how do you think about matching buyback activity with underlying cash flow as the year progresses?

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.

Okay. Makes sense. And then, just on EWP, could you maybe put some numbers or a range around kind of what you’re thinking on sequential pricing in Q1? Obviously, there’s a lot of quarter left, but it is a product where you should have greater relative visibility than the commodity. So, any thoughts there would be helpful.

Yes. The EWP market is closely linked to single-family housing. As that market has slowed, EWP demand has been affected, which is reflected in our quarterly production numbers. We took some additional holiday downtime to align better with that demand. When considering pricing, we always aim to balance market share, margins, and our operational stance. We implemented a targeted price reduction in EWP and will monitor how the rest of the quarter unfolds to assess the pricing direction. While I won't provide specific pricing details for competitive reasons, I want to emphasize that we remain above pre-pandemic levels. If housing activity increases again, we believe we are well-positioned competitively with our Engineered Wood Products.

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?

Yes. Well, I think the reality, and we’ve seen this really over the last couple of years, and my expectation is this is going to continue. There has been a lot of interest in the Timberlands asset class. And that’s from the traditional players, the REITs, the TMOs, the private integrators, just a lot of interest there. But we’re also seeing interest come in from some new types of investors. And I think that’s really driven a lot of activity. Last year, we were over $5 billion of Timberlands transaction activity. Our expectation is we’ll still be north of $3 billion for this year. So, just a lot of interest there. And I think there’s a few things. Number one, we have seen log prices trending up a little bit, so that could be driving some of it. But I think the bigger piece is just a lot more interest in the ESG properties of owning timberlands in an environment where there’s so much focus on climate. I think, they’re starting to be a better realization and recognition of some of the alternative values that are inherent in owning Timberlands, and that’s renewables, carbon, real estate, et cetera. So, just a lot of interest there. My expectation is that’s going to continue into 2023. Our view is that the trajectory for Timberlands is very positive in the years to come. All right. Well, I think that was our last question. So, I’ll just say thanks to everyone for joining us this morning, and thank you for your continued interest in Weyerhaeuser. Have a great day.