Weyerhaeuser Company (WY) — Q2 2024 Earnings Call Transcript

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's second 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 earnings 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 David 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 second quarter GAAP earnings of $173 million or $0.24 per diluted share on net sales of $1.9 billion. Excluding a special item, we earned $154 million or $0.21 per diluted share. Adjusted EBITDA totaled $410 million, a 16% increase over the first quarter. These are solid results, and I'd like to thank our teams for their continued focus and operational performances. Through their efforts, adjusted EBITDA improved across each of our business segments compared to the prior quarter, a notable achievement in light of numerous market-related challenges, particularly in the lumber market. Before getting into the businesses, I'd like to comment briefly on an exciting growth opportunity within our Southern Timberlands portfolio. As we announced yesterday, we are acquiring approximately 84,000 acres of high-quality timberlands in Alabama for $244 million. The collective acreage was sourced through multiple transactions, one of which closed in the second quarter for $48 million. The remaining transactions are under contract and expected to close later this year subject to customary closing conditions. These acquisitions represent an attractive opportunity to expand our footprint in one of the strongest inland sawlog and fiber markets in the U.S. These are highly productive and mature timberlands strategically positioned to demonstrate immediate synergies with existing Weyerhaeuser operations. In addition, they're expected to generate portfolio-leading cash flow and harvest tons per acre within our Southern Timberlands business. As highlighted on Page 18 of our earnings slides, we've demonstrated meaningful progress toward our multiyear Timberlands growth target. Including these transactions, we will have completed approximately $775 million against our target and are on track to reach $1 billion of strategic timberlands acquisitions by the end of 2025. Turning now to our second quarter business results. I'll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $81 million to second quarter earnings. Adjusted EBITDA was $147 million, a slight improvement compared to the first quarter, largely driven by increased sales volumes out of the West. Starting with the Western domestic market, log prices faced downward pressure in the second quarter as mills carried elevated log inventories and continued to navigate a softening lumber market. In addition, log supply was ample given the seasonal improvement in weather conditions and recent mill curtailments reduced log takeaway in the region. As a result of these dynamics, our average domestic sales realizations decreased slightly compared to the first quarter. Given favorable operating conditions, our fee harvest volumes were moderately higher and domestic sales volumes improved as demand for our logs remained stable despite softer end markets. Per unit log and haul costs increased, and forestry and road costs were slightly higher. Moving to our Western export business. Log markets in Japan were stable in the second quarter, and demand for our logs was steady. Suppliers of European lumber into Japan continue to face shipping and cost headwinds, which has provided our customers an opportunity to pick up market share. For the second quarter, our average sales realizations for export volumes to Japan increased slightly. Sales volumes increased significantly, partially due to the timing of vessels. In China, log consumption increased modestly following the Lunar New Year holiday, and log inventories at the ports declined steadily in the second quarter. That said, log takeaway waned as the quarter progressed. On balance, log demand was solid from our strategic customers in the region, and we significantly increased our sales volumes into China during the second quarter. Our average sales realizations were slightly lower compared to the first quarter. Turning to the South. Adjusted EBITDA for Southern Timberlands was comparable to the first quarter. Southern sawlog markets moderated in the second quarter, largely in response to elevated mill inventories, a seasonal increase in log supply and reduced consumption as mills adjusted to lower pricing and takeaway of lumber. In contrast, Southern Fiber markets were generally stable as supply and demand returned to a more normalized state. On balance, takeaway for our logs remained steady given our delivered programs across the region. As a result, our average sales realizations were comparable to the first quarter. Our fee harvest volumes and forestry and road costs were seasonally higher, and per unit log and haul costs were comparable. In the North, adjusted EBITDA decreased slightly compared to the first quarter due to significantly lower sales volumes associated with seasonal spring breakup conditions. Turning now to real estate, energy and natural resources on Pages 10 and 11. Real estate and ENR contributed $59 million to second quarter earnings. Adjusted EBITDA was $102 million, an $8 million increase compared to the first quarter, partially driven by higher royalty income from construction materials within our Energy and Natural Resources business. In our real estate business, we continue to benefit from solid demand for HBU properties, resulting in high-value transactions with significant premiums to timber value. That said, our average price per acre declined sequentially due to the mix of acres sold in the quarter. I'll now make a few brief comments on our Natural Climate Solutions business. We continue to see strong demand for large-scale solar development and signed additional agreements in the second quarter. In total, we now have over 70 agreements for potential solar projects, covering more than 130,000 acres across the U.S. South. Turning to Forest Carbon. We are advancing several projects through the development pipeline and expect to have 2 new projects in the U.S. South approved later this year. These projects, in combination with our main pilot project, are expected to generate over 100,000 credits in 2024. Looking forward, we're encouraged by the growing support for the voluntary carbon markets and are uniquely positioned to capitalize on the increasing demand for high-quality credits. Moving to Wood Products on Pages 12 through 14. Excluding a special item, Wood Products contributed $171 million to second quarter earnings. Adjusted EBITDA was $225 million, a 22% improvement over the first quarter, largely driven by an increase in OSB pricing as well as higher sales volumes and lower costs in lumber and EWP. Starting with lumber. Second quarter adjusted EBITDA was an $8 million loss with soft pricing as the primary headwind. Average benchmark pricing for lumber decreased by 5% compared to the first quarter. Despite solid single-family housing starts thus far in 2024, other end markets for lumber, particularly the repair and remodel and multifamily housing segments have been more muted recently. As a result, lumber supply continued to outpace demand and buyer sentiment remained cautious in the second quarter. Although this dynamic has been felt across the North American lumber market, it's been more acute in Southern Yellow Pine given the softness in treater and multifamily demand, which are proportionately larger markets in the South compared to other regions. For the lumber business, our average sales realizations decreased by 2% in the second quarter. Our sales volumes were moderately higher, partially due to increased production following winter weather disruptions in the first quarter. Unit manufacturing costs and log costs were both lower in the second quarter. Before moving to OSB, I'll make a few comments on our recent decision to indefinitely curtail operations at our sawmill in New Bern, North Carolina. These are always difficult decisions given the impact on employees, their families and the local community. So we did not take this decision lightly. New Bern is the smallest mill in our portfolio at 100 million board feet of capacity. Unlike other facilities across our mill set for a variety of reasons, we haven't invested meaningful capital in New Bern. So its cost structure was relatively challenged, making it very difficult in the current pricing environment. Given these variables, along with New Bern's limited integration with our fee timberlands, we didn't see a clear path to achieving sufficient financial results to keep the mill running. As a result, we've commenced an orderly wind-down of operations and expect the mill to be fully curtailed in the third quarter. I do want to thank our New Bern team for their contributions to the company as well as the local community for their support over the years. We're working to minimize the impact of the curtailment by providing employment opportunities in other parts of our operations or transition services to affected employees. As for the remainder of our mill set, we are very focused on running efficiently and controlling costs. Given our deeply ingrained OpEx culture and relative position on the cost curve, we firmly believe that we're better positioned to operate through the commodity cycle than most of the industry. Nevertheless, in light of current market conditions, we expect to reduce our lumber production by 5% to 10% in the third quarter. This will take place across our mill set and is inclusive of the New Bern curtailment. And looking forward, we will continue to assess our performance, customer commitments and broader portfolio integration as we evaluate the need to further optimize our lumber operations. So now turning to OSP. Adjusted EBITDA was lower compared to the first quarter, primarily due to higher average sales realizations. Benchmark pricing for OSB began the quarter at elevated levels but moved significantly lower as the quarter progressed, largely in response to the softer-than-expected demand during the spring building season and elevated channel inventories. Pricing stabilized by quarter-end and has remained steady into July. Notwithstanding this volatility, average OSB composite pricing was 6% higher compared to the first quarter, while our average realizations were 13% higher. This relative difference was largely due to the length of our order files, which results in a lag effect for OSB realizations. Our production and sales volumes and unit manufacturing costs were comparable to the first quarter, and fiber costs improved slightly. Engineered Wood Products adjusted EBITDA increased by $6 million compared to the first quarter. Given solid single-family construction activity, the EWP market experienced a slight seasonal improvement in demand at the outset of the second quarter before stabilizing into the summer months. As a result, our sales volumes were higher across all products in the second quarter, and sales realizations were comparable for most. Unit manufacturing costs improved sequentially, and raw material costs moved lower for solid section products but higher for I-joist, primarily related to OSB web stock. In Distribution, adjusted EBITDA decreased by $2 million compared to the first quarter as lower commodity margins offset higher sales volumes. With that, I'll turn the call over to David to discuss some financial items and our third quarter outlook.

Thank you, Devin, and good morning, everyone. I'll be covering key financial items and second quarter financial performance before moving into our third quarter outlook. I'll begin with key financial items, which are summarized on Page 16. We ended the quarter with $1 billion of cash, with approximately $200 million earmarked for the remainder of the Timberland acquisitions we announced yesterday. Our balance sheet, liquidity position, and financial flexibility remain exceptionally strong, and we are well positioned to navigate a range of market conditions. In the second quarter, we generated $432 million of cash from operations and capital expenditures were $91 million. We returned $146 million to shareholders through the payment of our quarterly base dividend, which was increased in the first quarter by 5.3% to $0.20 per share. In addition, we returned $50 million to shareholders through share repurchase activity in the second quarter. These shares were repurchased at an average price of $29.96, and as of quarter end, we had completed approximately $850 million of repurchase under our $1 billion authorization. Looking forward, we'll continue to leverage our flexible cash return framework and look to repurchase shares opportunistically when we believe it will create shareholder value. Second quarter results for our unallocated items are summarized on Page 15. Adjusted EBITDA for this segment increased by $6 million compared to the first quarter, primarily attributable to changes in intersegment profit elimination and LIFO. The outlook items for the third quarter are presented on Page 19. In our Timberlands business, we expect third quarter earnings and adjusted EBITDA will be approximately $20 million to $30 million lower than the second quarter of 2024, largely driven by lower sales volumes and realizations in the West. For context, results for our Timberlands business are generally at their lowest level in the third quarter, given seasonal dynamics. Turning to our Western Timberland operations. We expect domestic log demand and pricing to face downward pressure in the third quarter as mills continue to carry elevated log inventories and navigate a challenging lumber market. As a result, our domestic sales realizations are expected to be moderately lower compared to the second quarter. Our fee harvest volumes will be slightly lower as we have made the seasonal transition into higher elevation operations, which generally have lower productivity. Forestry and road costs are expected to be seasonally higher in the third quarter, and per unit log and haul costs are expected to be lower. Moving to the export markets. In Japan, we anticipate continued steady demand from our customers in the third quarter. As a result, our sales volumes are expected to be comparable to the second quarter. That said, we anticipate a moderate decrease in our average sales realizations given ongoing consumption headwinds in the Japanese log market and the effects of a strengthening yen against the dollar. In China, log demand is expected to moderate in the third quarter in response to lower consumption levels and an increase of log inventories at the ports. As a result, our sales volumes to China are expected to be lower compared to the second quarter, and our average sales realizations are expected to decrease slightly. In the South, we expect sawlog markets to moderate somewhat in the third quarter as log supply remains ample, and mills further adjust to lower pricing and takeaway of lumber. In contrast, Southern fiber markets are expected to remain stable with slight upside as the quarter progresses. 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 second quarter. Given favorable weather conditions in the third quarter, we anticipate our fee harvest volumes will be moderately higher. Per unit log and haul costs are expected to be comparable, and forestry and road costs are expected to be seasonally higher. In the North, our fee harvest volumes are expected to be significantly higher compared to the second quarter as we have fully transitioned from spring breakup conditions, and our sales realizations are expected to be moderately lower due to mix. Turning to our Real Estate, Energy, and Natural Resources segment. Real estate markets have remained solid year-to-date, and we have capitalized on steady demand and pricing for HBU properties. As a result, we are increasing our guidance for full-year 2024 adjusted EBITDA to approximately $330 million, $10 million higher than prior guidance. We continue to expect basis as a percentage of real estate sales to be 35% to 45% for the year. And we remain on track for a year-over-year increase in contributions from our Natural Climate Solutions business as we continue to advance toward our 2025 target. For the third quarter, we expect earnings will be approximately $10 million lower and adjusted EBITDA will be approximately $30 million lower than the second quarter due to the timing and mix of real estate sales. For our Wood Products segment, we expect third quarter earnings before special items and adjusted EBITDA will be lower compared to the second quarter, excluding the effects of changes in average sales realizations for lumber and OSB. Benchmark prices for lumber and OSB have been fairly stable in July after decreasing for most of the second quarter. For lumber, buyers remain reluctant to build inventories and supply continues to outpace demand. For OSB, supply and demand are currently more balanced, yet buyer sentiment has turned more cautious as we've transitioned beyond the spring building season. As shown on Page 20, our current and quarter-to-date average sales realizations for lumber are moderately lower than the second quarter average. For OSB, our current and quarter-to-date average sales realizations are significantly lower than the second quarter average. For our lumber business, as Devin mentioned, we expect to reduce lumber production by 5% to 10% in the third quarter inclusive of the New Bern curtailment. As a result, we anticipate lower sales volumes and higher unit manufacturing costs compared to the second quarter. Our log costs are expected to be slightly lower. For our OSB business, we expect lower production volumes and moderately higher unit manufacturing costs due to the planned annual maintenance outages that are typical in the third quarter. However, we anticipate our sales volumes to be comparable. Our fiber costs are expected to be slightly higher in the third quarter, primarily in Canada. In our Engineered Wood Products business, we continue to see steady demand for our products given solid single-family construction activity. As a result, we expect our sales volumes to be comparable to the second quarter. We anticipate moderately lower sales realizations, primarily for plywood and MDF products. Raw material costs are expected to be lower in the third quarter, primarily for OSB web stock. For our distribution business, we expect adjusted EBITDA to be slightly lower compared to the second quarter due to a decrease in commodity realizations. With that, I'll now turn the call back over to Devin and look forward to your questions.

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

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

Yes. Well, maybe I'll answer your second question first and then get back to how we got to the 5% to 10%. As we look at the lumber business, and this is frankly true for all of our businesses. One of the things that we've really been focused on over the last several years is really aligning our businesses for the cyclical nature of our industry. And so what does that mean? It means strengthening the balance sheet, which we've done a tremendous amount of work on that, very strong balance sheet. But it's really focused on making sure that your operations are low cost and can weather these dips that you see from time to time in these markets. And we've been really focused on that with all of the OpEx work that we've done. I think you can see that in our relative operating performance, industry-leading margins across all of our businesses. And we're very focused on that in good times and in more challenging times. In that way, you don't have to take as dramatic action when you see some of these more challenging markets like we're seeing in lumber. So that's what we're focused on all the time, whether lumber prices are high or low, because I think that's the way that you win in commodity markets. And as we see the market today, obviously, and particularly lumber, it's a little bit more challenged. With the pullback that we've seen on multifamily and repair and remodel, that's created an imbalance in supply and demand in the market. You're seeing that in the pricing environment. The 5% to 10%, that's really us looking out at the market. We're always looking to balance our supply with our customer demand. We look at the integrated nature of our model to see where we have opportunities to create value and where we need to dial back a little bit. So as we look into the third quarter, obviously, the New Bern mill had some unique situations there just because of the cost structure at that mill and the size. But outside of that, it's really just trying to balance the demand from our customers, maintaining the right inventory levels, and really seeking to drive the most earnings that we can in this current environment. I will say, it's important to remember we're at a price right now that is essentially making most of the market underwater. That's not going to last forever. At some point, you are going to see more action taken, prices will come up, and then we'll be back in a more sustainable place for lumber.

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

Yes. Maybe I'll take a crack at that, and Davie, you can come in if I miss anything here. First of all, I would just say we're really excited about these Alabama transactions. This is an opportunity to pick up some very high-quality Timberlands. As we mentioned, in the release. Really, when you look across the entirety of our Southern portfolio from a cash flow per acre standpoint, it's going to be really at the top of our ownership. So really pleased to get that. As we think about demonstrating and highlighting the value of our underlying timberlands, I think you're going to look at a couple of different things. Number one, we're going to continue to get investors out into the timberlands. We did that last year. I think that was a good opportunity for people to see on the ground just the quality of the asset. I do think as we continue to get deeper into this natural climate solutions journey and you start to see some of the work that we've really been putting effort in over the last few years, this is going to start coming to fruition in the years to come. I think that will be a great way to highlight some of this alternative value. I'll just use solar as an example; that's been an area that's been particularly attractive. That's a nice healthy uplift over timberland values. We've already got agreements signed up on over 130,000 acres. So we need that solar capacity to be installed and come to fruition and you're going to start seeing that cash flow hitting the P&L over time. That will be a way that we can really demonstrate the uplift from all of this work on alternative values. But it's an important part of what we need to do to educate our investment community on the value opportunity within this portfolio.

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

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

Are you talking on the cost side or the realization side, George?

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

Yes, I get you. It's mostly on the price side. The dynamic that we have at play right now in the West continues to be a very tensioned market. Under most circumstances, you're going to see pretty strong log pricing in the West. We've seen that over the years. The challenge that we have at the moment is with lumber prices where they are, we're just kind of bumping up against the ceiling where mills can still make money. Frankly, I think a lot of them are not currently. What that's doing is causing the mills to run at reduced postures across the West, which is really reducing the amount of takeaway. Now we're still moving the volume because we have a strong customer base, but our ability to raise prices in this environment is pretty challenged. And when you look at Japan pricing, which is kind of second most important here, that typically tracks what's going on in the domestic market. You always get a premium to domestic prices. But those two are correlated. And so the ability to really raise prices in Japan is somewhat limited both by the domestic dynamic. But also, as Davie mentioned in his script, the challenges with the yen right now are making that a little bit tougher as well. So it's really on the price side as much as anything. That's what's going on with EBITDA in the West.

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

Yes, there have been several billion board feet added over the last few years. Overall, capacity across North America has remained fairly stable during this time. Regarding production, we are noticing reduced production in the U.S. South, as well as in the Northwest and British Columbia. It's difficult to quantify exactly since we lack detailed insight into our competitors' operating rates, but production is certainly lower than it would be under normal conditions. In the South, it's important to note that treated lumber is a significant market for Southern Yellow Pine, which has likely seen a decrease in demand of mid- to high single digits this year. Additionally, the multifamily segment has also declined significantly due to an influx of new supply. This increase in capacity, combined with the downturn in those two areas, has put pressure on Southern Yellow Pine. Looking ahead, we can expect to see spruce-pine-fir (SPF) phased out of the market over time due to ongoing rationalization in the industry. Southern Yellow Pine is starting to enter markets that have historically been served by SPF, but this transition will take some time to fully materialize.

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

Yes. Thanks, George. I mean, obviously, the dividend is a Board decision, but the ability to increase that base dividend is supported by ongoing increases to our sustainable cash flow generation. To your point, those timberland acquisitions we announced yesterday, the growth in the Natural Climate Solutions business, all of those things help support our ongoing cash flow generation. That's ultimately what's going to support that growth in the dividend over time. But I'd also point out, it's not just those things. We also have improvements we've made over time in our capital structure, debt paydown, refinancing, and share repurchase, of course, helps contribute towards that, as does OpEx and innovation, the things that we're doing every single day to help make sure we have the right cost structure across our business. I'd say we've modeled a number of different scenarios and feel very confident in our ability to increase our base dividend even in challenging market conditions.

In your recent response, you highlighted the treated market down, I think you said mid- to high single digits. So in that R&R channel, do you have a sense as to how much maybe the DIY component is down because I think you mentioned that's faring worse than the broader market?

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

Fair enough. Then are you able to share your operating rates in the quarter for the various Wood Products businesses?

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

That's helpful. And just the last question I had was for the latest timberland acquisitions in Alabama. I appreciate the disclosures there on the EBITDA you expect from timber sales, but would you see additional Natural Climate Solutions revenues from the acreage you acquired?

Yes, Amir. Currently, we are somewhat limited in terms of the potential upside we can underwrite. However, as we've observed with the transactions we've secured in the Carolinas, Mississippi, and other areas over the past few years, we are encountering more opportunities than we initially expected as we incorporate them into our portfolio. This holds true for the Natural Climate Solutions business as well, and it also applies to the synergies we see from integrating them into our operational framework and managing those timberlands over time.

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

Yes, I'd say a couple of things, and I'm going to differentiate here between the West and the South. In the West right now, obviously, realizations are down relative to where they've been over the last several years. In a normalized lumber environment, I would expect higher log realizations in the West. We still feel good about the overall dynamic for pricing in the West outside of these unique circumstances that we're in right now in the lumber market. You should see a nice pickup in log realizations out of the west when things normalize. In the South, we have been adding timberlands here over the last several years as part of our $1 billion program, and you're going to start seeing that reflected in harvest volumes in the years to come. That's a component. We do think, again, outside of the situation that we're in today, lumber markets are challenged. In those geographies where we've seen new capacity come in, we expect to see log prices go up over time. We're also very focused as we've talked about before on growing our export business out of the U.S. South. It's still a small component right now, but I'm pretty excited about some of the opportunities in India and Vietnam. We're really looking to grow that over time, which is a component. Finally, the Natural Climate Solutions piece, in the next 5, 10, 15 years, the alternative values that are inherent in a timber portfolio are expected to start materializing significantly. We have a whole team that is focused on identifying and capturing that value. We're still in the early stages, but you're going to really start to see that materialize in a more meaningful way in the years to come. That gives us confidence that acquiring timberlands is going to develop nicely and create a lot of value for our stakeholders over time.

Got it. Okay. And then in terms of EWP, it was pretty encouraging to see I-joist and solid section pricing hold firm. How would you kind of describe the competitive environment out there? And how would you sort of characterize pricing risk if we were to see single-family starts soften further?

Yes. As you say, this is a product line that's primarily focused on single-family. That's held up reasonably well, giving us the ability to continue to move product and keep prices relatively steady. That's our expectation by and large for Q3 as well. Look, if single-family fell off dramatically, would we see some additional price pressure for EWP? Of course. But that's not our base case. We think that single-family is going to hold up reasonably well. It's a competitive marketplace, and we've got some solid competitors. They make a nice product as well. But I think the Trust Choice brand does carry a premium in the market. We do a lot in terms of customer support to make sure that we are taking care of our customers. We think that in a unique way provides us with a competitive advantage. So I think we'll fare well regardless of what's going on in the market. As long as single-family housing holds up, I think we should be just fine from an EWP standpoint.

Congratulations on a strong quarter despite the challenging environment. Devin, I have a question about the current weakness. How much of the decline in housing starts do you believe is linked to regional and smaller builders who don't have the resources of larger builders to reduce rates or provide other incentives?

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

Got you. Got it. Okay. That makes sense. And then just on EWP. You mentioned the operating rate being the low 80s for 2Q. I think it was in the high 70s for 1Q. You had some mill reliability issues last quarter. Were those addressed in 2Q and where do you think the operating rate will be in EWP for 3Q? If trends continue the way they are in terms of single-family holding its own, when do you think an inflection point can be reached in EWP pricing?

Yes. In Q1, we faced a minor reliability issue, partly due to weather, but overall, it was not significant. Currently, we're operating at around 80%, which is also what we expect for Q3. We could increase that slightly if market conditions improve, but our priority is to align production with customer demand. For an inflection point, we need to see more activity in housing. If we reach a single-family level of 1.1 or higher, it won't take much more to create tension in the EWP market. However, even in the current situation, we can perform quite well in the EWP business.

I want to start with lumber. Weyerhaeuser has made a lot of progress towards it. But EBITDA in the last three quarters has been kind of negative. As we look at the back half and your comments around demand being on the softer side, especially for R&R, I'm just curious why do you think a more decisive action towards production curtailments is not warranted given the market backdrop?

Yes. Well, a couple of things. Good question. First of all, our Wood Products segment as a whole has certainly been under pressure but with respect to lumber specifically, no question. This has been a very challenging pricing environment. Recently, lumber prices have been at multiyear lows, and this has been a challenge for the lumber industry. I would say that's particularly true for our Northwest and British Columbia operations where we do have low-cost mills; the log costs have remained elevated relative to the lower lumber prices. A few things for context when we think about what's going on. First, our mill set overall is positioned very well on the cost curve and you can see that in our relative performance. Even though we're not pleased with where EBITDA has been in lumber, relative to the rest of the industry, I think we've demonstrated where we sit on the cost curve. Second, I think we can and should be in the black at the bottom even at these prices in our southern operations and in Alberta. Pricing is not going to stay at levels where much of the industry is underwater forever. We're ultimately going to see a pickup in pricing for lumber, at which point we'll be back in the black as a system. In the interim, we're going to keep focusing on costs and running our operations efficiently to navigate the market dip and overcome some of these headwinds. Regarding our operating posture as we said, we're going to be down 5% to 10%. That's where we think just with our cost structure, our customer base, where we think that makes sense.

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

Yes. A couple of things on that. As we think about Q3 for us, we're expecting essentially comparable to Q2 from a sales volume standpoint, from a realization standpoint, we'll see how the quarter progresses, but things feel reasonably steady right now. When you look into Q4, as you mentioned, there is going to be some new capacity coming on. That said, it is important to remember when new capacity really comes on, it takes a while for them to get fully into production. So the ramp-up period will take some time. I would also note historically Q3 and Q4 are times where much of the industry takes some of their annual maintenance downtime. That may mitigate some of that new volume coming to market. Overall, if we have more volume hitting the market unless demand picks up, that is going to put some downward pressure on pricing. The good news, at least from my standpoint, is our base case is that rates are going to come down at some point. When you look across North America, there are housing shortages everywhere. I can't tell you exactly what the mortgage rate needs to be to unleash that level of building activity, but it's going to come at some point, at which point the OSB market will need that extra supply.

That's helpful. And then just switching over to lumber business. Can you talk about your expectations around the impact of softwood lumber duty cash deposit rates moving higher in August for the Canadian industry?

Yes. I mean, obviously, we don't have visibility into our competitors' cost structure, but if you raise the duty from 8% to 14%, that's just yet another headwind for producers moving lumber into the U.S. market. We'll see what happens in terms of whether that triggers additional capacity decisions or not. But directionally, that could be ultimately helpful. But we'll see.

Could you provide a bit more information on Natural Climate Solutions? You mentioned 70 solar projects covering 130,000 acres. When do those options expire, and when might we start to see cash flow from those deals?

Yes. The nice thing about solar is there's a tremendous amount of demand. The flip side is it takes these solar projects a while to work through the system. We're going to have solar development start coming online this year. First 1 is back half of this year, and you add several years to that, they just continue to build. The pipeline will grow over time, and you're going to start seeing that cash flow hit our income statement. Unfortunately, it's slow to get these things through the pipeline.

Okay. Now that we're a couple of years past your $100 million EBITDA target for Natural Climate Solutions, how have things turned out compared to your expectations?

Yes. That's a good question. I think when we look at the overall market, I think the opportunity that we see in the future is probably larger than back when we first set out that target, which is natural to some extent as these things continue to mature. I think the timeline on several of these different businesses has probably been a little longer than we expected, particularly around carbon capture and storage. I think that's going to be a big business, but the process to get through permitting has taken longer than we originally anticipated. I still have a lot of confidence that ultimately, those will be a nice revenue generator. Solar, probably there's been more demand than we expected, but the timeline hasn't dramatically shortened. We need quicker processes for these solar projects to move through the pipeline, but demand is extremely high. We are also excited about mitigation banking where we've seen more demand than we previously anticipated. Overall, we're optimistic.

That's helpful. Maybe just relatedly, so when we think about the EWP business, we've got OSB prices coming down, does that flow through into higher margins for your EWP business?

Yes, absolutely. That OSB web stock typically rolls through. It does provide a tailwind for margins as OSB prices come down.

Is there any way to quantify the fixed cost reduction you might see from New Bern? With the outlook for Lumber for 3Q and a few moving pieces with lower volumes, lower log costs, higher unit manufacturing costs, would your lumber EBITDA maybe be kind of directionally similar to 2Q? Or do you think that you could break even with some of the actions you've taken? Any color you can give there?

Yes, Anthony. Just starting on New Bern, that's relatively small mill, 100 million board feet capacity. Some fixed costs coming out, but it's going to be relatively immaterial in the broader context. That's what I would say there. In regard to lumber as a whole, I think that's probably a fair statement in terms of if pricing holds where it's at today, probably relatively comparable, but there are some reasons to think that prices could come up as the quarter progresses.

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