Weyerhaeuser Co (WY)

• Weyerhaeuser expects a stronger lumber market in 2025, anticipating increased demand and improved margins due to cost reductions and a better positioning on the cost curve. -
• Significant growth is projected in their Natural Climate Solutions business, with a robust pipeline of forest carbon projects and an expected meaningful uptick in revenues and EBITDA next year. -
• Expansion of log exports from the U.S. South is underway, with growing volumes to India and Vietnam, and new opportunities in Turkey and Pakistan, capitalizing on international demand. -

• Weyerhaeuser's lumber business has been losing money, with the company not satisfied with negative EBITDA in the lumber segment due to challenging market conditions. -
• The company acknowledges that its Engineered Wood Products (EWP) demand is down significantly, with I-joist volumes expected to be down about 25% from peak, indicating difficulty in recapturing market share. -
• Year-to-date base dividends and share repurchases have outpaced Funds Available for Distribution (FAD), suggesting potential issues with cash flow and that there might not be a substantial supplemental dividend, impacting shareholder returns. -

1. Lumber Market Outlook
   Q: How will lumber supply-demand dynamics affect 2025 pricing?
   A: Significant capacity reductions of about 3.5 billion board feet have tightened supply. With improved demand from single-family housing and the R&R sector, we expect upward pressure on lumber pricing as we enter the spring building season in 2025. -

2. Lumber Profitability in 2025
   Q: Can you achieve breakeven EBITDA in lumber next year?
   A: We are optimistic about 2025; with our well-positioned cost structure and anticipated demand pickup, we expect to return to profitability in lumber. At current lumber prices, we would expect to be EBITDA positive. -

3. Cost Management and Margins
   Q: How will OpEx initiatives impact margins in 2025?
   A: We've been focusing on cost controls through reliability and automation. If demand normalizes and we ramp up production to capacity levels, improved unit costs could be a significant tailwind for margins next year. -

4. Timberlands Outlook in the South
   Q: What could drive improvement in U.S. South Timberlands?
   A: As lumber prices improve on the West Coast, log prices will follow. In the South, we'll roll over any volume not harvested due to weather into future quarters. Over time, we expect price improvement driven by export opportunities and increased capacity utilization. -

5. EWP Demand and Market Share
   Q: Can you recapture EWP market share from Open Web truss?
   A: During the pandemic, builders used alternate products due to EWP availability constraints. We expect to recapture most of that market over time, especially as lumber prices normalize, making it easier to regain share. -

6. Capital Returns and Dividends
   Q: How do dividends and repurchases align with your FAD?
   A: Despite challenging markets, we expect to cover our base dividend with adjusted FAD. While we may not have a substantial amount above that, our framework allows flexibility for supplemental dividends or additional share repurchases. -

7. NCS Business Growth
   Q: What's the outlook for your solar and wind projects?
   A: We have 3 solar projects coming online soon and 2 new wind projects next year. While we're not disclosing specific economics, these projects will increasingly contribute to our NCS business, moving toward our $100 million EBITDA target by the end of 2025. - -

8. Export Markets Outlook
   Q: What is your view on Western exports in early 2025?
   A: For Japan, we expect solid demand in the first half, with competitive pressures easing as European supply decreases. China remains uncertain, but reduced European salvage volumes and potential economic stimulus could improve demand. -

9. Operating Rates and Production
   Q: What were your Q3 operating rates in EWP, lumber, OSB?
   A: In Q3, operating rates were mid to high 70s for lumber, high 80s for OSB, and mid-60s for EWP. We adjusted production to match demand and can ramp up easily as demand improves. - -

10. Hurricane Impact
    Q: How did hurricanes affect your operations and markets?
    A: Fortunately, we had no significant timberland damage. Volume impact in the South was about 1–2% in the quarter, mostly affecting fiber with minimal margin impact. Overall, markets were not materially affected. -

11. Lithium Mining Opportunities
    Q: Are there revenue opportunities from lithium mining on your lands?
    A: It's early to quantify, but there's significant overlap between our land base and major lithium deposits. We've had discussions and see this as a potential opportunity. -

12. EWP Operating Rates Outlook
    Q: How will EWP operating rates trend into next year?
    A: We expect slightly higher rates in Q4. In Q1 of next year, rates should ramp up to normal levels, typically in the high 70s to low 80s under normal conditions. -

13. Forest Carbon Projects
    Q: What progress have you made on forest carbon projects?
    A: We're seeing strong demand for high-quality projects. We have 3 projects nearing approval and several more in development. We expect a meaningful uptick in forest carbon revenues and EBITDA next year. -

14. European Lumber Impact
    Q: How might European lumber affect U.S. markets in 2025?
    A: European supply could increase if margins improve, but factors like reduced salvage volumes and absence of Russian lumber may limit this. We may not see European imports at pandemic levels despite potential U.S. market improvement. -

15. Log Exports from U.S. South
    Q: Are you expanding log exports from the U.S. South?
    A: Yes, we're growing exports to markets like India and Vietnam, and exploring opportunities in Turkey and Pakistan. While currently small, this is a focus area and we expect growth over time. -

Quarterly guidance for Q4 2024:

• Timberlands Segment (South): stable sawlog demand in Q4 - - (no prior guidance)
• Timberlands Segment (North): moderately higher fee harvest volumes in Q4 - - (no prior guidance)
• Western Timberlands: stable domestic log market; slight decrease in average domestic sales realizations - - (no prior guidance)
• Real Estate, Energy, and Natural Resources Segment: Q4 earnings and adjusted EBITDA expected to be $10 million lower than Q3 - - (no prior guidance)
• Wood Products Segment: Q4 earnings and adjusted EBITDA expected to be slightly higher than Q3 - - (no prior guidance)
• Engineered Wood Products: lower sales volumes and realizations in Q4 - - (no prior guidance)
• Distribution Business: adjusted EBITDA slightly lower in Q4 - - (no prior guidance)

Annual guidance for FY 2024:

• Real Estate, Energy, and Natural Resources Segment (Adjusted EBITDA): $340 million - - (raised from $330 million - - )
• Capital Expenditures: $420 million - - (no prior guidance)
• Natural Climate Solutions: $100 million - - (no prior guidance)