Q1 2024 Earnings Summary
- Weyerhaeuser expects strong growth in its Natural Climate Solutions business, with increasing demand for high-quality carbon credits and a positive trajectory of carbon prices over the coming years.
- The company anticipates higher operating rates in Q2 across all its Wood Products businesses, including lumber, OSB, and engineered wood products, indicating improved production efficiency and potential for increased profitability.
- Weyerhaeuser maintains top quartile cost structure mills, especially in the U.S. South, and is well-positioned to capitalize on anticipated lumber price increases, which will enhance profitability in the coming quarters.
- Weyerhaeuser has been EBITDA-negative in lumber for the past two quarters, primarily due to a challenging pricing environment in the Pacific Northwest and British Columbia, where lumber prices have declined faster than log costs, creating difficult operating conditions.
- Engineered Wood Products (EWP) are experiencing a steady trend of lower pricing, and the company is facing challenges in regaining market share in I-joists after customers converted to alternative products during the pandemic. Lower lumber prices may prolong the time needed to recover this market share.
- Adequate lumber inventory levels in the market are reducing buyer urgency, acting as a headwind on lumber prices, which have been weak, particularly for Southern Pine. Some industry participants may be operating below cash breakeven, suggesting ongoing pressure on profitability.
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Lumber Profitability
Q: With lumber prices down, what steps are you taking to improve profitability?
A: We've been working on operating costs for a decade and are well-positioned on the cost curve. Recent quarters have been challenging due to lower prices, especially in the Pacific Northwest and British Columbia. However, as prices come up, we'll be well-positioned, and in the U.S. South, most mills are top quartile cost structure. Even at today's prices, we should still be cash flow positive at trough level prices ("black at the bottom"). -
Natural Climate Solutions Growth
Q: Can you update on the $100 million NCS target by 2025?
A: We're still working towards the $100 million run rate by the end of 2025 , but we're not prepared to update that today. Solar projects will be a growing component, but timelines are extended due to permitting and grid connection challenges. CCS projects are a multiyear process and probably not a big part of the 2025 target, but offer significant upside beyond that. -
EWP Market and Production
Q: What are your views on EWP trends and capacity to meet demand?
A: We've seen downward price pressure in EWP coming off pandemic peaks, but pricing remains strong relative to pre-pandemic levels. We're working on regaining market share lost to alternatives during product shortages. We adjusted production last year due to expected housing softness, but we're now running at normal levels and don't expect the same challenges this year. -
Lumber Industry Curtailments
Q: Are you surprised there haven't been more industry curtailments given weak lumber prices?
A: On some level, yes, since parts of the industry are operating below cash breakeven. Mills may be holding out to retain labor, but it's unsustainable to operate below breakeven indefinitely. -
Inventory Levels
Q: Can you comment on inventory levels for lumber, OSB, and EWP?
A: Lumber inventories are adequate; buyers have built up some inventory, reducing aggressive buying and impacting prices. OSB inventories are leaner, and EWP inventories are at normal levels for this time of year. -
Impact of Interest Rates
Q: How are higher interest rates affecting your markets?
A: Single-family builders have been nimble and resilient, continuing to build despite higher rates. The multifamily segment shows more interest rate sensitivity, particularly in high-rise projects, but these use less wood. The repair and remodel Pro segment is doing fine, but DIY has been impacted and is softer this year. -
Timberland M&A and Valuations
Q: What's the latest on Timberland acquisitions and valuations?
A: We expect a typical year with $2 billion to $2.5 billion in transactions. There's strong interest and very strong pricing for quality packages, especially in Washington, Oregon, and the South. Carbon optionality is increasingly considered in valuations, though we're still early in fully quantifying its impact. -
Operating Rates Outlook
Q: What were your operating rates in Q1, and what's the outlook?
A: In Q1, lumber operated in the high 70%, OSB in the low 90%, and EWP in the high 70%. We plan to increase operating rates for all three in Q2, with EWP targeting the mid to low 80%. -
CCS Projects Timeline
Q: What's the process and timeline for CCS projects?
A: CCS projects are a multiyear process, involving geological analysis, challenging permitting, and infrastructure development. Timelines have extended beyond initial expectations from 2021, but demand is strong, and projects offer long-term recurring revenue. -
EWP Pricing and Input Costs
Q: How do pricing lags and input costs affect EWP margins?
A: There is a timing lag of 30-90 days in EWP pricing adjustments. Higher OSB costs impact EWP margins, but since we produce OSB internally, higher OSB prices benefit us on that side. -
Forest Carbon Credits Pricing
Q: What are the trends in pricing for forest carbon credits?
A: The voluntary market is challenging due to project quality differentials. We expect to receive solid premiums for our high-quality projects, with pricing improving over time as demand grows.