Weyerhaeuser Company (NYSE:WY), a leading timberland owner and wood products manufacturer, reported a profitable second quarter in 2024, with GAAP earnings of $173 million, or $0.24 per diluted share, on net sales of $1.9 billion. The company's adjusted EBITDA increased by 16% over the first quarter to $410 million.
Weyerhaeuser announced a significant expansion of its timberland holdings with the acquisition of approximately 84,000 acres in Alabama for $244 million and is on track to reach $1 billion in strategic timberland acquisitions by the end of 2025. Despite facing challenges in the lumber market, the company remains confident in its ability to navigate cyclical industry conditions and maintain industry-leading margins.
Key Takeaways
- Weyerhaeuser reported Q2 2024 GAAP earnings of $173 million, or $0.24 per diluted share.
- Net sales reached $1.9 billion, with an adjusted EBITDA of $410 million.
- The company acquired 84,000 acres of timberlands in Alabama for $244 million.
- Timberlands contributed $81 million to Q2 earnings; Wood Products added $171 million.
- The company ended the quarter with $1 billion in cash and returned $196 million to shareholders.
- Weyerhaeuser expects a decrease in earnings and adjusted EBITDA for Q3 due to lower sales volumes and realizations in the West.
Company Outlook
- The company maintains a positive outlook for the housing market and repair and remodel activity.
- For Q3, lower earnings and adjusted EBITDA are expected in Timberlands, Wood Products, and Real Estate, Energy, and Natural Resources segments.
- Steady demand and comparable sales volumes are anticipated for Engineered Wood Products.
- Distribution business expects slightly lower adjusted EBITDA in Q3.
Bearish Highlights
- The Western domestic market experienced downward pressure on log prices due to high inventories and a softening lumber market.
- Lumber prices faced challenges, and the sawmill in New Bern, North Carolina, will be curtailed indefinitely.
Bullish Highlights
- Stable log markets in Japan and increased sales volumes in China for the Western export business.
- Higher royalty income from construction materials contributed to earnings from Real Estate and ENR.
- OSB pricing showed an increase, contributing to a more favorable outlook for Wood Products.
Misses
- Adjusted EBITDA for the Distribution segment decreased by $2 million due to lower commodity margins.
- The company faces challenges in the lumber market, with recent prices at multiyear lows.
Q&A Highlights
- CEO Devin Stockfish expressed confidence in navigating current market conditions through cost reduction and operational efficiency.
- The company discussed the potential for increased income from Forest Carbon next year due to growing demand for carbon credits.
- Weyerhaeuser is optimistic about the long-term revenue generation from its Natural Climate Solutions initiatives, including solar projects.
In summary, Weyerhaeuser's Q2 2024 performance demonstrated resilience and strategic growth despite some market headwinds. The company's expansion of its timberland portfolio and its focus on operational efficiency and cost control position it well for future profitability and shareholder returns. With a robust cash position and a positive outlook on housing and remodeling markets, Weyerhaeuser is poised to continue its trajectory of steady growth and industry leadership.
InvestingPro Insights
Weyerhaeuser Company (WY) has shown a robust financial performance in the second quarter of 2024, which is reflected in its continued profitability and strategic timberland acquisitions. Delving deeper into the company's financial health and market position, we find additional insights from InvestingPro that could be valuable for investors:
InvestingPro Tips indicate that Weyerhaeuser has been a consistent player in the Specialized REITs industry and stands out for maintaining dividend payments for 54 consecutive years, signaling a commitment to shareholder returns. Additionally, the company is trading at a low revenue valuation multiple, which could suggest an attractive entry point for investors considering the stock's valuation in relation to its revenue.
From the real-time metrics provided by InvestingPro, we observe a market capitalization of $23.08 billion and a price-to-earnings (P/E) ratio of 30.84 as of the last twelve months leading up to Q1 2024. The dividend yield as of the latest data point is 3.1%, which complements the company's long history of dividend payments.
Furthermore, Weyerhaeuser's gross profit margin stands at 21.98% for the same period, which, although indicating profitability, aligns with the InvestingPro Tip highlighting weaker gross profit margins compared to industry peers.
For investors seeking a more comprehensive analysis, there are additional InvestingPro Tips available that could provide further clarity on Weyerhaeuser's financial outlook and market positioning. Use coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, and unlock the full range of insights on InvestingPro.
In summary, despite some challenges in the lumber market, Weyerhaeuser's solid dividend history, attractive valuation multiples, and strategic growth initiatives present a multifaceted picture for potential investors.
Full transcript - Weyerhaeuser (WY) Q2 2024:
Operator: Greetings, and welcome to the Weyerhaeuser Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Taylor, Vice President of Investor Relations. Thank you, Mr. Taylor, you may begin.
Andy Taylor: 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.
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. In 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 continue 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 in 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 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, and 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 is being felt across the North American lumber market, it's been more acute in Southern Yellow (OTC:YELLQ) Pine given 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 burn 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 [indiscernible] 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, VWP 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.
David Wold: 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 to Devin and look forward to your questions.
Devin Stockfish: Thanks, Davie. 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 homebuilders to offset affordability challenges. In contrast, the multifamily segment has been more challenged given the significant amount 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 homebuilding 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. And 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.
Operator: [Operator Instructions] Our first question comes from Susan Maklari with Goldman Sachs (NYSE:GS).
Susan Maklari: 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?
Devin Stockfish: 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? Well, 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. And so 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 -- where do we have opportunities to create value and where do we need to dial back a little bit. And so as we look into the third quarter, obviously, the New Bern mill had some unique situation 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.
Susan Maklari: 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 is 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?
Devin Stockfish: Yes. Maybe I'll take a crack, 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, really 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 -- 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. And I think that will be a great way to highlight some of this alternative value. And 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. And 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. And 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 -- to really educate our investment community on the value opportunity within this portfolio.
David Wold: 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, complete attractive share repurchase activity through the cycle when others may not be in a position to do so. So when markets inevitably improve, we'll be well positioned to take advantage of that position. So 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.
Operator: Our next question is from George Staphos with Bank of America Merrill Lynch (NYSE:BAC).
George Staphos: So I guess, first of all, with Timberlands and the outlook, it sounded like the larger amount of downward pressures 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?
Devin Stockfish: Are you talking on the cost side or the realization side, George?
George Staphos: 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.
Devin Stockfish: Yes, I get you. It's mostly on the price side. And the dynamic that we have at play right now in the West, I mean, it continues to be a very tensioned market. And under most circumstances, you're going to see pretty strong log pricing in the West. And 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. And frankly, I think a lot of them are not currently. And so what that's doing is it's causing the mills to run at reduced postures across the West. And so that 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 the 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 2 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 -- 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.
George Staphos: 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 are recognizing it's tough to call, not a monolithic market. We're running 5 days, 7 days. But there 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?
Devin Stockfish: Yes. I mean there have been several billion board feet that have been added over the last several years. I would just note when you look at capacity across North America as a whole, it's been pretty stable over the last several years. But to your specific question around production, I think what we're seeing -- and again, it's hard to say for sure, but certainly, from our log customer standpoint, we're definitely seeing reduced production across the U.S. South. And by the way, that's true in the Northwest and this true in British Columbia, I believe, as well. Hard to dimension it just because we don't have that level of insight into our competitors' operating rates, but it's certainly down relative to where it would be in a normalized condition. I would say the 2 things from an overall supply-demand dynamic, I think, that are important to remember 2 in the South are number one, treated lumber is a pretty big market in the South for Southern Yellow Pine. That's probably been down mid- to high single digits this year from best we can tell and then multifamily just because there is a lot of multifamily activity that's been going on that uses Southern Yellow Pine, that obviously has been down quite a bit this year. So I think the combination of that incremental capacity coming in to the south as well as those 2 components being down has really put some pressure on Southern Yellow Pine. Now I will say just again, over time, what's going to happen is you're going to continue to see SPF coming out of the market. And you've seen a lot of rationalization over the last few years. And what's going on in the market today is Southern Yellow Pine is just kind of pushing into some of those markets that have historically been SPF, but that's going to take a little time to fully play out.
George Staphos: 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 2 you shouldn't. Where you sit here 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.
David Wold: 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. So 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. And so 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, 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.
Operator: Our next question comes from Amir Patel with CIBC (TSX:CM) Capital Markets.
Amir Patel: 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.
Devin Stockfish: 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.
Amir Patel: Fair enough. Then are you able to share your operating rates in the quarter for the various Wood Products businesses?
Devin Stockfish: 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.
Amir Patel: 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 of acreage you acquired?
David Wold: Yes. Of course, Amir. We -- it's pretty limited in terms of what we're underwriting today in terms of that upside over time. But as we've seen in the transactions that we've acquired in the Carolinas, and Mississippi and other spots over the last few years, we continue to see a lot more opportunities than we had originally anticipated as we bring those into our portfolio. And so certainly, that's true on the Natural Climate Solutions business, but it's also true as we think about the synergies that we identify in terms of putting them into our operating footprint and really just running those timberlands over time.
Operator: Our next question comes from Kurt Yinger with D.A. Davidson.
Kurt Yinger: I just wanted to start off on Timberlands. I guess, 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? And I guess, excluding price, what other levers do you think are going to be most important in driving that for Weyerhaeuser?
Devin Stockfish: 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. And a normalized lumber environment, I would expect higher log realizations in the West. So 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. So 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. And so that's a component. We do think, again, outside of the situation that we're in today, where lumber markets are challenged. In those geographies where we've seen new capacity come in, we do 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. And it's still a small component right now, but I'm pretty excited about some of the opportunities in India and Vietnam. And I think we're really looking to grow that over time, which is a component. And then again, just the Natural Climate Solutions piece, I think as you look out over the next 5, 10, 15 years, one of the things you're really going to see PAUSE is the alternative values that are inherent in a timber portfolio are going to start materializing in a much greater way. And whether that's solar, wind, carbon, carbon capture and storage, real estate development, mitigation banking conservation. There are a lot of different things that you can do on a land-based like ours. We've got a whole team that's really 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. And so that's -- when we look out into the future, obviously, we're going to continue to focus on having the lowest log and haul costs we do today, and we will, I think, in the future because we're super focused on it. I think we'll see some upside on log prices, but we're also very focused on creating alternative values off the land base. So that's what gives us confidence that this program to acquire timberlands is going to develop nicely and create a lot of value for our stakeholders over time.
Kurt Yinger: Got it. Okay. And then in terms of EWP, I mean, 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 kind of sequentially soften a bit further, just given what we've seen in the last couple of months.
Devin Stockfish: Yes. I mean as you say, this is a product line that's primarily focused on single family. And so that's -- that's held up reasonably well, and that's given us the ability to continue to move product and keep prices relatively steady. And 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. 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 in a unique way that provides us with a competitive advantage. And so I think we'll fare well regardless of what's going on in the market. But as long as single-family housing holds up I think we should be just fine from an EWP standpoint.
Operator: Our next question comes from Mike Roxland with Truist Securities.
Mike Roxland: Congrats on a good quarter despite the backdrop. Devin, just one question on the weakness -- how much of the weakness that we're seeing in housing starts, do you think relates to regional and smaller builders who don't have the wherewithal of the larger builders to buy down rates or offer other incentives?
Devin Stockfish: Yes. I mean I think that it's certainly a component. And there's no question, we have seen a bifurcated market with interest rates being where they are. The ability for the bigger builders to buy down rates is a meaningful competitive advantage in this market. So yes, I think that certainly impacted overall new home construction activity. However, I don't think it's 1 for 1 in terms of for every house that a small builder doesn't build it just doesn't get built because the big builders are just taking market share. And you can certainly see that over the last few years. Now the good news, I think, 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.
Mike Roxland: 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, I think 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? And just last in EWP, 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? Could that be 3Q, it's late 3Q, 4Q? What do you think needs to get us over the hurdle to actually see prices inflect higher?
Devin Stockfish: Yes. Well, in terms of operating rates, in Q1, it was -- there was a little bit of a reliability issue. Some of that was weather related. It was pretty minor in the grand scheme of things. Right now, we are operating at kind of that low 80%. That's more or less what we're expecting for Q3 as well. We can dial that up a little bit if markets improve, but we're really just trying to kind of keep that production in line with what we see as customer demand. So this is the rate we're going to be running at here until we see a meaningful pickup in activity. In terms of what's the inflection point, we're going to need to see a little bit more housing activity. If we can get up to 1.1 or north of that on the single-family side, I think -- it doesn't take a whole lot to see the EWP market tension up. So you don't need all that much more. But again, even in this current environment, we can, I think, do pretty well on the CWP business. It's important to remember, obviously, we've seen prices come down a little bit from the pandemic highs, but when you look at where EWP pricing is relative to history, it's still very strong.
Mike Roxland: Yes, I would agree with that. And good luck in the second half.
Operator: Our next question is from Ketan Mamtora with BMO (TSX:BMO) Capital Markets.
Ketan Mamtora: I want to start with lumber. And look, I mean, clearly, Weyerhaeuser has made a lot of progress towards it [indiscernible] at the bottom efforts. But EBITDA in the last three quarters has been kind of negative. So I'm just curious, as we look at sort of back half and to your comments around demand being on the software side, especially for R&R, I'm just curious why do you think a more decisive kind of action towards production curtailments is not warranted given the market backdrop?
Devin Stockfish: Yes. Well, a couple of things. Good question. So a couple of things I'd note. First of all, when we talk about black at the bottom, it is important to note that our Wood Products segment as a whole certainly has been black at the bottom. But with respect to lumber specifically, no question. This has been a very challenging pricing environment. Recently, we've seen lumber prices at multiyear lows, and this has been a challenge for the lumber industry as a whole. I would say that's particularly true for our Northwest and British Columbia operations where even though we do have low-cost mills, the log costs have remained elevated relative to the lower lumber prices. But just a few things for context when we think about what's going on. So first, our mill set overall is positioned very well on the cost curve. And you can see that, I think, in our relative performance. even, obviously, we're not pleased with where EBITDA has been in lumber, but 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 black at the bottom, even at these prices in our southern operations and in Alberta. And I think, look, it's important to remember that pricing is not going to stay at levels where much of the industry is underwater forever. And so we're ultimately going to see a pickup in pricing for lumber, at which point, certainly, we'll be back in the bottom -- back in the black as a system. But in the interim, we're going to keep focusing on costs and OpEx and running our operations efficiencies to navigate efficiently to navigate the market dip and overcome some of these headwinds. In terms of 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. And look, others will make the decisions based on their operations and their cost structure. But ultimately, you're not going to sit in a place where prices are below cash breakeven for most of the industry.
Operator: Our next question is from Matthew McKellar with RBC (TSX:RY) Capital Markets.
Matthew McKellar: Hi, good morning. Thanks for taking my questions. Paul, just a couple of good products. Maybe first, can you talk about your expectations for the U.S. The 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? And you noted, I think you all for all related somewhat elevated inventory levels.
Devin Stockfish: Yes. So a couple of things on that. As we think about Q3 for us, we're expecting, you know, essentially comparable to Q2 from a volume standpoint, sales volume standpoint, from a realization standpoint, we'll see kind of 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. And so we'll see what that does to the market. It is important to remember when new capacity really comes on, it does take a while for them to get really fully into production. So the ramp-up period will take some time. I would also note PAUSE historically, Q3 and Q4 are times where much of the industry takes some of their annual maintenance downtime. So that may mitigate some of that new volume coming to market just from a Q4 standpoint, but overall, if we have more volume hitting the market unless demand picks up, that is going to put some downward pressure on pricing. Now the good news, at least from my standpoint, is our base case is that rates are going to come down at some point. And when you look pretty much everywhere in the U.S. and North America, there are housing shortages everywhere. And so it's really just -- and I can't tell you exactly what the mortgage rate needs to be to kind of unleash that level of building activity, but it's going to come at some point, at which point, I think the OSB market is going to need that extra supply. So we'll see there may be a moment in time where it gets a little out of balance. But over the longer term, I think OSB should be a pretty strong business.
Matthew McKellar: 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. Do you expect that pricing can be higher to offset some of that? Or do you have any expectations around capacity that could come out?
Devin Stockfish: 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 that are moving lumber into the U.S. market. So we'll see what happens in terms of whether that triggers additional capacity decisions or not. But directionally, that could ultimately be helpful. But we'll see.
Operator: Our next question is from Mark Weintraub with Seaport Research Partners.
Mark Weintraub: Just maybe a little bit more on Natural Climate Solutions. So you mentioned 70 solar projects, 130,000 acres. When do those -- can you give a sense when those options expire when you might expect you to start seeing more cash coming in related to those deals.
Devin Stockfish: Yes. I mean 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. So -- we're going to have solar development start coming online this year. First 1 is back half of this year and then you add, call it, several year and they just continue to build. And so the pipeline will grow over time, and you're going to start seeing that cash flow hit our income statement. But it's -- unfortunately, it's slow going just the process to move these things through the pipeline.
Mark Weintraub: Okay. And so now we're kind of a couple of years into -- after you're having provided that $100 million EBITDA target for Natural Climate Solutions, how things played out differently, better, worse than you expected? And maybe start there.
Devin Stockfish: 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 time line on several of these different businesses has probably been a little longer than we expected. And that's particularly true around carbon capture and storage. I think that's going to be a big business. But the process to get through all of the permitting, that's just taken a little bit longer than we would have expected. I still have a lot of confidence that ultimately, those are going to be a nice revenue generator. Solar, probably there's been more demand than we had expected. I think the time line, unfortunately, hasn't dramatically shortened relative to when we kick this off. And I do think just from an overall public policy standpoint, we do need to figure out a way to get these solar projects through the pipeline quicker. But the demand level is extremely high. So we feel good about that. I think mitigation banking is another area where we've seen probably a little bit more demand than we had originally anticipated. So that might be a bigger component of that initial $100 million than we originally anticipated. And I think Forest Carbon is we're seeing growing levels of support. We had the Biden administration that came out in support of voluntary carbon markets, SBTI came out talking about voluntary credits for Scope 3 emissions. You've seen a variety of commentary from the environmental community and support. So I feel like that's -- that's growing in momentum. And when we talk to customers for forest carbon, there's a significant amount of demand as long as you can get over that credibility hurdle. And I feel like we're making good progress there. So I think that's another market that we're pretty excited about. And you're going to really start to see that hit in a more material way next year in terms of the income stream coming off of Forest Carbon. So overall So that flows through typically at a little bit higher price and just kind of commodity OSB. And then lastly, we typically have a higher mix of high-value product relative to sheeting, which helps our overall realizations relative to at random links. And it's really those three things typically.
Mark Weintraub: That's helpful. Maybe just relatedly, so when we think about the EWP business, we've got OSB prices coming down, at least the commodity price is coming down very substantially. Does that flow through into higher margins for your EWP business or not necessarily as much as you would think.
Devin Stockfish: Yes, absolutely. I mean that OSB web stock, I mean it typically because it is all supplied internally, it's on a 13-week rolling average. So it does roll through. But absolutely, that is a tailwind for margins as you see OSB prices come down for the EWP business.
Operator: Our last question is from Anthony Pettinari with Citi.
Anthony Pettinari: I just wonder, is there any way to quantify the fixed cost reduction you might see from New Bern? And then with the outlook for PAUSE lumber for 3Q. I guess there's a few moving pieces with lower volumes, a little lower log costs, higher unit manufacturing costs. I mean if prices kind of stay where they are now through 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? Or just any color you can give there?
David Wold: Yes, Anthony, just starting on the New Bern, again, I'd remind you that, that's relatively small mill, 100 million board feet and capacity. So there are some fixed costs coming out, but it's going to be relatively immaterial in the broader context. So 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 of course, I do think that there's some reason to think that prices could come up as the quarter progresses.
Operator: There are no further questions at this time. I'd like to turn the floor back over to Devin Stockfish for closing comments.
Devin Stockfish: All right. Well, thanks, everyone, for joining us this morning, and thank you for your continued interest in Weyerhaeuser. Have a great day.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. And we thank you for your participation.
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