Greetings, and welcome to the Weyerhaeuser First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Beth Baum, Vice President of Investor Relations and Enterprise Planning. Thank you, Ms. Baum. You may begin..

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's first quarter 2021 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website.

Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call.

We will discuss non-GAAP financial measures and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer; and Nancy Loewe, Chief Financial Officer. I will now turn the call over to Devin Stockfish..

Thanks, Beth. Good morning, everyone, and thank you for joining us today. This morning, Weyerhaeuser reported first quarter net earnings of $681 million or $0.91 per diluted share on net sales of $2.5 billion. Adjusted EBITDA was $1.1 billion, a 68% increase over the fourth quarter of 2020 and a 167% increase compared to the year ago quarter.

This represents the highest quarterly adjusted EBITDA on record, surpassing the third quarter of 2020 by 48%. I'm extremely proud of the operational and financial results delivered by our team, notwithstanding winter weather disruptions and supply chain challenges throughout the quarter.

The hard work we've been doing over the last several years has positioned us well to capitalize on these current favorable market conditions and we remain focused on delivering superior value for our shareholders. Additionally, I'm very pleased to introduce and welcome to the call, Nancy Loewe, who joined Weyerhaeuser in March as our new CFO.

Nancy brings more than 20 years of leadership and financial and operating roles across a broad range of industries. She's hit the ground running and we're excited for the energy and expertise she is bringing to Weyerhaeuser and our leadership team.

With Nancy now onboard, Russell Hagen has fully transitioned into his new role as Chief Development Officer. I'm confident this organizational change will deliver meaningful portfolio management benefits as we align our real estate, energy and natural resources, acquisitions and divestitures, and business development activities under one umbrella.

I'm equally excited for the work this team is doing to support the company's increasing focus on emerging carbon and other natural climate solutions opportunities. In a moment, I'll dive into our first quarter business results, but first let me make some brief comments on the housing market.

First quarter housing starts averaged 1.6 million units on a seasonally adjusted basis, an improvement of 2% over the fourth quarter. Activity dipped briefly in February, driven by severe winter weather, but March activity rebounded sharply. March housing starts totaled 1.7 million units on a seasonally adjusted basis, the highest level since 2006.

Single family starts in March reached the highest rate for any month since June of 2007 at nearly 104,000 units. Additionally, housing permits in the first quarter averaged nearly 1.8 million units on a seasonally adjusted basis, surpassing last quarter by 10% and surging to its highest quarterly average since before the Great Recession.

Continued improvement in this key leading indicator points to increasing demand for new home construction in 2021. With these encouraging tailwinds, our housing market outlook is very favorable and further supported by macroeconomic fundamentals that will continue to drive strong U.S.

housing activity, including record low supply of new and existing homes for sale, strong homebuilder sentiment, favorable demographic trends, flexible work arrangements driving increased mobility and migration to the suburbs, higher savings rates and continued post-COVID improvements in GDP and unemployment.

Repair and remodel activity also remained robust in the first quarter, supported by rising home equity, additional federal stimulus and limited resale inventory. Feedback from our customers indicates a shifting trend from small do-it-yourself projects to larger professional remodels.

We expect repair and remodel demand to remain strong throughout 2021 as project backlogs continue to expand.

We are keeping an eye on certain cautionary factors, including the impacts of increasing home prices and mortgage rates on affordability and challenges for homebuilders resulting from rising material costs, supply chain disruptions and labor availability. However, we do believe the supportive fundamentals considerably outweigh these headwinds.

With the additional prospect of a federal infrastructure bill and growing demand for mass timber, we anticipate very favorable demand for wood products for the foreseeable future. Turning now to our first quarter business results. I'll begin the discussion with timberlands on pages six through eight of our earnings slides.

Timberlands contributed $108 million to first quarter earnings. Adjusted EBITDA increased by $5 million compared to the fourth quarter. Turning to Western timberlands starting with domestic market conditions, demand remained strong throughout the quarter as mills maintained healthy log inventories to capitalize on record lumber prices.

Log supply in the first quarter continued to improve as salvage harvest activity in Oregon increased substantially. Similar to the fourth quarter, salvage operations resulted in an abundance of smaller diameter logs in the market. This, in turn, is driving stronger demand and pricing for larger diameter logs.

Our fee harvest volume was comparable to the fourth quarter and our proportion of salvage volume increased significantly. Average domestic log sales realizations were slightly lower than the fourth quarter as salvage operations resulted in a greater mix of smaller diameter logs. We continue to make great progress on our 2021 salvage plan.

And as of the end of the first quarter, we’ve harvested approximately 40% of our planned salvage volume. We did not experience any downgrades in realizations on our salvage logs during the quarter. Log and haul costs increased slightly during the first quarter due to increased salvage activity and forestry costs were seasonally lower in the quarter.

Turning to our export markets. In Japan, demand for our logs remained strong in the first quarter. Reduced lumber imports into Japan resulting from strong U.S. domestic lumber markets and a global shortage of shipping containers allowed our customers to increase market share and drove stronger demand for our logs.

Our Japanese log sales volumes increased moderately compared to the fourth quarter, with a slight increase in realizations. Similar to Japan, the market for U.S.

logs in China remained strong in the first quarter as supply headwinds persisted, including lower overall lumber import volumes, a lack of container availability and restrictions on Australian log imports.

Log inventories at Chinese ports increased in February as manufacturing activity paused over the Lunar New Year period, but were drawn down rapidly in March as strong takeaway resumed. Average realizations for our China export logs increased modestly compared with the fourth quarter, but this was offset by higher ocean freight rates.

Our sales volumes to China decreased significantly as we intentionally flexed volume to the domestic market to capitalize on the strong pricing for our large diameter logs. Moving to the South. Southern timberlands adjusted EBITDA increased $5 million compared with the fourth quarter.

Southern sawlog market strengthened in the first quarter as record lumber and panel pricing drove strong demand and supply was limited by severe winter weather and seasonally wet conditions. Fiber markets also improved as demand increased following the fourth quarter maintenance outages by many of our pulp log customers.

Our fee harvest volume was slightly lower than the fourth quarter as we lost several operating days due to the snow and ice in February. Average sales realizations were slightly higher than the fourth quarter due to improved sawlog and fiber log realizations as well as favorable mix. Road and forestry costs decreased seasonally.

On the export side, we continue to see growing demand from both China and India. Southern export log pricing increased substantially in the first quarter, but volumes were comparable to the fourth quarter as container availability and increased freight rates were notable headwinds.

Northern timberlands adjusted EBITDA increased $1 million compared to the fourth quarter due to improved sales realizations for hardwood logs. Turning to Real Estate, Energy and Natural Resources, pages nine and 10. Real Estate and ENR contributed $66 million to first quarter earnings and $96 million to adjusted EBITDA.

First quarter adjusted EBITDA was $73 million higher than fourth quarter due to timing of transactions. Similar to 2020, our 2021 real estate sales activity is heavily weighted toward the first half of the year.

Average price per acre was down significantly compared to the unusually high fourth quarter, but still substantially higher than one year ago. As was the case in fourth quarter, first quarter included a number of high value retail transactions in the US South. Wood products, pages 11 and 12.

Wood products contributed $840 million to first quarter earnings and $889 million to adjusted EBITDA. First quarter adjusted EBITDA was 68% higher than the fourth quarter and surpassed by 45% the previous quarterly record, which was established in the third quarter of 2020.

Our lumber, OSB and distribution businesses delivered the highest quarterly adjusted EBITDA on record during the first quarter. Demand remained extremely strong across our product lines, with continued strength in the new residential construction and repair and remodel end markets.

The framing lumber composite entered the first quarter near the record levels achieved in the third quarter of 2020. After a slight pullback in January, prices reentered record territory and continued to increase as the quarter progressed, notwithstanding a low-end consumption in the South following the severe winter weather event in February.

Inventory in the distribution channels remained lean throughout the quarter as buyers delicately balanced their need to replenish inventory with buying at record high price levels. Average lumber composite pricing increased 41% compared with the fourth quarter.

EBITDA for lumber increased $259 million compared with the fourth quarter, a more than 100% improvement. Average sales realizations increased by 42%. Cost for Canadian logs increased significantly and Southern log costs increased slightly during the quarter.

Our lumber production decreased slightly compared with the fourth quarter as a handful of mills lost production days due to severe winter storms in the US South. Sales volumes decreased by 5% compared with the fourth quarter, as customer takeaway and supply chains in the South were temporarily disrupted following the severe winter weather.

OSB markets performed at an unprecedented pace in the first quarter. Limited resin availability added incremental constraints to an already lean supply of OSB in the market. This dynamic coupled with continued strong demand resulted in a record setting price run that persisted for the entire quarter.

Average OSB composite pricing increased 30% compared with the fourth quarter. OSB EBITDA increased $80 million compared to the fourth quarter, a 36% increase. Average sales realizations improved by 22%.

Production volumes increased slightly compared with the fourth quarter and unit manufacturing costs improved as a reduction in planned maintenance more than offset weather-related downtime at one of our Southern mills.

Although resin availability was a challenge across the OSB market, our supply chain and transportation teams did a fantastic job of effectively navigating the disruption, resulting in no material impact to our OSB production volumes or mix in the first quarter. We continue to benefit from proactive initiatives to diversify our resin supply.

Engineered wood products EBITDA increased $5 million compared to the fourth quarter. Average sales realizations for solid section and I-joists products improved as we continued to benefit from our August 2020 price increase and quickly began capturing the benefit of a second increase announced in January.

This was partially offset by higher raw material costs for oriented strand board web stock, resin and veneer. Production volumes also decreased slightly across several product lines as a result of weather-related downtime.

In distribution, EBITDA increased $15 million compared to the fourth quarter, a strong demand drove sales volumes across all products and the business captured improved margins. Turning briefly to operational excellence.

After exceeding our 2020 operational excellence target, we remain focused on OpEx in 2021, targeting another $50 million to $75 million across our businesses. With one quarter of 2021 behind us, we're on track to achieve our full year 2021 target and look forward to sharing some accomplishments as the year progresses.

Finally, I'd like to comment briefly on two recent timberland transactions. As we've noticed -- noted previously, we're continuously evaluating opportunities to optimize and grow the value of our timberland holdings. Today, we reported the closing of our previously announced acquisition of 69,000 acres of Alabama timberlands.

These are high quality acres that are accretive to our portfolio and exhibit strong operating on [ph] our existing footprint. We also announced this morning an agreement to sell 145,000 acres in the North Cascades region of Washington to Hampton Resources for $266 million.

Hampton is a strategic buyer with a complementary manufacturing footprint in the area. This transaction is part of a multi-year effort to strategically optimize our Western Timberlands portfolio and completes our targeted large-scale divestitures in the region. The North Cascades is our least productive acreage in the West.

It's primarily high elevation white wood with high operating costs and does not serve any of our internal mills or export customers. This property does not materially contribute to EBITDA and was not expected to generate a competitive return within our portfolio, even considering future alternative sources of value.

We're really pleased with this transaction and plan to redeploy the proceeds in line with our priorities for opportunistic capital allocation, including continue to enhance and grow our timberlands portfolio in a disciplined manner. So, with that, I'll turn the call over to Nancy to discuss some financial items and our second quarter outlook..

Thank you, Devin, and good morning, everyone. I'm looking forward to meeting many of you in the coming months. It's a privilege to be joining Weyerhaeuser at such an exciting time and I want to thank everyone for the warm welcome I've received.

Over the past two months, I've spent a great deal of time with the senior leadership team as well as the finance team here at the company immersing myself in the business and getting to know our employees and operations.

I've come away from that with tremendous excitement about the future and our ability to create significant long-term value for shareholders. I'm looking forward to the work ahead. So, this morning I'll cover a few aspects of our first quarter financial performance as well as our second quarter outlook.

I'll begin with the first quarter results for our unallocated items as summarized on page 13. First quarter adjusted EBITDA for this segment improved by $7 million compared to fourth quarter 2020.

This improvement was mainly due to lower corporate function and variable compensation expenses, partially offset by higher charges for the elimination of inter-segment profit in inventory and LIFO. This charge was primarily driven by higher lumber inventory in the South, where customer takeaway was disrupted after the severe winter weather.

Turning now to our key financial items, which are summarized on Page 14. Cash from operations totaled nearly $700 million for the first quarter. This is our highest quarterly operating cash flow since fourth quarter 2006 and our highest first quarter cash flow on record.

We generally expect cash from operations to decrease significantly in the first quarter, primarily due to seasonal working capital increases. However, operating cash flow improved by over $250 million compared with the fourth quarter as these factors were more than outweighed by higher pricing for lumber and oriented strand board.

We reinvested a portion of this cash in our timberlands and wood products businesses through capital expenditures, which totaled $53 million for the first quarter. Adjusted funds available for distribution or FAD for first quarter 2021 totaled $645 million as highlighted on page 15.

In the first quarter, we returned $127 million to our shareholders through payment of our first quarter base dividend of $0.17 per share. As a reminder, we plan to target a total annual return to shareholders of 75% to 80% of our annual adjusted FAD.

We will deploy the remaining 20% to 25% of our annual FAD consistent with our stated priorities for opportunistic capital allocation. Turning to the balance sheet, we ended our first quarter with over $1 billion of cash and undrawn line of credit, and just under $5.5 billion of outstanding long-term debt.

As a reminder, we have cash earmarked to repay our $150 million 9% note when it matures in the fourth quarter. Our strong balance sheet position in addition to our record EBITDA performance has resulted in a net debt to adjusted EBITDA leverage ratio of 1.5 times.

Although our leverage ratio is significantly below our over-the-cycle target of 3.5 times net debt to EBITDA, we believe that's appropriate given the extremely strong commodity markets we're experiencing today. Looking forward, key outlook items for the second quarter are presented on page 16.

In our timberlands business, we expect second quarter earnings and adjusted EBITDA will be comparable to the first quarter. In our Western timberlands operations, we expect our second quarter domestic log sales volumes will be significantly higher than the first quarter.

Domestic mill inventories ended the first quarter at moderate levels and log demand in the West remains favorable due to strong lumber market. Domestic average sales realizations are expected to be moderately lower compared with the first quarter.

Additionally, while we expect average sales realizations for large logs to improve, we believe this will be offset by an unfavorable mix of small logs as we continue to work through salvage wood.

We anticipate second quarter fee harvest volumes will be significantly higher, in that forestry and road spending will increase as we enter the spring and summer months. Moving to the export markets. In Japan, log demand remains strong.

Japanese Douglas Fir lumber producers continue to experience very favorable demand as lumber imports into Japan remain limited due to the high price of US lumber and low availability of shipping containers. Our second quarter average sales realizations on log imports to Japan are expected to increase modestly compared to the first quarter.

Our average sales volumes are expected to be comparable to the first quarter. For China, average export log sales realizations are expected to increase significantly. Demand for imported logs is strong due to significant economic growth, limited lumber imports and continued disruptions in the supply of imported logs.

However, our average log sales volumes are expected to be lower compared with the first quarter. With strong US domestic demand for large logs and high ocean freight costs, we'll flex more logs to the domestic market to capture the highest margin.

In the South, we anticipate fee harvest volumes will be significantly higher than first quarter due to seasonally higher thinner activity -- thinning activity as well as the deferred harvest activities related to the adverse weather we experienced during the first quarter. We expect average log sales realizations will be comparable to first quarter.

Forestry spending in the South is expected to increase, which is typical coming into the spring months. In the North, average log sales realizations are expected to increase slightly compared to first quarter, while fee harvest volumes are expected to be significantly lower as we enter the spring breakup season.

I'll wrap up the timberlands segment with a few comments on our recent timberland transaction. In the second quarter, we will report a cash outflow of approximately $149 million for the 69,000 acre Alabama timberlands acquisition that we completed this week.

And as Devin mentioned, we have also announced the sale of our North Cascades acreage and we expect to complete that transaction in the third quarter. A gain on sale will be reported as a special item within the timberlands segment. Turning to our Real Estate, Energy and Natural Resource segment.

Real estate markets remained strong into the second quarter as societal preferences during this time continued to drive robust demand for rural recreational properties. We expect second quarter net earnings and adjusted EBITDA to be moderately lower than first quarter due to timing of transactions.

We continue to expect full year 2021 adjusted EBITDA of approximately $255 million, although we now expect land basis as a percentage of real estate sales to be approximately 35% to 45% for the year due to the mix of properties sold.

We continue to anticipate our 2021 real estate activity will be heavily weighted to the first half of the year similar to our cadence in both 2019 and 2020. For our wood products segment, new residential construction activity has remained at very favorable levels.

And our builder and dealer customers are anticipating a strong second quarter, following the already strong first quarter. In repair and remodel markets, we are seeing a shift from small do-it-yourself improvement projects to larger remodel activity further solidifying the demand for structural wood products within this market.

Excluding the effect of changes in average sales realizations for lumber and oriented strand board, we expect second quarter adjusted EBITDA will be significantly higher than the first quarter.

For lumber, we expect production volumes to increase during the quarter as operating rates are expected to improve following weather-related mill downtime in the first quarter. We expect these higher production volumes to have a favorable impact on our manufacturing costs.

We also anticipate this increased supply as well as higher seasonal inventory drawdown to drive higher sales volumes during the quarter.

Oriented strand board is expected to have a slightly lower production level in sales volumes and slightly higher manufacturing costs due to an extended outage to complete a planned capital project at our Elkin OSB mill.

This equipment has been on-site, but installation has been delayed multiple times due to COVID-related travel restrictions and vendor resource availability. Log costs are expected to be comparable to the first quarter.

Entering the second quarter, benchmark pricing for oriented strand board and the framing lumber composites have continued to rise beyond the record levels experienced in the first quarter.

For lumber, our quarter-to-date average sales realizations are approximately $105 higher and current realizations are approximately $130 higher than the first quarter average.

For OSB, our quarter-to-date average sales realizations are approximately $135 higher and our current sales realizations are approximately $185 higher than the first quarter average. As a reminder for lumber, every $10 change in realization is approximately $11 million of EBITDA on a quarterly basis.

For OSB, every $10 change in realization is approximately $8 million of EBITDA on a quarterly basis. For engineered wood products, we expect higher average sales realizations for our solid section and I-joists products as we continue to capture the benefit of price increases announced in August 2020 and January 2021.

Additionally, in March 2021, we announced a third increase, which ranges from 10% to 25% and will be captured over the next several quarters. This will be partially offset by higher raw material costs. I'll wrap up with a few additional comments on our total company financial items.

We continue to expect full year 2021 interest expense will be approximately $315 million. Additionally, we continue to anticipate 2021 capital expenditures to total $420 million, with most large projects executing in the second half of the year.

Turning to taxes, we continue to expect our full year 2021 effective tax rate will be between 18% and 22% before special items based on our forecasted mix of earnings between our REIT and taxable REIT subsidiary. As previously discussed, a $90 million tax refund associated with our 2018 pension contribution remains in process.

We anticipate receiving this refund in second quarter 2021. Excluding this refund, we continue to expect our 2021 cash taxes will be generally comparable to our overall tax expense. Now, I'll turn the call back to Devin and look forward to your questions..

Thanks, Nancy. In closing, our first quarter financial performance was the strongest on record, and I'm incredibly proud of the work our teams are doing to achieve these results.

Whether it's navigating winter conditions and supply chain disruptions, keeping our people safe through a pandemic or the relentless focus to capture OpEx opportunities across our portfolio, our employees have done an outstanding job positioning the company to capitalize on the strong markets we're experiencing today.

Looking forward, the demand for our products is extremely favorable, supported by encouraging macroeconomic conditions and continued resiliency in the US housing and repair and remodel markets. We remain committed to serving our customers and delivering industry-leading performance across our operations.

When combined with a strong balance sheet and a dividend framework that returns meaningful cash to shareholders, we're well positioned to drive superior long-term value into the future. And now, I'd like to open up the floor for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Anthony Pettinari with Citi. Please proceed with your question..

Good morning..

Good morning..

Devin, given lumber prices where they are, are you undertaking any debottlenecking or brownfield expansions beyond the Holden expansion that you talked about last quarter? Could you even look at a greenfield mill in the South here? I'm just wondering, if you could talk about how you kind of balance making sure you get your share of growth versus not getting ahead of yourself in maybe an unusual market?.

Yes, absolutely. Happy to comment on that. If you think back to our capital program over the last several years, we have been investing significant amounts of capital across our wood products business.

In fact, we're doing $300 million of incremental capital this year, part of which, as you know it, it goes to the Holden mill, which will increase by about 100 million board feet capacity at that location. We continue to get incremental capacity through the capital program that we've had in place for a number of years.

Just for reference, if you think back over the last couple of years, our Millport and our Dierks mill brownfield expansions, have added about 300 million board feet of incremental capacity. And we continue to put capital to work across our wood products manufacturing businesses, and it's always a balance, Anthony.

We're always looking to continue to drive down costs and improve efficiencies at our mills. One of the course to our operating strategy on the manufacturing side is to have the best cost structure in the industry, so that we can continue to drive good margins, regardless of where we are on pricing.

We're going to continue to look for opportunities across our Wood Products manufacturing footprint, whether we're going to go out and do a greenfield mill. I think as we said in the past, our inclination is to really focus in the near-term on our existing mill set.

And the reason behind that is just we think we can get better risk adjusted returns by putting that capital to work in our existing mill footprint. Now, over time, as we continue to work through our capital programs down the road, is there an opportunity for a greenfield? Sure, we're always going to be open to that.

But I think in the near-term, it's going to be more focused on our existing footprint..

Okay, that's helpful. And then, understanding that the special dividend is the main use of cash for you, given you're levered at 1.5 turns.

Would you potentially look at share repurchases if your stock price isn't reflecting the strong earnings growth that you're seeing and maybe you can see it for some time here?.

Yes, sure. Just a quick comment and then I'll answer that specifically. And certainly, we're experiencing incredibly strong pricing right now. And if that continues to play out over the course of the year, we're going to generate very strong cash flow.

And as you noted with our new dividend framework, around 75% to 80% of that is going to go back to shareholders through the base dividend and supplemental dividends. So, any cash flow over and above that really goes to our opportunistic options, which are growth, further debt pay down and share repurchase.

As we think about share repurchase, specific to your question, Anthony, I think that can be a really good opportunity to return cash to shareholders under the right circumstances. And we continue to view that opportunistically.

And so to the extent, we feel like our shares are trading at a material discount, that's a great way to return cash to shareholders. But absent that, I think the preference really is to distribute that via the supplemental dividend..

Okay, that's helpful. I'll turn it over..

Thanks..

Our next question comes from the line of George Staphos with Bank of America. Please proceed with your question..

Hi, everyone. Good morning. Thanks for taking the question. Devin, I think you can take the rest of year off, what do you say, amazing how things -- I doubt you'll do that. Amazing how things change in a year. I just want to….

Well, there is still money to be made, George, so we’ll keep working..

Understood. So a way, I guess. So, I just want to make sure I understood. Holden, you said that's 260 million board feet. I just wanted to make sure that I had that, I had a slightly different number in my forecast just for clarification.

And then my first real question is, tell us why your customers aren't really worried about housing affordability or aren't -- don't see that as a big enough speed bump based on everything else that you're seeing right now because the price of construction of home is going on, it's going up beyond 10%, 15% given our numbers for aggregate cost of construction?.

Yes. Well, with respect to Holden, so it's a 100 million board feet of incremental capacity and that takes you up to about 260 million board feet when that project is complete..

That's what I got. Okay..

So, with respect to your question around affordability, I think the short answer, George, is just there is so much demand for housing right now that the builders are able to -- even though they are experiencing some increased costs, they're able to pass that on to the buyer.

And ultimately, you can't continue to see housing prices continue to go up at this level year after year. There is obviously some limit where that starts to take some increment of the buying community out of the market. But with low mortgage rates sitting around low 3%, that gives a little bit more flexibility.

But, again, the reality right now is there is a real shortage of housing in the market and the demand is just overwhelming. When we talk to our homebuilder customers, they just -- they have more buyers than they can satisfy at present.

And so, in that environment, it does give the builders more pricing power and we're certainly seeing -- you see that in the numbers with the permits and the starts and builder sentiment, just a lot of demand for housing.

And if you think about it just at a broader level, and we've been saying this for years, the country has been under building for a decade. And you probably saw the Freddie Mac number out, where they were estimating 4 million units under bill.

The amount of time it takes to build through that overhang, it's just -- it's a lot of demand and that's ultimately I think what keeps the buyer still there even though pricing continues to go up..

Understood. And I appreciate the thoughts there. I was hoping you could give us a bit more granularity to some degree piggybacking off of Anthony's questions in wood.

One, if you -- we didn't -- if we hold Holden outside of the equation for a minute, what kind of productivity capacity increases might you get around the rest of your network in lumber and OSB this year? And recognizing you said significantly and there are lots of ways to define that, I guess, or throw that into a model, if we take pricing aside and just assumed average pricing in the first quarter to second quarter, what kind of increase would we be looking at for wood products 2Q versus 1Q? If you can give us any kind of guardrails around that?.

Yes, sure. Well, I'll answer the second question first and then we'll swing back to the capacity question.

So, good way to think about it quarter-over-quarter if you take out lumber and OSB pricing is about $75 million to $100 million of incremental EBITDA, and that's really primarily a result of increased lumber volume and the EWP pricing increase rolling through.

And so, where you sit between that $75 million and $100 million really depends on how much OSB prices continue to go up because web stock obviously is -- it's an input cost that we have to bear in EWP. Although I will note, we supply almost all, if not all, of our web stock comes from our OSB mills. And so, we do get that in a different pocket.

So, that's the range about $75 million to $100 million. In terms of incremental capacity, every year through our capital program, you get several percentage -- several percent increase just on the debottlenecking work that we do, you get incremental volume. So, that kind of comes year after year just through our normal cost programs in CapEx.

We've also added as I mentioned about 300 million board feet over the last couple of years. And so, that's now rolling through the system. We've got another 100 million coming in Holden.

And so, we don't necessarily talk about it this way all the time, but we are seeing organic growth in our wood products manufacturing operations just through those capital programs, even though they are primarily focused on cost reduction..

Okay, thanks for the thoughts, Devin. I'll turn it over and I'll come back in queue if there's time. Thanks..

Great, thank you..

Our next question comes from the line of Mark Wilde with Bank of Montreal. Please proceed with your question..

Devin, it really is amazing what a different situation we're in from a year ago..

It's been something else, Mark. That is to say the least, it's been quite a ride over the last 12 to 18 months..

Yes.

I wondered, if you could -- just to start out, you could give us some sense of where your order books are for lumber and OSB and engineered wood? How far into the second quarter you've sold at this point?.

Yes. So, I'll go by product. Starting with EWP, I mean, we're essentially off the market into the third quarter at this point, so those order files are really extended. On OSB, we're five to six weeks out, so really at the outer edge of what we're comfortable with in terms of order files.

And even on lumber, we're at two to three weeks at this point, which for lumber is on the high end of where we typically have order files. So, when you think about what's going on in the market, lean inventories everywhere, order files extended and that's playing in partly to what you're seeing on the price side..

Yes. I wondered, just thinking about what is going on in the price side, how much of an issue is rail and trucking transport? I mean, I've heard about some lumber producers in the Northwest significantly short of railcars, we've heard about some issues coming out of Western Canada.

Just trying to figure out kind of how much kind of transit delays and transit bottlenecks might be contributing to kind of the current market situation?.

Yes, Mark. I think it's definitely playing a role. When you think about transportation across the system, it's challenging, there is no question about it. And the place I would highlight for you that is the most acute is trucking in the South.

And really across all industries, just with what we're seeing in the economy, the spending across all kinds of different industries, trucking availability is really short. And so, that's definitely a challenge really in a lot of different places.

The South, as I mentioned, is the most acute issue, but that's really bleeding over into the rail side as well. So, securing trucking capacity and rail capacity, it's been a challenge for the industry, something that, believe me, we're focused on this 24/7 to make sure that we're getting product to customers and keeping them satisfied.

So, that's a challenge. And I think part of it, when you think about having lean inventories, you add the transportation challenge for customers really across the channel trying to get product to serve their existing projects and their customers, it just adds one more challenge.

And so, I think when people can get product on a short-term basis, they're willing to pay really high prices just to secure the product..

Okay. And then finally, Devin, I wondered, I think everybody saw the release this morning about the Northern Cascades timberlands, so we kind of -- we understand what the issues were there in terms of valuation.

But I wondered, if you could provide just a little color about the deal down in Alabama? Because from the outside, it looks like it was probably $300 or $400 an acre kind of above surrounding comps.

So, I wondered, if you could just help us put a little color around that 21.50 kind of bid price that you made?.

Yes, sure. Happy to. So, really, Mark, when we think about doing acquisitions or divestitures, for that matter, for us, it's very specific to that individual land base. And so, certainly, we look at comps to get a sense of what the market looks like.

But when we are doing our future cash flow projections, it really goes down to things that are specific to that land, the stocking level, the species mix, what we think the road infrastructure looks like, what we think the costs of logging and hauling in that region are going to be.

So, we do a very, very detailed analysis, we have some tools that we have that I think are proprietary that help with that to really dial-in on what we think that the cash flow will look like over a period of time.

And we layer on top of that what do the local market conditions look like and we have a pretty good sense because we're in all of these markets on what we expect market dynamics to look like.

And then we layer on top of that what are the synergies that we can bring to that specific land, things like leveraging our scale to drive lower log and haul costs, finding opportunities for export or alternative values like solar, wind, HBU. So, our model bakes all of those things in.

And when we look at that particular land down in Alabama, a few things really jump out. It's in a very good market. I would say that Pine Hill, Alabama market is one of the stronger markets in the area, it's growing both on the saw timber side, but importantly it's a strong fiber market which can really help the economics of owning timberland.

We've got an expanding mill capacity. We've got a diverse set of customers there that we think we can really leverage to drive additional value on that. And it really fits well with our existing timberlands portfolio. We have people on the ground there, so we don't have to add a lot of personnel to manage this incremental land.

So, when we look at all of these things, good species mix, good site index, good synergies, logistics benefits, it's a really good property for us, it's really one of the better properties that we've looked at in quite a while in the South. And so, we're really excited to add that to the portfolio..

Okay, very good. Good luck in the second quarter through the balance of the year, Devin..

Great. Thanks, Mark..

Our next question comes from the line of Mark Connelly with Stephens. Please proceed with your question..

Hi, Devin. Just two things. You talked about the timber sales cleaning up the situation in the Pacific Northwest.

Should I assume that your backlog of timber that you want to monetize is below normal at this point?.

Yes. So, I would say in the Pacific Northwest, specifically, we've really gotten through all of the big transactions that we had as part of the review, the Southern timber -- or the Southern Oregon timberlands deal that we did last year and then this North Washington deal.

Those were really the two big pieces of property in the West that we wanted to clean out of the portfolio. And again, it's really as you think about our Western portfolio as a whole, you take out the North Cascades and the South Oregon, I mean, the rest of the property is really cream of the crop timberland.

And so, I think at this point from a Western perspective, we're pretty much there in terms of getting the portfolio where we want it to be and obviously we'll continue to look for opportunities to add good timberlands to that. But in terms of the big divestitures in the West, I think we're pretty much there..

Okay.

And -- but what about in the South, I mean, where would you say you are in that optimization process?.

Yes. When we think about the South, I wouldn't say we've identified really large transactions like you saw in South Oregon and North Washington, but I would absolutely anticipate that we're going to continue to trim small pieces here, add pieces there.

So, the optimization work will continue to be ongoing in the South, but at least sitting here today, I don't know that I would expect any sort of large transactions in the near-term..

Okay, that makes sense. And just a question on Russell's role.

Do you expect his work to change the way you've managed real estate and natural resources? We tend to think of that as generating steady cash flow, but are you looking to try to substantially grow that business over time?.

Yes, the short answer is yes, definitely. When we think about what we're asking Russell to do, I mean, there is a piece of it that obviously continues to be the HBU land sales that we've been doing for a while.

The energy and natural resources, construction materials, that will continue to be a part of it, but what we're really excited about is looking across the portfolio and better leveraging some of these additional opportunities. Great example is around natural climate solutions.

So, whether you think about carbon opportunities, whether you think about mitigation banks, just a whole host of opportunities that we have owning so much land, there is just inherent optionality when you have a large land base like we do.

And one of the things that we're really excited about with Russell stepping into this role is to further take advantage of some of that optionality. So, we're really excited. He's only been in the role for a couple of months, but I think you're going to see some real traction on this front over time..

That's super. Thank you, Devin..

Yes, thank you..

Our next question comes from the line of Mark Weintraub with Seaport Global. Please proceed with your question..

Thank you. Devin, first, the infrastructure bill. You made comment to that, how that could be a positive catalyst, and I realize nothing is finalized.

But kind of big picture, is that potentially a meaningful dial mover for wood products demand and kind of what's your assessment there?.

Yes. Well, I think it could be a nice little tailwind for us, Mark. You think about a couple of things that we've seen in the infrastructure bill. Obviously, there is a housing component that is embedded in the infrastructure bill. And so, incremental housing demand obviously is supportive for the industry in driving incremental demand.

But even when you look more broadly, roads, highways, bridges, other infrastructure, certainly a lot of that is going to be concrete and steel. But you do have incremental demand anytime you have infrastructure spending with concrete forms and just other incremental lumber or plywood or OSB that you see when those projects are put out.

And so, just kind of a rough order of magnitude guess from our standpoint is, if this does get passed and not even considering necessarily the housing piece, you could see another 1 billion, 1.5 billion board feet of incremental demand on the lumber side coming out of an infrastructure program.

And so, we'll dial that estimate in as we get closer and get more clarity on what an infrastructure bill looks like. But I do think that if you see a bill of this magnitude come to fruition, it's going to have incremental demand implications for our industry..

Great, that's really helpful. Second, we hear quarter after quarter of late, lumber prices, fantastic, going up and then we hear log prices in the South comparable to last quarter.

What's it going to take to potentially change that? And kind of likewise, are timberland values themselves presumably tied to log prices? And in that context, as you're looking at the M&A pipeline in timberlands, are you seeing any changes or is it still looking fairly similar to what it has been in prior months and quarters?.

Yes. I think at a high level, the reality is many of the markets across South are still over-supplied from a log standpoint. And so, when we think about what's going to change that, it's couple of things. One, it is continued capacity coming into the South and we've seen a lot of that.

We continue to see announcements coming in for new mills being built in the South. Lumber, we see pellet mills coming into the South. So, the trajectory is right, I think also to the extent that you have land that's approximate to ports, I feel really optimistic about the export opportunity.

We're seeing great demand into China, India is a growing market. We're sending chips into Turkey. So, I think there are opportunities to continue to expand the pulp into offshore markets. And so, that can have a tensioning effect. But really the third piece Mark is just time.

We need some time for these new mills to come onboard and to chew through some of the inventory. And so, that's something that will continue to happen. It's going to be differential by market.

Again, when you think about places like Pine Hill, Alabama or your spots in Louisiana and Arkansas and South Carolina, North Carolina, where you've seen some capacity come in, you see things starting to tighten up a bit in the local area, but really, it's something that's going to take some time to work through and it will be differential.

One note I would make on that front; while Southern -- average Southern sawlog prices across the South is moderately interesting to us, what's really interesting is what's happening in the wood baskets where we have fee timberland.

And so, I can tell you, and this goes back to something that Russell and his team are working, we want to make sure that when new mill capacity comes into the South that it's being cited in the geography that fits well with our fee timberland.

So, we're having lots of conversations with people about how we can help them if they decide to put a mill in a geography that's a place where we have fee timberland. So, we're working all of those things. As you think about how does that translate into M&A, it's differential.

Most of the players in the market are pretty astute in terms of understanding local supply-demand dynamics. So, people will bake in what they think is going to happen in that wood basket over time as they put valuations into their model..

Thank you, Devin. Thanks a lot..

Our next question is from Kurt Yinger with DA Davidson. Please proceed with your question..

Yes. Good morning, everyone, and thanks for taking my questions..

Good morning..

Good morning. I just wanted to start off on the EWP front. Obviously, some more room to run as far as pricing in Q2.

Just given kind of the timing lag and what you've already announced, is there any way you could kind of frame how much incremental price you kind of expect over 2021? And then with the most recent announcement, is that primarily something that's going to be relegated to 2022 or could you start to see some benefits from that this year as well?.

Yes. So, just high level as you think about the timing to rollout a price increase, and as we mentioned we had one last summer, we had another one in January and then you had another one in March. And typically that takes a couple of quarters to really start rolling through in a meaningful way.

The March increase, we'll start getting a little bit of that in Q2, but we'll get more of that, the majority of that as you get into Q3. So, when you think about 2021 as a whole, certainly the vast majority of the August 2020 price increase will be included in 2021.

I would say most of the January will be included in 2021 and the March price increase we'll start getting more of as we get into the back half of the year..

Got it. Okay, that's helpful. And then my second one. You indicated that at the end of the first quarter, you're about 40% through your salvage plans in Oregon.

Could you update us on the timing of when that will be kind of fully complete based on your plans and perhaps talk about what type of mix impact that might have had on Western realizations in the quarter?.

Yes, sure. So, we're doing a good job getting through that salvage operation. I mean, that is a monumental effort. When you think about 125,000 acres that were impacted by the fire, that's a bigger impact than we saw Mount Saint Helens just to put it in the context.

And so, the team has done a great job of organizing contractor and trucking availability in the region, so we can get after that quickly. Our expectation is that we are going to get through the vast majority of the salvage work in 2021. So, I would expect to have that mostly complete this year.

We're obviously trying to get at it as fast as we can, so that we can make sure we're capturing the maximum value of those salvage logs before you start to see any sort of degradation in the wood. So, we're going to be trying to do as much as we can in Q2 and Q3.

And that really has a few impacts, one of which, to your question is, it does have an impact on mix because we're harvesting a lot of acres that are younger than ordinarily would be the case. And so, that adds smaller diameter logs into the market.

And what we're seeing primarily in Oregon is the mix of log volume into the market is a lot more smaller log, that's the truth -- that's the case for us, but it's also I think broadly speaking the case in the market. So, that brings realizations down a little bit and that'll be a little bit of a headwind in Q2 and Q3.

The flip side of that is that puts a bit of a premium on larger logs into the system. And so, you're seeing a little bit of an uplift there. So, I think it's going to be a little bit of a headwind, Q2, Q3, which is why we said domestic pricing in the West is going to be down a little bit in Q2.

That's really just a function of those smaller salvage logs going into the market. The one other point I would just make there is, as you think about 2021 for us in the West, salvage logging is obviously a little bit more expensive. And so, there's a little bit of a cost headwind in the West for the next couple of quarters as well..

Got it. Okay, great. Well, appreciate the color and good luck here in Q2..

Thank you..

Our final question is from Paul Quinn with RBC Capital Markets. Please proceed with your question..

Yes. Thanks. Good morning, Devin, and welcome to Weyerhaeuser Nancy. Nancy Loewe Thank you..

Good morning, Paul..

Yes. I'm mystified, so you just put up great Q1 results, Q2 is looking significantly better. Operations, as far as I've covered the company in the last 15 years, have never run as well as they are right now. Stock is down 6%, well below now, so shareholders can't be happy.

And I'm just wondering, if you consider changes to the portfolio now or is it just too early?.

Yes. So, just with respect to today's stock prices, our focus is much more on what happens over the long-term. And when we think about how we're running the business, the assets that we have, the cash that we're generating, the supplemental dividend that's building, I think that will resolve itself over time.

So, we're really more focused on the long-term. And I'd say with respect to the portfolio, by and large, we like the businesses that we're in. We've done a lot of work to improve our operating performance. You can see that in our relative margins really across our businesses. We're generating a lot of cash.

We think we still have opportunities to improve. You can see that in the OpEx target we have for 2021. So, we think we're doing a lot to improve the business. And I think certainly over time, that's going to get reflected in the stock as we continue to build value in what we're doing. So, we're always looking at the portfolio, Paul.

It's something we've done a lot of over the years. I think on the timberlands side, we'll continue to try to optimize. But at least as of right now, we like the businesses that we're in..

All right. Best of luck..

Thank you. All right, I think that was our final question. And so, thanks everyone for joining us this morning. Thank you for your continued interest in Weyerhaeuser. Stay safe everyone, and have a great day..

This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation..