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Weyerhaeuser Co
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Greetings and welcome to the Weyerhaeuser Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce 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 third quarter 2020 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 Russell Hagen, 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. I hope everyone is well and staying healthy. This morning, Weyerhaeuser reported third quarter results, reinitiated a quarterly cash dividend, and announced a new dividend framework consisting of a base dividend plus a variable supplemental dividend.
I will begin by highlighting our third quarter results and then turn my focus to the dividend reinitiation. Weyerhaeuser reported third quarter GAAP earnings of $283 million, or $0.38 per diluted share, a net sales of $2.1 billion. Excluding net charges of $103 million for special items, we generated earnings of $386 million, or $0.52 per diluted share. Adjusted EBITDA totaled $745 million in the third quarter. This is 93% higher than the second quarter and over 140% higher than a year ago. Each of our businesses delivered outstanding operational and financial results, despite disruptions caused by severe storms in the U.S. South, extreme fires in the Pacific Northwest and the ongoing COVID-19 pandemic. This strong operational and financial performance enabled us to deliver the highest operational cash flow since 2006 and take additional steps to meaningfully strengthen our financial position.
I'll begin the discussion of our results with a few brief comments on the continued improvement in the housing market. U.S. housing activity rebounded sharply in the third quarter, supported by a growing preference for larger single-family homes in less urban areas. Total housing starts averaged over 1.4 million for the third quarter, an improvement of 33% over the second quarter. Single-family housing starts accelerated even more sharply, averaging over 1 million units for the quarter and reaching the highest level since 2007.
On a seasonally adjusted basis, third quarter single-family starts improved by over 35% compared with the second quarter and over 15% compared with the third quarter of 2019. We are seeing similar levels of improvement in key leading indicators, single-family permits and new home sales increased nearly 40% compared with the second quarter and were up approximately 20% and 40% year-over-year, respectively. Single-family permits in September reached the highest rate since 2007 and builder confidence has reached all-time highs for two consecutive months.
Repair and remodel activity has also remained robust, supported by do-it-yourself and professional activity and the remodeling industry's confidence has continued to increase. Several other fundamental factors also support our continued strong outlook for residential construction, including historically low mortgage rates, demographic tailwinds and an aging housing stock. Clearly, there remains room for caution, especially as it pertains to U.S. unemployment, the outlook for additional government stimulus, and the risk of further COVID-19-related disruptions as we approach the winter months. However, we are increasingly confident that the recent strength in U.S. housing and the repair and remodel segment will continue, notwithstanding ongoing macroeconomic headwinds.
Turning now to our third quarter business results, starting with Timberlands on Pages 6 through 8 of our earnings slide. Timberlands EBITDA decreased by $10 million compared with the second quarter and earnings decreased by $86 million due to an $80 million non-cash timber casualty loss for Oregon fire damage. The 2020 fire season in the Pacific Northwest was one of the most extreme that we have experienced in many years. In early September, highly unusual weather conditions transformed fire activity in the State of Oregon for minimal to highly destructive in a few short days. Our thoughts are with everyone affected by this disaster, and I want to acknowledge all of the fire fighters, first responders, government and industry partners, as well as our Weyerhaeuser employees for their extraordinary work to save lives, protect property and contain the fires.
As we previously disclosed, these wildfires spread on to our Oregon Timberlands, affecting approximately 125,000 acres to some extent. The magnitude of the damage to timber varies based on topography, age of the timber and many other factors. We have commenced salvage operations to maximize the value of the damaged timber, and Russell will discuss that more in a few minutes. The non-cash charge we recorded in the quarter represents the estimated book value of the timber and related assets that cannot be salvaged based on information available at this time.
Moving on to our third quarter operating performance. Western Timberlands EBITDA decreased by $1 million compared with the second quarter. In the Western domestic market, demand was strong and pricing improved throughout the quarter, as mills sought to take full advantage of record lumber prices. Log supply tightened abruptly in the second half of the quarter, particularly in Oregon where wildfire shut down harvest operations in most of the state for several weeks.
Our fee harvest volume decreased 15% compared with the second quarter as we lost 10 harvest days in Oregon and four days in Washington due to fire restrictions. As harvest operations resumed, our teams did a phenomenal job of managing the operational complexity of coordinating multiple firefighting efforts, while at the same time, rescheduling harvest operations and safely optimizing the deployment of dozens of logging and trucking crews to continue serving our customers. This includes our own mills, where we were able to leverage our integrated model and operational agility to ensure our Western mills did not lose a single shift due to out of log downtime.
Turning to our export markets. In Japan, demand for our logs were soft early in the quarter due to continued slow housing activity and incremental effects of the COVID-19 pandemic. Demand improved as the quarter progressed as Japan housing activity improved modestly and U.S. log availability was reduced by strong domestic lumber markets in Western fire activity.
In China, average realizations were flat with the second quarter, and demand was solid. However, our sales volumes to China decreased significantly as we flexed volume to more profitable domestic opportunities.
Moving to the South. Southern Timberlands adjusted EBITDA decreased $8 million compared with the second quarter. Fee harvest volumes declined by 5% compared with the second quarter as we continued to implement the previously announced 10% reduction in full-year Southern harvest volumes. Although, the U.S. South experienced multiple hurricanes and tropical storms during the quarter, we incurred very minimal damage and lost almost no production days as we redeployed harvest crews to alternative parcels. Average log sales realizations were comparable to the second quarter.
The Southern sawlog market experienced downward pressure in the quarter as favorable summertime logging conditions resulted in abundant wood supply. However, our average sawlog realizations improved slightly due to marketing and merchandising efforts associated with our operational excellence initiatives. This improvement, however, was offset by lower fiber log realizations in the quarter.
In Northern Timberlands, adjusted EBITDA improved by $1 million compared with the second quarter due to seasonally higher harvest volumes as we exited spring breakup.
Real Estate, Energy and Natural Resources, Pages 9 and 10. Real Estate and ENR adjusted EBITDA increased by $3 million compared with the second quarter but earnings decreased slightly due to a higher average land basis on the mix of properties sold. Real Estate sales increased slightly from the second quarter as an increase in the number of acres sold was largely offset by lower average price per acre due to mix. Third quarter again included some sale of low productivity acreage in Southern Oregon that we acquired with the Plum Creek merger. Results from Energy and Natural Resources were slightly higher than the second quarter due to seasonally higher production of construction materials.
Wood Products, Pages 11 and 12. Wood Products delivered its strongest quarterly performance ever, contributing $566 million to third quarter earnings and $615 million to adjusted EBITDA. This exceeds the previous record EBITDA attained in 2018 by almost 60%. Our lumber, OSB and distribution businesses all delivered the highest quarterly results on record and engineered wood products achieved record third quarter results. Although these results were enabled by historic increases in commodity prices, they would not have happened without continued strong operational performance across the business. Through hurricanes and tropical storms in the South, extreme fire activity in the West and the ongoing impacts of the global pandemic, our teams have continued to deliver outstanding operating results and maintain record low controllable costs across multiple product lines.
In the third quarter, demand vastly outstripped supply in virtually all of our product lines, driven by strong new residential construction and repair and remodel activity. With inventories lean across the channel, benchmark pricing for lumber and oriented strand board escalated rapidly until mid-September. Customers began to purchase more deliberately late in the quarter, particularly for lumber, as repair and remodel activity began to show some signs of the seasonal slowdown. However, order files remained extended for most products as the quarter closed, especially OSB and engineered wood products.
In lumber, adjusted EBITDA was $260 million higher than the second quarter, as a 54% increase in average sales realizations was slightly offset by higher Western log costs. We incurred a small amount of weather-related downtime in the quarter due to wildfire smoke in the West and hurricanes in the South. In OSB, adjusted EBITDA increased by $119 million due to a 65% increase in average sales realizations and slightly lower manufacturing costs. Adjusted EBITDA for engineered wood products increased by $16 million.
Sales volumes for solid section and I-joist products increased by 21% and unit manufacturing cost improved slightly. These improvements were partially offset by higher raw material costs for oriented strand board web stock.
In distribution, adjusted EBITDA was $24 million higher than the second quarter. This is attributable to improved sales volumes and higher margins, including operational excellence initiatives.
Turning briefly to operational excellence. Through three quarters, we've made excellent progress against our $50 million to $70 million full-year OpEx goal, and I'm confident we will achieve this target by year-end. I'm extremely proud of our teams for their continued focus and dedication to achieving our OpEx goal despite the disruptions caused by the pandemic in recent natural disasters.
Let me now turn to capital allocation and the reinitiation of our quarterly dividend, Pages 14 to 16. We remain firmly committed to returning cash to shareholders as part of our balanced capital allocation philosophy. Early in the pandemic, we made the difficult decision to suspend our quarterly dividend to preserve financial flexibility. Since May, the Board has regularly reviewed opportunities to reinitiate an appropriate quarterly dividend. This review has taken into account a number of considerations, including our market conditions, the broader macroeconomic environment, the desire for dividend framework that will drive long-term shareholder value across market cycles.
Over the past several months, demand for housing and Wood Products has proven resilient, even as macroeconomic headwinds continue. Our businesses have delivered strong operating and financial results through an unprecedented range of market conditions. And our outlook on the near-term business climate has improved markedly since late spring.
Additionally, as Russell will discuss in more detail, we have taken a number of actions to significantly reduce leverage and strengthen our balance sheet. Accordingly, we are reinitiating a quarterly cash dividend. We are also adjusting our dividend framework to ensure that the dividend and our overall approach for returning cash to shareholders are both sustainable and appropriate for the Company's portfolio and the cash flow that we generate from our businesses across market cycles. In this framework, we are targeting an annual payout of 75% to 80% of adjusted funds available for distribution. This is comparable to the targets communicated as part of our prior dividend frameworks and underscores our commitment to returning a significant portion of our free cash flow back to shareholders.
Going forward, however, our new dividend framework will include two components: we will pay a sustainable quarterly base cash dividend, and each year we will supplement that base dividend with an additional return of cash, as needed, to achieve the targeted 75% to 80% of adjusted FAD. We believe this new dividend framework will enhance our ability to return meaningful and appropriate amounts of cash to our shareholders across a variety of market conditions, while positioning Weyerhaeuser to deliver superior long-term value creation. The sustainable base dividend remains our core mechanism for returning cash. We are reinitiating this quarterly cash dividend at $0.17 per share. This base dividend payment, which totals approximately $127 million per quarter is supported by the cash flow from our Timberlands, Real Estate and ENR segments. We intend to grow this payment sustainably over time as segment cash flows increase.
The second component of our dividend framework is a variable supplemental dividend. This will generally be an annual payment declared and paid in the first quarter based on cash flow generated during the prior fiscal year. We will apply this new supplemental dividend framework to our 2021 results and accordingly, we currently expect the first supplemental dividend will be paid in the first quarter of 2022 based on full-year 2021 adjusted FAD. We expect the supplemental dividend will be our primary tool for returning cash above and beyond the base dividend to achieve our targeted annual payout. However, we may also utilize opportunistic share repurchase to return cash under certain circumstances.
Page 16 shows our adjusted FAD and adjusted EBITDA back to 2017, when our current portfolio was established. Timberlands, Real Estate and ENR results have been relatively stable over time, while earnings for our Wood Products business have fluctuated with lumber and oriented strand board pricing. The two-part base plus variable supplemental dividend framework will enable our shareholders to more fully benefit from the mix of cash flow profiles generated by our businesses. Shareholders will receive a stable income stream that is fully supported even in adverse market conditions and they will also benefit from significant upside and strong commodity markets through the variable dividend component.
The remainder of our cash generation, that is the cash in excess of our base and supplemental dividends, will be deployed consistent with our stated priorities for opportunistic allocation. These priorities include value enhancing growth opportunities, liability management and opportunistic share repurchase. We are committed to allocating this excess cash in a disciplined manner to grow our base dividend and drive superior long-term shareholder value.
I will now turn it over to Russell to discuss financial items and our fourth quarter outlook.
Thanks, Devin, and good morning. I'll begin with our key financial items, which are summarized on Page 17. Cash from operations during the third quarter was $608 million, our highest operating cash flow since the fourth quarter of 2006. We used a significant portion of this cash to strengthen our balance sheet by redeeming some of our 2023 debt maturities. We ended the quarter with approximately $6 billion of total debt outstanding and strong liquidity, including the cash balance of $787 million and the full $1.5 billion capacity available on our revolver.
Page 18 highlights actions we have taken to reduce our gross debt balance. During the third quarter, we redeemed $325 million, 3.25% notes that were due March 2023. We incurred a $23 million charge on the early extinguishment, which is included in our results as a special item. Earlier this week, we submitted notice that we will be redeeming in mid-December, our $500 million, 4.625% notes due September 2023. Following this repayment, our gross debt will be approximately $5.5 billion. We will have reduced our total debt by nearly $900 million since 2019 year-end. We have also significantly reduced our net debt-to-adjusted EBITDA leverage ratio, improving it by approximately 2 turns from the high of 4.9 times at the end of 2019 to 2.9 times at the end of the third quarter. Our leverage ratio now sits comfortably below our target of 3.5 times net debt-to-adjusted EBITDA over the cycle.
As previously indicated, we have cash earmarked to repay our $150 million, 9% note when it matures in the fourth quarter of 2021. Today, we are operating from a strong financial position. And with the progress we have made on our debt reductions, particularly the 2023 maturities, we have reduced leverage to a level that we believe is appropriate and sustainable for the Company over the cycle and supports our solid investment-grade profile.
Turning now to key outlook items for the fourth quarter, which are summarized on Page 19. In our Timberlands business, fourth quarter adjusted EBITDA is expected to increase by approximately $20 million, compared to the third quarter. In our Western Timberlands operations, we expect our fourth quarter domestic log sales volumes and domestic average sales realizations to be moderately higher than the third quarter. Log demand in the West remains favorable due to strong lumber markets and log inventories at domestic mills ended the third quarter on the lower end of the normal levels as log supply was restricted due to the extreme wildfire activity in September. This has resulted in improved pricing during the month of October. We expect market tension to moderate during the quarter as log supply improves and mills replenish inventories.
We anticipate fourth quarter fee harvest volumes will be higher than the third quarter as we resume harvest operations following the third quarter fire restrictions, and begin to prioritize our salvage activity on affected Timberlands in Oregon. We are experiencing little downgrade in the quality of the salvage logs delivered to our customers and we do not expect pricing for the salvage logs to negatively affect our fourth quarter realizations. Unit log and haul costs will increase modestly compared to the third quarter. The salvage activity will result in lower productivity and increased hauling distance to market.
We currently expect to complete a majority of our salvage operations over the next 12 months to 18 months and we'll recover a significant portion of the merchantable timber value. Although additional work is needed to determine the impact on our operations going forward, our preliminary expectation is that, our 2021 Western harvest volume will be roughly comparable to 2020, as we redeploy our current logging capacity into salvage activity. We'll provide you an update on our year-end earnings call.
Moving to the export markets. In Japan, housing starts improved modestly in the third quarter. Demand for our logs has strengthened slightly. We expect fourth quarter sales volumes and realizations will increase compared to the third quarter. Chinese export log realizations are expected to be comparable in the fourth quarter. Log sales volumes will increase due to the timing of shipments. Demand for our logs remains solid, supported by improving economy and government infrastructure spending.
In the South, we expect higher forestry expenditures in the fourth quarter as we complete work that was deferred during the third quarter hurricane -- due to the third quarter hurricane activity. Average log sales realizations will be slightly lower than the third quarter due to mix. We anticipate a higher proportion of fiber log sales as we complete additional plant thinning activity. Fee harvest volumes should be comparable to the third quarter.
In the North, average log sales realizations should increased slightly with continued favorable demand for hardwood and softwood lumber.
I'll now turn to the recently announced transactions to enhance our Oregon Timberlands holdings. In September, we entered into an agreement to sell 149,000 acres of Southern Oregon Timberlands for $385 million and a separate agreement to purchase 85,000 acres of mid-coastal Oregon Timberlands for $426 million. The net cost is approximately $40 million and we expect significant and sustained cash flow accretion from these transactions. We continue to expect these transactions will close in the fourth quarter and the Southern Oregon Timberlands are now shown on the balance sheet as held for sale. We expect to record a gain on the sale with no accompanying tax liability. The gain will be reported as a special item in our Timberlands business.
Turning to our Real Estate, Energy and Natural Resources segment. Interest in our real estate properties remained strong, the shifting societal preferences are driving increased demand for rural HBU properties. However, transactions remain slower to close due to extended timelines for financing and other key activities. We expect fourth quarter earnings for Real Estate, Energy and Natural Resources segment will be approximately $10 million lower than the third quarter and we continue to expect full-year 2020 adjusted EBITDA of approximately $235 million. We anticipate land basis as a percentage of real estate sales will be approximately 50% for the fourth quarter and approximately 70% for the full-year.
For our Wood Products segment, new residential construction activity remains strong and our builder and dealer customers are optimistic moving into the winter months. In repair and remodel markets, we have seen some seasonal slowdown in demand for our products, but takeaway remains above historical averages for this time of year. Channel inventories remained generally lean with buyers limiting purchases to immediate needs.
Looking to the fourth quarter, we expect earnings and adjusted EBITDA for Wood Products will be lower than our record performance in the third quarter but above previous record set in the second quarter 2018. Excluding the effects of changes in average sales realizations, we expect fourth quarter results will be significantly lower than the third quarter. We expect a modest seasonal reduction in sales volume, as well as higher Western and Canadian log costs and higher raw material costs for engineered wood products. We also expect lower operating rates for some product lines as we complete maintenance outages that were deferred early in the pandemic. The framing lumber composite has retreated from its late September peak but remains above the record levels of 2018.
For lumber, our quarter-to-date average sales realizations are approximately $15 higher and current realizations are approximately $50 lower than the third quarter average. Entering the fourth quarter, benchmark pricing for oriented strand board remains at record levels and our current quarter-to-date average sales realizations are approximately $140 higher than the third quarter average. As a reminder, for every -- for lumber, every $10 change in realizations is approximately $11 million of EBITDA on a quarterly basis. And for OSB, every $10 change in realizations is approximately $8 million of EBITDA on a quarterly basis.
For engineered wood products, average sales realizations for our solid section and I-joist products will be slightly higher, as we begin to capture the benefit of announced price increases. These increases generally range from 4% to 8% and will be captured over the next several quarters. We expect realizations for other engineered wood products will be lower than the third quarter average.
Page 13 outlines the major components of our unallocated items. Third quarter included a $9 million non-cash charge from elimination of inter-segment profit in inventory and LIFO in the third quarter, compared to an $18 million benefit in the second quarter. The charge recorded in the third quarter was primarily driven by higher unit costs for log and lumber inventories across our businesses. Third quarter expense also included a year-to-date adjustment for performance-based incentive compensation.
I'll wrap up with a few additional outlook items highlighted on Page 20. Including our $23 million special item related to the early extinguishment of debt, third quarter interest expense was $111 million. We now expect full-year 2020 interest expense will be approximately $350 million, excluding special items. This is $10 million lower than our prior guidance due to the reduction in our gross debt balance.
Turning to taxes, we expect our full-year 2020 effective tax rate will be between 20% and 22% before special items, based on the forecasted mix of earnings between our REIT and taxable REIT subsidiary. We expect our full-year cash taxes will be lower than the overall tax expense, as we defer some payments into early 2021.
And last, we now expect total CapEx for 2020 will be approximately $280 million. This is $10 million more than our prior guidance reflecting a few additional high-return capital projects in Wood Products, slightly lower Timberlands CapEx due to the third quarter fires and severe weather.
Now, I'll turn the call back to Devin, and I look forward to your questions.
Thanks, Russell. With our unrivaled portfolio of assets, strong operational performance, our financial strength and focused safety culture, we believe we're well positioned to capitalize on strong and growing fundamental demand for U.S. housing. We are committed to returning a meaningful portion of our resultant cash flow back to shareholders, and our new dividend framework positions us to deliver on our commitment in a way that is sustainable and appropriate across market cycles.
Looking forward, we remained focused on industry-leading performance and discipline, prudent capital allocation to sustainably grow our base dividend and drive superior long-term value for shareholders.
And now, I'd like to open the floor for questions.
Thank you. [Operator Instructions] Our first question comes from Anthony Pettinari with Citi. Please proceed with your question.
Good morning.
Good morning.
Just a question --. Good morning. Just a question on the supplemental dividend. So you indicated you paid at the beginning of the year based on prior year's free cash flow. And I'm just curious in terms of any flexibility there. If you have a situation where you generated a lot of cash in year one, but heading into year two the outlook has deteriorated based on macro or market trends? Would you make the judgment call to pay out less or should we think of this as just kind of a mechanical payout that we should expect to get paid out regardless of market conditions?
Yes. A couple of things on that. First, just with respect to the timing. The general approach under the new framework is to payout the supplemental dividend annually in Q1 based on the prior year's FAD. So, that would mean, Q1 2022. That being said, could there be a situation where we would consider an interim supplemental dividend during the year? Certainly, I think that's conceivable. We wouldn't shut the door on that possibility. But again, the general view is that, that's going to be paid out on an annually -- annual basis.
With respect to the 75% to 80%, really that's going to be the target. And I think the benefit of this dividend framework is that, we're going to be in a position to payout 75% to 80% of FAD really across all different market cycles. Certainly, when we're in a down market, we think we have sufficient cash flow from the Real Estate, ENR and Timberlands business to cover that. And then when we see strong commodity markets like we're seeing today, obviously, there is a lot of upside with the supplemental piece.
Okay. That's helpful. And then just, we're finally back to 1.4 million housing starts and you indicated your Southern sawlog prices ticked up in the quarter, I think, commercial and merchandising activities. I'm just wondering if you saw underlying kind of apples to apples price improvement in any regions of the South, especially with these saw mills running full out. And would you anticipate price improvement in 2021, assuming we stay at or above that 1.4 million starts level?
Yes. Anthony, we've historically talked about that in terms of housing starts. I think in retrospect, the more applicable look there is what's happening in supply and demand in each individual wood basket. And as you alluded to, some of those regions are more tension than others. And so, clearly, there are regions, say, the Atlantic Coast, North Carolina, some regions that just have a little bit more tensioning and you see a little stronger log pricing there. I do think, as we look out over the longer-term, obviously, we've seen a fair amount of sawmill capacity coming into the South over the last several years, call it, 5.5 billion, 6 billion board feet of new capacity. We've even seen a few new ones announced here just of late.
I do think over the longer-term, you are going to continue to see sawmill capacity coming into the U.S. South. It's one of the best places, certainly, in North America, if not, the world to manufacturer lumber. And so, our expectation is that, over time, we'll continue to see more converting capacity come in and with each new mill that comes in, that has a tensioning effect in that particular wood basket. So, we do expect that to improve over time.
I would say, obviously, housing repair and remodel activity is an important piece of that, and that it drives that in demand for lumber and other wood products. But ultimately, log prices are going to be based on the supply demand dynamic in that individual wood basket. So, I think we are optimistic that over time that will improve. I think it's just going to be slow going as each new mill comes in, and that will overall improve the supply demand dynamic over time.
Okay. That's helpful. I'll turn it over.
Thank you.
Our next question comes from George Staphos with Bank of America. Please proceed with your question.
Hi. Good morning, everybody. Thanks for taking my questions.
Good morning, George.
How are you doing? Congratulations on the quarter.
Thank you.
My first question, given -- Anthony teed it up, I want to segue from that question and maybe the answer can be more or less the same, but given the supply constraints that you're seeing on the West, given the higher pricing that we're seeing for logs in the West, are you seeing any tangible evidence of maybe some substitution recognizing they're different regions, large distances between the two regions? From Douglas fir to Southern yellow pine and in turn any expectation that that might happen such that we see even more capacity come into the market too, ultimately, hopefully, tension the Southern markets more. Any thoughts on that would be helpful? And I had a couple of follow-on.
Sure. Well, George, you don't really see much in the way of substitution between Southern yellow pine and Doug fir and that's generally just the builders have preferences with an individual species and they generally stick with that. So you don't see a lot of crossover. So the short answer to your question is really -- notwithstanding some of the pricing dynamics, you don't really see a whole lot of crossover between Doug fir and Southern yellow pine.
I do think where you see a little bit more substitution is with the SPF and Southern yellow pine. And as we've seen, some of the SPF supply has come down due to the pine beetle up in Canada, I think we are seeing, in certain markets, Southern yellow pine gained market share over SPF and I would expect that would continue to be the case.
Okay. That's helpful, Devin, and a good reminder on that. One thing I want to go back to, I think it was Slide 10 you had the realizations on the price per acre that you're seeing within Real Estate and Energy and Natural Resources. And there has been a general trend lower that you show on the chart in terms of the realizations are getting per acre. Any things that we should be taking away from that as we look out to '21 and '22? And it would seem like mix will stay relatively lower, not higher if, in fact, you're seeing more demand for rural land because what's been going on with COVID and the like the last six months. Any thoughts on that?
Yes. George, this is Russell.
Hey, Russell.
I would say that in '20 --. How are you doing, George? In 2020, we definitely had a higher mix of some properties in our Southern Oregon and these were legacy Plum Creek properties with a high basis. We had stepped those up at the time of the merger. And so, I think as you look forward into 2021 and 2022, you'll see a more kind of normalized pattern of the sales coming through the Real Estate program. So, again, it is definitely skewed in 2020 with those Oregon transactions.
Okay. Thanks, Russell. My last question, I'll turn it over. If we look at the transaction that you [announced earlier], essentially this was in your wording, but trading land in Oregon you're effectively getting, I think from what we read better stock land and you're basically getting cash upfront versus cash later. Can you give us a bit more detail in terms of why you're selling one portion and buying another recognizing the deal hasn't closed and we might be limited in terms of what you can share there? Thank you. And good luck in the quarter.
Yes. George, I'll take that. When you look at what we're selling in our Southern operations, I would say that those were -- they're good timberlands, but they were not as strategic or as strategically located as the timberlands we're acquiring. And so, when you look at the timberlands we're acquiring, they're really well fitted for our current operating region there, and it also supports our export program and then it supports a couple of our mills within that region also. So, again, it's really a good trade for us. It fits our operations really well. They'll be cash-accretive, very strong cash accretion. And I think overall, it definitely improves the overall profile of our Western Oregon Timberlands.
Thank you so much. Have a good quarter.
You bet.
Our next question is from Mark Wilde with Bank of Montreal. Please proceed with your question.
Good morning, Devin. Good morning, Russell.
Good morning, Mark.
Good morning, Mark.
Devin, I wanted to start off, could you just give us some more thoughts about sort of the -- how you went about setting this initial dividend level, the base dividend?
Yes, sure. So, the level of the base quarterly dividend was really based on the cash flows that we generate across business cycles both at the business level and the Company level. And as we look to set that, we looked at the cash flow generation of each of our businesses across a variety of pricing scenarios, historical cash flows from the businesses, we looked at our Company level FAD over the last several years, and also modeled out FAD under a number of different market and pricing scenarios. And really the idea was to set the base quarterly dividend at a level that is both sustainable and supportable from our cash flow, even in a challenged market condition. And so, we expect that $0.17 per share quarterly dividend largely to be able to -- to be supported largely from the cash that we're generating from the more stable Timberlands, Real Estate and ENR business. And then, obviously, over time, we would expect to grow that base dividend as we grow our Timberlands and ENR cash flow.
And I'm just recalling, I think, Devin, that back in '18 when you made the last dividend raise that actually the percent of kind of cross-cycle FAD you'd raised up to 85%. It seems like you've pulled that down here a bit. Would you care to comment on that?
Yes. And just in terms of the 75% to 80% payout ratio, it's in the general vicinity, over the last several years, it's been anywhere from 75% to 85%. And as we were thinking about reinitiating the dividend and the new framework, that's 75% to 80% is really what we believe to be an appropriate balance of returning a significant amount of cash back to shareholders, while still retaining some amount of cash to support growth in maintaining -- maintain an appropriate capital structure.
Okay. And would you care to provide people with just some thoughts on kind of share repurchase? I mean, if we think about share repurchase programs in cyclical businesses, they've been devilishly hard to pull off well.
Yes. And as we think about the ways in which we're going to be returning cash to shareholders, obviously, as we said, we're going to lean toward the supplemental dividend as the primary vehicle over and above the base. But that being said, share repurchase can be a good way to return cash to shareholders under the right circumstance. So, that's something that we're going to look at on a regular basis. And to the extent that, our shares are trading at a meaningful discount and that's something that we could look at to return cash to shareholders.
Okay. Well, I think if you can provide clarity to people kind of going forward about how you're going to make those judgments, I think that's helpful.
And the last one for me is just thinking about how you would grow the land base over time. Can you share some thoughts with us on that? Because I think this kind of steady selling down of the land base, I think it raises concern among some investors that they're buying a melting ice cube. And I just -- I'd like to get your thoughts on that issue.
Yes. So, I guess, a couple of comments on that, Mark. Obviously, we do have a Real Estate program where we're trying to capture the value of our HBU profile. We've done some portfolio moves over the last few years as well. But I do think it's important to remember that if you go back to 2013, Weyerhaeuser had about 6 million acres, whereas we have about 11 million acres now. And so, it's something that we're always looking at. It's an opportunity I think for us going forward to continue to deploy some of our excess cash to timberland acquisitions.
We're always in the market looking for transactions to both improve and grow our timber base. And so, that's certainly something that we're going to continue to look at. We do want to make sure that we're being disciplined about it, though. Obviously, we want to make sure that we're not just doing acquisitions to grow. We're doing acquisitions that we think that can create real value. But certainly, that's something that is top of mind for us, and it's going to be something in Russell's new role that he will be even more focused on going forward.
All right. Sounds good. I'll turn it over, Devin.
Thanks, Mark.
Our next question is from Mark Weintraub with Seaport Global. Please proceed with your question.
Thank you. Wanted to just drill down a little bit more on the average pricing in the Wood Products. You mentioned in lumber, up $15 quarter-to-date and then up $140 for OSB. Roughly how much of the volume that you'd expect to sell in the fourth quarter would be in those categories at this point?
I want to make sure -- I'm not sure I understood your question, Mark. So, maybe can you rephrase that? I'm not sure what you're hitting out with that.
Sure. So stick with lumber. So quarter-to-date average realizations are $15 higher than the third quarter, is that about a third of the volumes that you'd expect to sell in the quarter that that $15 higher would apply to or is it 40%?
Yes. I think a good way to think about that is it somewhere in the third category. So, I think, generally speaking, it's going to be similar each month over that Q4 period.
Okay. Because, I guess, I'm just trying to understand how order files, etc., come into play in the way we're thinking about this. And then, likewise, when you talk about it being $50 lower currently, is that based off where the random print was two or three weeks ago or is that based on where the random print is today?
Yes. So just, I guess, a little context for the lag that you see in realizations and I'll be specific to lumber, although it's a similar dynamic in OSB, but just different supply demand dynamics. So, in lumber, generally, you're going to be pricing one to three weeks prior to shipment, which -- that's the lag effect that you see between the print and the delivered realizations. And generally speaking, the nature of the market is that, order files typically extend in hot markets and they shrink in soft markets. So, when we go back to Q3, as prices were climbing, our order files extended out several weeks and the inventories were pretty lean. As we approach peak pricing, customers start moving to the sidelines and the order files shrank down fairly quickly. And so, that lag effect that you see on the upside oftentimes is a little bit longer than what you see on the downside. And so, when you look at that, the current pricing relative to print, that's going to be based on a shorter order file that's coming down versus what it was when it was going up.
And so, order of magnitude that $50 lower, what time reference would be most applicable in saying, okay, that -- if we try to mark-to-market?
Yes. So, at this point, whereas our order files were three-plus weeks as the prices were going up, they're now down to about one week -- one to two weeks.
Okay. Okay. And then you mentioned, I think Russ, that channel inventories are generally lean. More color on that if you could? And where would they be, would you say in the various businesses relative to where they normally would be now?
Yes. I think you can say generally across the board in all product categories, and I'll comment on each specifically. But generally speaking, the inventories in the channel are pretty lean across the board. And when you think about lumber, really the buying is mostly limited to covering immediate needs. I would say, most folks in the market are still trying to determine what lumber prices are going to shake out at and are cautious about really starting to build inventories when they're not clear on what a more stabilized pricing is going to look like. So, I would say, generally speaking, lumber inventory is pretty lean across the system.
OSB also very lean, a little bit different dynamic there. Order files in OSB, at least for us, are still pretty extended out four-ish weeks. And so, there's just not a whole lot of extra inventory in the system. You've seen the OSB pricing hold up a little better. And I think that's largely just a function of order files continue to be pretty extended.
EWP, similar story. Long, strong order files in EWP. And I'd say, generally, pretty minimal inventory in the channel in that product.
Okay, great. One last very quick clarification. On the reference to the debt leverage ratios being where you want them to be. Obviously, EBITDA goes up and down and EBITDA is extremely strong right now. Is the absolute level of debt at the level where you would want it to be?
Yes. I'd say, from a gross debt perspective -- and you're right, the ratio is a function of EBITDA as well. But from a gross debt perspective, I think we're in the ballpark of where we want to be with the actions we've taken this year and then the $150 million that we have earmarked for the 2021 maturity, that gets you in the neighborhood of $5.3 billion of gross debt, and I think that gives us adequate flexibility really through all parts of the market cycle to stay right around that 3.5 times net debt-to-EBITDA.
Great. Thank you.
Yes.
Our next question is from Mark Connelly with Stephens. Please proceed with your question.
Thanks. Devin, we've been hearing about labor availability as the homebuilding challenge for several years now and yet housing activity seems to be constrained by other stuff and we haven't really seen a big change in construction approaches, which come slowly anyway. So I'm wondering, with your experience in [trusses] manufacturing and all that, are you seeing any signs that the market is preparing to shift or trying to shift to more prefab or something else to reduce labor content?
Yes. There's certainly lots of talk about that and I think there are certain homebuilders that are investing in that. Frankly, some of the dealer network partners are also looking at opportunities to really help with some of the off-site manufacturing to deal with the challenges around labor. So it's something that we hear a lot about, you're seeing some of it. I don't know that we're at a point where it's really starting to make a meaningful difference yet. But there is no question that labor has been a challenge, I think, it remains a challenge. In talking to the homebuilders, it's certainly something that's still top of mind for them and they're really looking at all different avenues to try to help with that, from off-site panelization to really ramping up their programs to incent people that come into the trade. So they're really looking at that across the board, because it does still remain a challenge, I think, to get to you, what would otherwise be full building.
Is there a role for Weyerhaeuser in that process?
Yes. I think there is, in the sense that, we want to make sure that we stay very close to all of our customers throughout the value chain to make sure that we're looking for opportunities, whether it's panelization, whether it's off-site manufacturing, to leverage our supply chain expertise to get them products and what they need to be successful at the right cost. So, it's something that we are focused on. We're certainly in discussions with all of our partners on how we can help them. I don't know that we're necessarily looking to get into panelized manufacturing, if that's the question. But I do think we'll look for opportunities to leverage that if it does get some momentum with our customers.
Super. And just one question, you mentioned the fiber log demand in the South being down. If that stays down, how meaningful will that be assuming more normal lumber prices? Clearly, some paper and pulp markets have been hit and aren't going to come back quickly. So, I'm curious is that going lead you to think about shifting harvest cycles or marketing programs. Or is it just not big enough to matter?
Yes. I don't think it's big enough to matter. A couple of comments on the Southern fiber markets. Obviously, we've seen some puts and takes in pulp log demand. Some segments, whether it's containerboard, boxboard, those kinds of markets, those have done okay. Printing paper, obviously, in a COVID environment has been somewhat challenged. I don't think all things considered, it's at a point now where it's going to make a meaningful difference to us one way or the other, just in what's going on in the current market conditions.
I would say a couple of other comments there, going into fourth quarter for whatever it's worth, I think the log decks for most of the pulp and paper manufacturers are pretty light relative to normal. So, certainly, not significant log inventories in that market. And then the other, just piece of color there is, we did see a number of our pulp log customers defer maintenance earlier in the year when the markets were a little stronger and a lot of that ran through Q3. And so, that's a little bit of the softness that you saw as well. Those are mostly coming out of those maintenance shutdowns as we head into Q4.
Thank you, Devin.
Yes.
Our next question is from Paul Quinn with RBC Capital Markets. Please proceed with your question.
Yes. Thanks very much and good morning.
Good morning.
Hey, just a couple of questions in Wood Products there, Devin. When I take a look at Slide 12 and third-party sales volumes. So this is just shipments for lumber and OSB over the last seven quarters, it's pretty much flat. I'm just wondering on the production side, whether that production has been flat and whether you've been able to meaningfully increase that. And also, whether you are running at capacity? And what's your ability to take that up going forward?
Yes. I do think, particularly in the lumber side, we will grow that production over time. We've got the Dierks and the Millport mills that are up and running. I think with respect to Q3, in particular, there were a few things in the quarter, we had to take some downtime in the West due to wildfire smoke. We had downtime at some of our mills in the South with the various hurricanes coming through and power outages, some maintenance downtime, those kinds of things. But over time, our lumber production will increase and even, I'd say, on OSB around the margins just as we continue to improve on reliability across our various products, we'll see some improvement there as well.
And then just on mass timber and it is part of what Mark was asking around, but there has been a lot of activity there and this is an area that's growing straight line with your sustainability goals. Just -- and you guys already manufacture a number of components for it. Just wondering if that's an area of interest to be able to expand that side of the business.
Yes. We're really excited about the momentum we're seeing around cross-laminated timber, mass timber, it's certainly something that has gotten people excited across the board and we're seeing that move, frankly, faster than we had anticipated. So, we are in touch with the manufacturers of CLT. I don't know, in the near-term, we're really looking to get into manufacturing CLT. But certainly, we know how to manufacture wood products and we'll continue to look at that market down the road, maybe that makes sense. But I think in the near-term, it's really more of an opportunity for us to sell lumber and other engineered wood products into that space.
All right. That's all I had. Best of luck.
Terrific. Thank you.
Our next question is from Buck Horne with Raymond James. Please proceed with your question.
Hey, thanks. Good morning, guys.
Good morning.
I wanted to go back to the dividend for a quick follow-up, maybe you -- maybe I missed this early in the discussion. I'm just curious on the timing of the initial supplemental dividend with the suspension of the dividend for the better part of this year and, of course, the strong EBITDA results coming out of Wood Products. What was the decision process in terms of not doing a supplemental dividend in the first quarter of '21 and then waiting another full year for the first payment to be in 2022? What's the -- what was the thought process in going that much further out with the supplemental?
Yes. A couple of comments on that. I guess, first, when we think about the cash flow that we generated from 2020, clearly, we have prioritized debt reduction with the cash flow that we've generated this year. We've allocated over $1 billion to debt reduction, which has been a significant percentage of our overall 2020 cash flow, which is the $400 million that we've reduced gross debt year-to-date. The $500 million we're paying down in Q4, another $150 million we've got earmarked for 2021. And so, this has really taken us to a place where we've reduced leverage, where we feel it's an appropriate level of cross-business cycles. Obviously, we have also returned $375 million of cash through the dividend payment that we made in Q1 and the fourth quarter dividend we just declared. So, on balance, that's how we allocated the cash flow from 2020.
When we talk about the supplemental dividend, we talk about Q1 2022 payout. I mean, that's generally going to be the approach with the dividend framework to do that annually. But again, as we said, we're not going to be overly dogmatic there, could there be a situation where we would consider an interim supplemental dividend during 2021, even Q1? Certainly, I think that's conceivable. We wouldn't shut the door on that possibility. We're going to continue to look at that. But again, we're expecting that, on -- as a general matter, the supplemental dividend will be paid out annually in most circumstances.
Okay. Thanks for that color. I appreciate that. And just with the[notes] in the Wood Products a little bit further. Just maybe longer-term bigger picture, I think we agree with you, certainly on the potential runway for the housing recovery and the single-family housing shortage that in all the demographic factors that go into that equation, and of course, the demand for lumber capacity is going to likely continue to increase. How do you guys look at the longer-term potential of your existing Wood Products capacity in terms of what additional CapEx projects could move the needle to increase your capacity internally with higher return projects? And/or would you need to -- or would you consider additional acquisition opportunities if there are any out there to increase your manufacturing capacity?
Yes. Well, I think there definitely are opportunities for us through our capital expenditures program to continue to drive value through the Wood Products business. We have done, I think a remarkable job over the last four or five years with our CapEx in the Wood Products business. We've been primarily focused during that time on cost reduction. I think you've seen that shown up in our relative performance. In that business, we've reached the point of being black at the bottom. We did have some come along volume that came through those programs to date as I mentioned with Dierks and with Millport. We've got a number of additional projects in the queue that we think can return very good returns, continue to ensure that we have a very cost-effective, efficient mill set and in that, will be some opportunities for increased lumber capacity and production as well. So, this is something I think is really -- it's a great opportunity for us and we'll continue to look at that. I would expect us to provide more guidance on 2021 CapEx on our next earnings call.
All right. Thanks. Good luck. Thank you. Appreciate it.
Thank you.
Take care.
Our next question comes from Steve Chercover with D.A. Davidson. Please proceed with your question.
Good morning. Thanks for taking my late question. So, if memory serves, I had to step away from my desk, you took an $80 million write-off for the Oregon fires. In a prime west side Oregon, the land is about $4,000 an acre. Is it safe to say that greater than 20,000 acres were destroyed or can you just give us a number?
Yes. So, just a little context around that. So, for us, we had about 125,000 acres that were impacted to some extent. What I would say is, when you think about each individual acre, they were impacted depending on topography, age class, the rate of spread, species. So, it's variable the extent of the damage. But what I would say is, at a high-level, at least based on our early work in the salvage operations, we think we're going to be able to capture the vast majority of value on our merchantable timber.
So, in other words, as we have gone in, even on the acres that had relatively severe burn, we are still able to capture the value of the fiber, the bark has done its job and protected the underlying fiber. So, we do think the good news there -- obviously, it's never a good news when you have a big fire like this, but the good news is, we think we're going to be able to capture most of the value on that merchantable timber over the next, call it, 12 months to 18 months.
Yes. That's why I assume that the acreage impacted was substantially more than, call it, the total loss for a certain volume. So, over the 20 years I've covered Weyerhaeuser and also Plum Creek, everyone has self-insured and I'm wondering if that makes you rethink the whole notion of insurance, acknowledging that premiums tend to go up significantly after a disaster.
Yes. As a practical matter, there is really no economically feasible way to buy insurance on significant acreage of timberland. And so, for us, the way we mitigate fire risk is, we have a diverse area of timberland coverage across various regions. We are very active in our work around fire management, working with other landowners in the state to make sure to the greatest extent possible that we're protecting our lands. But there is going to be some risk, that's the nature of the business, and it's really not something that you can [uncover] -- that you can cover through insurance.
Yes. And finally, I'm in Oregon, so I can attest to this how windy it was and how extreme the weather was. But normally your lands are sufficiently managed, but it's really only adjacent land, federal lands that catch on fire that impact you. And was this just a whole new kettle of fish?
Well, it was just a -- it was a situation -- this is the worst fire situation we've had in decades, and it was just a situation where the humidity dropped really low. We had a period of no rain. So, it was very dry. You had fire start-up and then you had the significant wind, and when all of those things happen together, it can get bad quickly as we saw this year. But, look, we're not -- it's not anything new dealing with fires. It's something that we see in the West every year. Most years, we have very minimal damage and impact. This was just a tough year.
Okay. Thanks. Good luck in the quarter.
All right. Thank you.
There are no further questions at this time. I'd like to turn the floor back over to Devin Stockfish for closing comments.
All right. Well, thank you. And thanks to everyone for joining us this morning and thank you for your interest in Weyerhaeuser. Stay safe and healthy, everyone.
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