Weyerhaeuser Company (NYSE:WY) Q1 2024 Earnings Call Transcript

Weyerhaeuser Company (NYSE:WY) Q1 2024 Earnings Call Transcript April 26, 2024

Weyerhaeuser Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Weyerhaeuser First Quarter 2024 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 Andy Taylor, Vice President of Investor Relations. Thank you, Mr. Taylor. You may begin.

Andy Taylor: Thank you, Rob. Good morning everyone. Thank you for joining us to discuss Weyerhaeuser’s first quarter 2024 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our 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 Davie Wold, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Devin Stockfish: Thanks Andy. Good morning everyone and thank you for joining us. Yesterday, Weyerhaeuser reported first quarter GAAP earnings of $114 million or $0.16 per diluted share on net sales of $1.8 billion. Adjusted EBITDA was $352 million, a 10% increase over the fourth quarter of 2023. These are solid results, and I’m pleased with the operational and financial performance delivered by our teams. Turning now to our first quarter business results. I’ll begin with Timberlands on Pages 6 through 9 of our earnings slides. Timberlands contributed $80 million to first quarter earnings. Adjusted EBITDA was $144 million, which was comparable to the fourth quarter. In the West, adjusted EBITDA increased by $3 million compared to the prior quarter.

Starting with the Western domestic market. Adverse weather conditions in January temporarily impacted log supply and demand across the region. As the quarter progressed, log supply in the system increased as weather conditions improved. Several recent mill curtailments, primarily in Oregon, also added to log availability in the region. Despite this dynamic, the market remained fairly balanced due to healthy log demand and improvements in lumber pricing. As a result, pricing for our logs was comparable to the fourth quarter. That said, our average domestic sales realizations decreased slightly, largely driven by a lower percentage of grade logs in our mix. For the quarter, our domestic sales volumes were significantly higher as we strategically shifted logs to domestic customers.

Fee harvest volumes were moderately higher and per unit log and haul costs were significantly lower as we made the seasonal transition to lower elevation and lower-cost harvest operations. Forestry and road costs were seasonally lower. Moving to our Western export business. Log markets in Japan were stable in the first quarter. Despite ongoing consumption headwinds, demand for our logs remained steady as our customers benefited from lower volumes of competing European in lumber imports. As a result, our average sales realizations for export volumes to Japan were comparable to the fourth quarter. Our sales volumes were moderately lower due to the timing of vessels. In China, log inventories at the ports grew in the first quarter as a result of reduced consumption during the Lunar New Year holiday and increased log imports from New Zealand.

However, log takeaway improved as the quarter progressed. Despite steady demand for our logs, our sales volumes into China were significantly lower in the first quarter as we intentionally flexed log sales to the domestic market. Our average sales realizations were slightly higher compared to the fourth quarter. Turning to the South. Adjusted EBITDA for Southern Timberlands decreased by $4 million compared to the fourth quarter. Southern sawlog markets moderated somewhat in the first quarter, largely in response to elevated mill inventories and ample log supply. In contrast, Southern Fiber markets were stable in the first quarter as supply and demand trended to a more balanced state. Given these dynamics, our average sales realizations were comparable to the fourth quarter.

Per unit log and haul costs were also comparable and forestry and road costs were seasonally lower. Our fee harvest volumes decreased slightly in the first quarter. In the North, adjusted EBITDA increased by $1 million compared to the fourth quarter as sales realizations increased moderately. Fee harvest volumes were moderately lower in the first quarter, largely driven by the early onset of spring breakup conditions. Turning to our real estate, Energy and Natural Resources on Pages 10 and 11. Real estate and ENR contributed $60 million to first quarter earnings and $94 million to adjusted EBITDA. First quarter EBITDA was $27 million higher than the fourth quarter, primarily attributable to an increase in real estate acres sold. Average price per acre decreased compared to the fourth quarter due to the mix of properties sold, but remained elevated compared to historical levels.

We continue to benefit from solid demand for HBU properties, resulting in high-value transactions with significant premiums to timber value. Now, for some comments on our Natural Climate Solutions business. In February, we announced an exploratory agreement with Lapis Energy to pursue carbon capture and sequestration projects across five potential sites in the U.S. South. The agreement represents a unique opportunity to scale our CCS offerings. To-date, we’ve entered into three CCS agreements covering up to seven sites across our Southern Timber holdings. And we remain focused on developing new projects and intend to enter into additional agreements over the next few years. Turning to Forest Carbon. On the heels of our first approved project in Maine, we’re advancing two projects in the U.S. South that are expected to be completed later this year.

Combined, these three projects are expected to generate over 100,000 credits in 2024, and we intend to sell these credits into the voluntary market. Looking forward, we have several additional projects in the development pipeline and continue to see strong demand for high-quality credits. Lastly, I’ll make a few comments on the progress we’re making on our Renewable Energy business with a specific focus on solar. Given our unmatched portfolio in the U.S. South, we are uniquely positioned to drive meaningful value across our land base as demand for large-scale solar development increases. In total, we’ve signed over 60 agreements for potential solar projects covering more than 100,000 acres across 11 states. Notably, we recently signed sizable agreements in Georgia and Mississippi, and currently have several projects in late stages of development with one expected to be operational later this year.

We’ve been very selective in choosing the counterparties to these agreements and have built an outstanding portfolio of projects with experienced and successful developers and utilities. Looking forward, we continue to see strong demand as this market continues to develop and we expect to sign additional agreements over the next several years. Moving to Wood Products on Pages 12 through 14. Wood Products contributed $128 million to first quarter earnings. Adjusted EBITDA was $184 million, a 16% increase from the fourth quarter. Starting with lumber. First quarter adjusted EBITDA was a $5 million loss, but improved by $29 million compared to the fourth quarter, largely driven by a slight increase in sales realizations. Adverse weather conditions in January and cautious buyer sentiment weighed on the lumber market at the outset of the first quarter.

As the quarter progressed, demand signals improved slightly, particularly for Western SPF and Douglas fir species. This drove modest pricing improvements through mid-March. In contrast, Southern lumber markets faced persistent headwinds during the quarter, given weather-related challenges, a moderation in demand, and ample supply of finished products. For the quarter, our average sales realizations increased by 4% compared to the fourth quarter, largely in line with the framing lumber composite. Our sales volumes decreased slightly, partially driven by winter weather disruptions early in the quarter. Unit manufacturing costs increased slightly and log costs were slightly lower. OSB adjusted EBITDA increased by $14 million compared to the fourth quarter, primarily due to an increase in product pricing.

Benchmark pricing for OSB was relatively stable through February, but increased significantly in March. This improvement was largely driven by lean inventories, supply limitations and resilient demand from new home construction activity. As a result, our average sales realizations increased by 4% compared to the fourth quarter, while the average OSB composite pricing increased by 13%. This relative difference was largely due to our extended order files, which result in a lag effect for OSB realizations. Our production and sales volumes were slightly higher in the first quarter and unit manufacturing costs improved. Fiber costs were slightly higher. Adjusted EBITDA for Engineered Wood Products decreased by $18 million compared to the fourth quarter.

Primarily due to a decrease in average sales realizations as previously determined price adjustments took effect in certain markets. Our sales volumes for solid section products were comparable to the fourth quarter, while I-joist volumes were lower. Both unit manufacturing and raw material costs increased for most products in the first quarter. A couple of things worth noting for context regarding our Engineered Wood Products in Q1. First, we did ship somewhat higher EWP volumes to customers in the fourth quarter of last year after having been on allocation for most of 2023. And consequently, customer inventories were slightly elevated entering the new year. Also, while single-family construction activity remained resilient, we experienced the typical seasonal pattern in EWP demand in the first quarter.

That all being said, we expect healthy demand from the single-family segment as we get further into the spring building season. As a result, we anticipate higher sales volumes and stable sales realizations from our EWP business in the second quarter. In distribution, adjusted EBITDA increased by $4 million compared to the fourth quarter largely driven by an improvement in commodity realizations and margins. With that, I’ll turn the call over to Davie to discuss some financial items and our second quarter outlook.

David Wold: Thanks Devin and good morning everyone. I’ll be covering key financial items and first quarter financial performance before moving into our second quarter outlook. I’ll begin with key financial items, which are summarized on Page 16. Our balance sheet remains exceptionally strong with approximately $900 million of cash and total debt of just under $5.1 billion at the end of the quarter. In the first quarter, we generated $124 million of cash from operations. It’s worth noting that the first quarter is usually our lowest operating cash flow quarter due to seasonal inventory and other working capital build. Capital expenditures for the quarter were $79 million, which is a typical level for the first quarter. We returned $146 million to shareholders through the payment of our quarterly base dividend, which we increased by 5.3% to $0.20 per share during the quarter.

This is in line with our commitment to grow our sustainable base dividend by 5% annually through 2025. During the quarter, we also returned $102 million to shareholders through the payment of our supplemental dividend, which was associated with our 2023 financial results. First quarter share repurchase activity totaled approximately $50 million. And as of quarter end, we have completed nearly $800 million of repurchase under our $1 billion authorization. Looking forward, we will continue to leverage our flexible cash return framework and repurchase shares opportunistically when we believe it will create shareholder value. First quarter results for our unallocated items are summarized on Page 15. Adjusted EBITDA for this segment decreased by $22 million compared to the fourth quarter partially attributable to changes in intersegment profit elimination and LIFO.

Looking forward, key outlook items for the second quarter are presented on Page 18. In our Timberlands business, we expect second quarter earnings and adjusted EBITDA will be slightly higher than the first quarter of 2024. Turning to our Western Timberlands operations, we expect steady to increasing log demand in the domestic market in the second quarter as mills respond to improving lumber takeaway as we get deeper into the spring building season. That said, log supply is expected to increase as weather conditions improve seasonally. On balance, this should translate to a fairly stable domestic log market. As a result, we expect our domestic sales realizations to be comparable to the first quarter. We anticipate our fee harvest volumes will be moderately higher given seasonally favorable operating conditions in the second quarter.

Forestry and road costs are expected to be higher as we enter the spring and summer months and per unit log and haul costs are also expected to be higher. Moving to the export markets. In Japan, we anticipate stable log markets and steady demand from our customers in the second quarter. As a result, we expect our average sales realizations for export volumes to Japan to be comparable to the first quarter. Our sales volumes are expected to increase, largely due to the timing of vessels. In China, we expect a modest increase in construction activity and log consumption following the Lunar New Year holiday. And given steady log demand from our strategic customers, we expect to significantly increase our sales volumes into China in the second quarter.

Our average sales realizations are expected to be comparable to the first quarter. Moving to the South. Log inventories were elevated at the outset of the second quarter, and log supply is expected to increase seasonally. As the quarter progresses, we expect sawlog demand to remain relatively stable and fiber demand to soften in response to increased annual maintenance outages. On balance, takeaway for our logs is expected to remain steady given our delivered programs across the region. As a result, we expect our sales realizations will be comparable to the first quarter. Our fee harvest volumes and forestry and road costs are expected to be higher due to drier weather conditions that are typical in the second quarter and we anticipate comparable per unit log and haul costs.

In the North, our sales realizations are expected to be moderately higher than the first quarter and fee harvest volumes are expected to be significantly lower given spring breakup conditions. Turning to our Real Estate, Energy and Natural Resources segment. As Devin mentioned, we are still seeing solid demand for our real estate properties, and we continue to expect a consistent flow of HBU transactions with significant premiums to timber value. For the second quarter, we expect adjusted EBITDA will be comparable to and earnings will be approximately $10 million lower than the first quarter of 2024 due to the timing and mix of real estate sales. For the full year, we maintain our adjusted EBITDA guidance of approximately $320 million for the segment, which includes a year-over-year increase in contributions from Natural Climate Solutions as we continue to advance toward our 2025 target for that business.

For our Wood Products segment, we expect second quarter earnings and adjusted EBITDA will be slightly higher than the first quarter of 2024, excluding the effect of changes in average sales realizations for lumber and OSB. This is largely driven by improved sales volumes across our Wood Products businesses and favorable cost for lumber. I will note that we do expect demand for Wood Products to remain healthy, supported by improving housing and repair and remodel activity as we move further into the spring. As shown on Page 19, our current and quarter-to-date average sales realizations for lumber are slightly higher than the first quarter average. That said, the framing lumber composite has trended lower over the last several weeks. For OSB, our current and quarter-to-date average sales realizations are significantly higher than the first quarter average.

As Devin mentioned, our extended order files result in a lag effect for OSB realizations. As a result, most of the OSB price improvement that we saw in March will be captured in our second quarter realizations. For our lumber business, we expect higher production and sales volumes in the second quarter and moderately lower unit manufacturing costs. Log costs are expected to be slightly lower. For our OSB business, we anticipate sales volumes to be moderately higher than the first quarter with comparable unit manufacturing costs. Fiber costs are expected to be slightly higher in the second quarter. In our Engineered Wood Products business, we anticipate higher sales volumes across all products. Our average sales realizations are expected to be comparable to the first quarter.

Raw material costs are expected to be higher primarily for OSB web stock. For our Distribution business, we expect adjusted EBITDA to be higher compared to the first quarter due to increased sales volumes and stronger commodity realizations. With that, I’ll now turn the call back to Devin and look forward to your questions.

Devin Stockfish: Thanks Davie. Before wrapping up this morning, I’ll make a few comments on the housing and repair and remodel markets. Starting with housing. On balance, our macro view on the housing market is largely unchanged. Despite elevated mortgage interest rates, the single-family segment remains solid and continues to be supported by strong overall demand for housing, a limited inventory of existing homes on the market and actions taken by the large homebuilders to offset affordability challenges. In contrast, activity in the multifamily segment has moderated given the elevated interest rate environment and the recent and upcoming influx of multifamily units entering the market. As a reminder, single-family construction is a much more important demand driver for our business than multifamily.

For the first quarter, housing starts averaged 1.4 million units on a seasonally adjusted basis with single-family starts holding up well. However, we do think homebuilding activity in the first quarter was impacted to some degree by various weather events across the U.S. So, the spring building season has been a little slower to kick into high gear. As we move deeper into 2024, we’re still expecting healthy demand for housing, particularly in the single-family segment. That’s consistent with what we are hearing from our homebuilding customers. On longer term, our view on the housing fundamentals continues to be very favorable, supported by strong demographic trends and a vastly under billed housing stock. Turning to repair and remodel. Activity has been a little softer to start off the year, particularly in the do-it-yourself segment.

Moving forward, we expect R&R activity to pick up somewhat as weather conditions improve and continue to believe that demand will ultimately be supported by prospective homebuyers that elect to remodel in lieu of purchasing a new home in the current rate environment. And beyond 2024, most of the key drivers supporting solid repair and remodel demand remain intact including favorable home equity levels and an aging housing stock. So in closing, we delivered solid results across our businesses in the first quarter. We also continue to make progress toward our multiyear targets by increasing our quarterly base dividend and signing our third CCS agreement. Looking forward, we’re encouraged by the strong underlying fundamentals that will drive long-term growth for housing and repair and remodel demand and natural climate solutions.

And given our unmatched portfolio of assets, we’re uniquely positioned to capitalize on these opportunities well into the future. Our balance sheet is exceptionally strong, and we remain focused on driving peer-leading performance across our businesses, serving our customers and delivering superior long-term value and returns for our shareholders. With that, I think we can open it up for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from George Staphos with Bank of America. Please proceed with your question.

George Staphos: Hi, everyone. Good morning. Thanks for taking my question. I hope you can hear me okay.

Devin Stockfish: Good morning.

David Wold: Good morning, George.

Devin Stockfish: Yes.

George Staphos: So I want to look a little bit under the hood in terms of timber realizations in the West in the quarter and the implications into 2Q. Now it said you redirected — you mentioned you redirected volume from export even though realizations were flat in export to domestic markets. Nonetheless, Western realizations were down a bit. And I guess the question would be, given that price realization, why did you direct so much timber demand domestically when it looked like export markets, at least were able to maintain flat realizations? That’s question number one. Question number two, recognizing there were some timing factors in terms of VWP. There’s been this steady trend lower in both solid section and I- Joist and just wondering what your views are in terms of the implications going forward?

And then third, given all the project activity in Climate Solutions, are you prepared to update your $100 million target by 2025, might that number need to be raised at some point? Thank you and good luck in the quarter.

Devin Stockfish: Yes. Thanks for the question. So I’ll answer the third one first with respect to the $100 million. We’re still working towards that run rate, $100 million by the end of 2025. As we get closer to that end date, we’ll obviously work with you on updating what that longer-term number is, but we’re not prepared to do that today. With respect to the first question on the timber markets in the Northwest, the lower realizations was really more a reflection just on mix and not so much on number two, Doug, for log prices. Those were just fine. So we moved some, as we always do, looking for the best margin opportunity in Q1 to meet some customer demands. As we roll into Q2, as we noted, we’re seeing pretty strong demand from our customers in China, not withstand all of the market dynamics there.

So we have an opportunity to flex a little bit more volume to China in Q2, and that’s what we’re going to do. And that’s typical, we’ll move back and forth depending on what the best margin opportunity is. And with respect to EWP, we have seen some downward price pressure here coming out of the peak of the pandemic, but I think it’s important to put that in historical context. We still have very strong EWP pricing relative to pre-pandemic. We still see strong demand. I think on the I-joist side, in particular, one of the dynamics at play during the real peak of the pandemic where we saw product shortages. We did see some conversion to Open Web during that period. And so we’re working on regaining that market share. Obviously, with lumber prices being relatively lower right now, from a cost standpoint, it may take a little bit longer to pull some of that market share back to I-joist.

But we’re working on that. The team is doing a nice job of picking up customers and making that conversion. As we think about Q2, as Dave, you mentioned, we’re expecting comparable realizations, and we’ll see the volume pick up in Q2 and Q3. So still a good market. I still think there’s a lot of opportunity in EWP notwithstanding pricing coming down a little bit from those pandemic peak levels.

George Staphos: Thank you, Devin. I’ll turn over.

Devin Stockfish: All right. Thanks.

Operator: Our next question is from Susan Maklari with Goldman Sachs. Please proceed with your question.

Susan Maklari: Thank you. Good morning, everyone.

Devin Stockfish: Good morning.

David Wold: Good morning, Susan.

Susan Maklari: My first question is on the solar projects that you mentioned, Devin, you gave some interesting commentary on those. Can you talk a bit about how that could potentially contribute to results in the more near to medium term, perhaps? And then anything on the unit economics of those projects and how they compare to some of the others that are falling within the NCS area?

Devin Stockfish: Yes. Sure. With respect to the specific economics, at this point, we’re not prepared to release that. We’re really working on signing up new contracts. And I think just from a competitive positioning standpoint for not to do that at this point, we will obviously at some later date. It’s going to be a growing component of NCS. The NPV uplift on doing a solar project is always going to be the right answer relative to timber multiple uplift on NPV. So you’re going to sign those up as often as you can. The challenges with many of the NCS businesses is just the time line to get these things hooked into the grid. We’re signing up pretty healthy number of agreements. We’re building up a really nice pipeline. As I mentioned, we’ve been really thoughtful about the counterparties that we’re engaging with, really trying to get the high-end developers to improve the conversion rate.

It’s important to remember, not every solar agreement you signed is necessarily going to convert into a project that comes to fruition, but I think we’ll have a pretty good success rate just given the partners that we’re engaging with. So as I said, that will be a growing component of our NCS and even in the $100 million, that will be a decent component of that. But obviously, it will grow over time as more of these projects come online.

Susan Maklari: Okay. That’s helpful color. And then turning to Wood Products, lumber prices have been sort of softer lately despite the activity that we’re seeing on the single-family side, like you mentioned, I guess what do you think that we need to see in order to get some more strength there and understanding you don’t forecast lumber prices, but just generally, how important do you think an improvement in R&R is? And I guess, how do you think about that relative to the supply dynamics in that area?

Devin Stockfish: Yes, Sue, I think you hit the nail on the head there. The big issue, I think, right now, given that single-family construction has been relatively strong. Although I would note even though we’ve seen strong housing numbers of late on a seasonally adjusted basis, you do see more actual building activity as you get into spring and summer. So there is just that natural increase in the demand for lumber and wood products as the number of actual building activity picks up. But I think the real issue, and this is particularly true for Southern Yellow Pine is R&R has been okay. It hasn’t been terrible, but we just haven’t seen as much of that spring R&R activity as we typically would have seen I think in the South, in particular, some of the treated market, we haven’t necessarily seen as much buying activity there, which obviously Southern Yellow Pine lumber is big in that treated market.

So I do think as we get deeper into the spring beyond some of these weather events, I expect that to pick up somewhat. And so we’ll see some of that tensioning up as we get a little bit deeper into the year. But I think with lumber, obviously, about 40% of the ultimate demand is repair and remodel. So if that’s a little bit softer, that does have a bit of an impact on pricing. For the SPF and Doug fir markets, I think maybe the outdoor market isn’t quite as important, but particularly for Doug fir, the California market is very important. And it was a pretty rainy Q1, it’s drying out, you’re starting to see a pickup in activity, and I think that will put some upward pressure on Doug for prices as we move deeper into the spring and summer.

Susan Maklari: Okay. That’s helpful color. Thank you. Good luck with everything.

Devin Stockfish: All right. Thank you.

Operator: Our next question is from Hamir Patel with CIBC Capital Markets. Please proceed with your question.

Hamir Patel: Hi. Good morning. Devin, just given how weak the lumber prices have been of late, particularly for Southern Pine, are you surprised we haven’t seen more curtailments across the industry?

Devin Stockfish: Yes. I mean, on some level, yes, because I suspect there’s a good chunk of the industry that’s been operating below cash breakeven. So historically, that would have caused people to make certain operating decisions. I do think, to some extent, there’s still this residual concern coming out of the pandemic around labor and just to the extent people think that prices are going to turn around, kind of trying to hold out a little bit longer, so you don’t jeopardize the available labor force in your mills. So perhaps that’s some of it. But ultimately, you wouldn’t expect people to operate indefinitely if they’re below cash breakeven, which I think where our Southern Yellow Pine prices are, for some of the industry, I think that’s certainly the case right now.

Hamir Patel: Great. Thanks. And that’s helpful. And are you able to comment on where inventories look to you in the channel today for lumber, OSB and EWP.

Devin Stockfish: Sure. I think for lumber, I would say inventory levels are adequate. We’ve had a few years where they were more or less operating on a pretty lean basis. I think to a large extent, buyers have built up some inventory. I mean, I wouldn’t say it’s excessive by any means, but at least it’s enough for people to not have to be aggressive in terms of their lumber buying, which has been a headwind on price. OSB has been a little bit leaner. I’d say on balance, the channel is still pretty lean on the OSB side. And I’d say EWP is pretty typical for this time of year, not terribly low or high, just generally in normal range for this time of year.

Hamir Patel: Fair enough. Thanks. That’s all I had. I’ll turn it over.

Devin Stockfish: All right. Thank you.

Operator: Our next question is from Mark Weintraub with Seaport Research Partners. Please proceed with your question.

Mark Weintraub: Thank you. Maybe first, just following up on the NCS recognizing competitive reasons, you don’t like to give too much in the way of details, but are you primarily looking at leasing on the solar side? Or would there be sales arrangements? Is there a strong bias?

Devin Stockfish: Yes. We’re focused on leasing activity. We think that provides the best long-term value.

Mark Weintraub: Okay. And obviously, we’ve seen some other directional estimates on the types of uplift. Is there any reason to believe that your situation would be meaningfully different from what we hear from others?

Devin Stockfish: Yes. I mean we may have minor disagreements in terms of the specific numbers, but directionally, I think what others are talking about aligned with how we’re thinking about it, at least for quality projects. I think the differentiator for us, Mark, is really a couple of things. One, particularly on the forest carbon development, we are doing more of that work internally, so we get to keep more of the economics. And then just from a scale standpoint, we have the opportunity to participate maybe at a larger level. But directionally, in terms of NPV uplift, I think those are generally in the ballpark, at least in our view.

Mark Weintraub: Okay. That’s very helpful. And just lastly on the CCS. Can you just remind us kind of what the process is here? You got to get that permitting. And then after that, well, you don’t get — the permitting has to be gotten. And then does equipment have to be put in place, et cetera. So what type of time lines are realistic for the CCS projects?

Devin Stockfish: Yes. I mean it is a multiyear process. So you have to go through the process of, first, we provide certain geologic information, but the counterparty is going to do their work and their analysis on that. There’s a permitting process as we all know. In the U.S., permitting is very challenging. And so that’s a process that has to be worked through either at the EPA level as the one in Mississippi or at the state level now that Louisiana has gotten primacy from EPA. That’s a lengthy process that has to be undertaken. Then there’s the process of actually building the injection facility on site and the pipeline development. So all of that work does take a bit of time and frankly, probably has taken a little bit more time than we had anticipated when we rolled out these targets initially back in 2021.

But again, ultimately, we think this is going to be a healthy business for us. We think the demand is definitely there, but you just have to work through the process. But the beauty is once it’s up and running, it’s a recurring revenue stream for decades.

Mark Weintraub: Right? So is it fair to say that that’s probably not a big part of the 2025 but that there’s hopefully significant upside beyond that from these projects?

Devin Stockfish: Yes, that’s accurate.

Mark Weintraub: Okay. And then just lastly, I promise last one, on it. So I believe at one point, you talked about 500,000 acres being potentially suitable or identified for CCS. With the Lapis project, do you have an update on that number?

Devin Stockfish: Yes, it’s probably another 100,000, 75,000 acres over and above that just because three of the five sites that are part of that Lapis agreement were not part of our initial estimate and so I think that has expanded the potential opportunity zone. I will say just a cautionary note with respect to the acreage references, since we will continue to manage the above-ground land base on those projects outside of a very small sliver for the pipeline and the injection site. It’s not necessarily the greatest proxy for how much underground space. We use that just to kind of help dimension. Ultimately, each of these sites will have their own poor space availability. But we do think that the opportunity with Lapis is a nice way to continue to expand our potential opportunities within the CCS space.

Mark Weintraub: And so as you think about ratios of poor space to land base, what might be a reasonable average percentage to use?

Devin Stockfish: Yes. I mean it’s really hard to do that, Mark, because each one it’s going to be different. So I’d be hard-pressed to give you sort of a rule of thumb number since each one is going to be differential.

Mark Weintraub: Fair enough. Thank you.

Devin Stockfish: All right. Thank you.

Operator: Our next question is from Ketan Mamtora with BMO Capital Markets. Please proceed with your question.

Ketan Mamtora: Good morning, and thanks for taking my question. Perhaps the first one on OSB, I was a little bit surprised that your current realizations are up sort of $95 versus Q1 average versus kind of random length, which is up almost $200. I understand the lag impact. But beyond that, what are the other nuances that we may be missing?

Devin Stockfish: Yes. I mean it’s really just the lag effect because you’re talking about a 3- to 5-week lag trailing behind random lengths. And so what you typically see when you have the tighter markets for us with OSB is we lag on the upside, but then we hold it longer on the downside. That’s really it.

Ketan Mamtora: So Devin, in that case if we assume that prices stay near these levels for the rest of the quarter, just hypothetically, then is it fair to say that your realizations should move higher if they were to just stay here at this level for the quarter?

Devin Stockfish: Yes.

Ketan Mamtora: Understood. Okay. And then just one quick one as a follow-up. What were your operating rates in lumber, OSB and engineered wood in Q1.