Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

Good afternoon. I'm Collin Mings. I am the Timber REIT analyst here at Raymond James. I'm very excited again to welcome back Weyerhaeuser to our Institutional Investors Conference here in Orlando. Specifically we have with us President and CEO, Devin Stockfish; as well as Beth Baum, Vice President of Investor Relations. So very excited. They've made the trip down to Orlando here. After a few minutes of prepared remarks, Devin will take us through the slide deck and overview of the company. After that, I have some timely questions we'll kind of run through with Devin. But by all means, the audience has questions, look forward to your participation as well. So with that very brief introduction, Devin, I'll let you can take it from here.

All right. Well, thanks, Collin, appreciate the opportunity to be here with you today to talk about Weyerhaeuser Company. Before I get started, just a quick note, I will be making some forward-looking statements, so the typical cautionary language applies. Also, the presentation materials that we'll go through here today are available on our website. So Weyerhaeuser, we're focused on 3 key levers to drive value for shareholders. It starts with our unmatched portfolio of Timberlands, it goes to our industry-leading performance, disciplined capital allocation and as we've done for over 100 years, it's built on a strong foundation of ESG leadership. And I'll speak to each of these in a bit more detail. Starting with our unmatched portfolio of assets. We are the largest private owner of timberlands in North America. We have 11 million acres of high-quality, high-performance timberlands across the United States. We're also one of the largest wood products manufacturers in North America. We produce lumber-oriented strand board and engineered-wood products. We have 3 business segments at Weyerhaeuser, Timberlands, Real Estate and ENR and Wood Products. All of these businesses have significant scale and industry-leading performance, and they're managed within a tax-efficient REIT structure. In fact, we're one of the largest REITs in the United States. Over the many decades of managing these businesses, we've developed deep unrivaled expertise in creating and capturing superior value across each stage of the supply chain, and it all starts back in the forest. With the proprietary ceilings that we produce to customized planting, each targeted at every acre, to maximize the value on our acreage. As our ceilings grow, we have targeted silviculture prescriptions to maximize the value and the volume that we're growing across our ownership. When our forest reach financial maturity, we harvest them. We use data-driven optimization processes to merchandise the logs to the highest value output based on current market conditions. And since we harvest and haul 36 million tons of logs every year, we have significant logistical and operational advantages that allow us to deliver our product efficiently and cost effectively to our customers. And the scaled log model is really what is a differentiator for us in our businesses, something our customers value and are willing to pay for. Turning to the Wood Products business, where we take the logs that we purchase either from our own timberlands or third-party tree growers and we convert those into lumber-oriented strand board or engineered wood products. Our mills are efficient, reliable and low-cost. We focus on maximizing the margins from the products that we produce out of our mills. We serve hundreds of different customers across the variety of channels, including our own distribution facilities. But that's not all. We also look to optimize and drive additional value back to the acre, through our real estate and ENR programs. In Real Estate, that comes via HBU land sales, in the Energy and Natural Resources business that comes through royalty and lease income from a variety of non-timber resources. There's one consistent theme across all of our businesses, and that is we're constantly striving to be the best and to drive incremental value at every step of the process. But it's not just about being the best, it's also about doing it in the right way. We've managed our business with integrity and a strong commitment to ESG principles for well over 100 years. It's core to who we are as a company and it's deeply ingrained in how we manage our businesses. Our commitment to environmental stewardship starts with our commitment to sustainable forestry. And this really goes back to the early days of the company. We created the first certified tree farm and forest research center in the United States. We're one of the first companies to certify 100% of our timberlands to sustainable forestry practices. We plant nearly 150 million trees each and every year, that's about 5 trees every second. Our growing forest capture carbon from the atmosphere, our wood products sequester carbon in those products for the lifetime of those products, and we're always looking to minimize the environmental footprint of our manufacturing facilities. We're also committed to social responsibility and governance. That starts with a safe, highly ethical and inclusive work environment. It's supported by good governance structure across our organization. This helps us attract and retain top talent. It cements relationships across a broad variety of stakeholders, and it ensures that we're managing our resources in the right way for the long term. At the foundation of our company is our Timberlands business. We really do have an unmatched portfolio of assets that have substantial enduring value that can create value both today, but also well into the future. Being the largest private owner of timberlands with 11 million acres, it's really unrivaled in terms of the scale, the scope, the diversity and the quality of our Timberland portfolio. Of that 11 million acres, 3 million acres are in the west, in Washington and Oregon. These are some of the best timber-growing regions in the world, high-quality timberlands, high-quality Douglas-fir, strong domestic and export markets. We have nearly 7 million acres across the U.S. South, high-quality Southern yellow pine plantations. This ownership allows us to serve all the key markets across the Southern United States. We also have 1 million acres in the North, a diversified mix of species, including some high-value hardwood sawlogs. Our diverse customer mix allows us to capture the full value of our timber assets. We have a broad mix of third-party customers. Our timberlands are approximately located to our own internal mills, and we have access to export markets through ports in the Pacific Northwest and across the U.S. South. And this diversity of customers allows us to flex volume across different customers to maximize customer demands and take advantage of market opportunities. Our export business has been primarily focused on the Japan market. And this is a business that has delivered significant value back to Weyerhaeuser for many decades. We have a unique model going into the Japan market, both in terms of the quality of the logs that we send, but also the infrastructure we have to support exports out of the Pacific Northwest, really unrivaled in the industry in terms of our ability to serve that market. We also have long-standing relationships with customers across key export regions and markets, and we're well-positioned to serve this growing market over time. Timberlands have a number of unique characteristics that make it an attractive asset class. First, the key assets are trees. They continue to grow in size and value, regardless of what's going on in the markets. Historically, timberland returns have had a low correlation to other asset classes. And timberlands not only hold their value through market fluctuations, but have also grown in value over long periods of time. 85% of our assets are in our timberlands, and the enduring value creates value both today and into the future. We're also very focused on disciplined management of our Timberlands portfolio. And this really gets down to constantly optimizing and upgrading our ownership, looking for the best acres that can generate the best returns for our shareholders over time. Over the last decade, we've significantly grown our timber portfolio, increasing by significant percentage in both the west and in the south, while at the same time, executing on a number of strategic divestitures that have generated $1.6 billion of proceeds with a minimal reduction in EBITDA. Owning and managing a large, diversified portfolio of timberland also creates options to create additional value back to the acre. Our real estate and ENR business is laser-focused on maximizing the value of every acre we own. A key aspect of this is looking across our ownership for opportunities where we can unlock incremental value over and above timber value. Our AVO, or Asset Value Optimization program, looks at each acre across our portfolio to look for characteristics and attributes that can support higher, better-use valuation. We refreshed this analysis routinely. We've identified 1.3 million acres across our ownership that have the potential to generate HBU valuation over time. This is a nimble, low-overhead business. It requires minimal capital investment. We're very disciplined in how we manage this program, less than 1% of our acreage flows through the AVO program each year. And we've generated significant premiums to timber value over time. The Energy & Natural Resources business similarly focused on bringing incremental value back to the acre. We do that, through this business, primarily on royalty and lease streams coming from a variety of non-timber resources like construction materials, oil and gas, wind and energy. And together, the real estate and ENR business has demonstrated an ability to generate consistent, reliable cash flow over time to support our capital allocation priorities. And finally, our Wood Products business, one of the largest manufacturers in North America. As I'll touch on momentarily, we've made significant strides on improving the operating performance in this business, reducing costs, improving profitability to really position this business to generate significant value for shareholders over time. Our Wood Products business is industry-leading. It's low cost. We have 35 manufacturing facilities across the U.S. and Canada. We manufacture high-quality lumber-oriented strand board and engineered-wood products. We also have 18 distribution facilities. And these assets and the geographic coverage allows us to serve a broad mix of customers all across North America. And we do have a diverse mix, both of end markets and customers. Our customers -- we have long-standing relationships with virtually all of the large builders, distributors and big-box retailers. Our customers value our quality, our reliability and our consistency. As I mentioned, we've been intensely focused on improving the operating performance of these businesses. We've made significant improvements over time in the cost structure, and it's really yielding benefits. We can now say that we've achieved black at the bottom status, which means we're positioned to generate positive cash flow even in an environment similar with pricing to the great recession. A core part of our overall strategy as a company has been improving our operating performance across the entirety of Weyerhaeuser Company. Core to this has been our operational excellence journey. Since 2014, we've captured $650 million of margin improvement. As you can see, this cuts across all aspects of our business, it's a testament to the hard work of folks all across Weyerhaeuser Company. And it's really positioned us to generate superior returns over a market cycle. You can see how this has translated into our relative performance versus our competition. We've made significant strides over the last several years. We're industry-leading across all of our manufacturing businesses, and our mandate is to be a clear #1 in each of our businesses in terms of profitability. And while we've made significant improvements to our operating performance, we're never satisfied. We know that we need to continue to push, continue to improve as a company. And so we've rolled out what we're calling OPX 2.0 Weyerhaeuser Company. This is an evolution of how we do OPX. We're going to continue to stay focused on margin improvement and cost discipline. That remains a key part of how we're going to be running our businesses, but we've layered in an additional piece or 2 to really drive additional value. That starts with future value creation, which is important, really for any company, particularly for those like our business that are long-term in nature. We've added in cost avoidance and efficiency. We believe that incentivizing those behaviors in our employee base will yield benefits today as well as into the future. So we're really excited about this. We're anticipating another $50 million to $70 million of operational excellence improvements in 2020 and look forward to continuing to drive operating improvements across our businesses going forward. Let me turn to the third pillar of our investment thesis, which is disciplined capital allocation. This is a critical part of creating value for shareholders over time. Our balanced capital allocation philosophy has 3 key priorities: returning cash to shareholders, reinvesting back into our businesses and maintaining an appropriate capital structure. As you can see, in 2019, we, again, stayed true to these priorities by returning over $1 billion in cash to shareholders, reinvesting in our businesses, $380 million through our disciplined CapEx programs, and significantly reducing our future pension obligations by nearly $1.5 billion. We remain committed to returning cash to shareholders. We've returned nearly $8 billion of cash since 2014 to our shareholders, $5 billion of that coming via the dividend, $3 billion through opportunistic share repurchase. We consistently reinvest back in the businesses. The core priority here is disciplined capital expenditures that are really focused on enhancing and sustaining our wood products and timberlands operations. On the Timberland side, that's primarily focused on reforestation, roads and infrastructure. On the Wood Products side, it's been primarily focused on cost reduction and improving reliability and efficiencies at our mills. We have brought the CapEx in our Wood Products, down by a few million over the last several years, and that's really a reflection on completing some large mill rebuilds that we've done, mills like Dierks and Millport over the last several years. But we do believe there are continued opportunities to drive improvement in value through CapEx into these businesses. And the last piece of our capital allocation philosophy is really around maintaining an appropriate capital structure. And this is really core to maintaining an appropriate investment-grade credit profile. We do have investment-grade ratings with both of the agencies. We have a 3.5x net debt-to-EBITDA target over a cycle, ample liquidity, strong asset coverage. In 2019, we took advantage of some opportunities around liability management by reducing future pension obligations and refinancing some near-term debt at favorable rates. With our strong portfolio and our industry-leading performance, we do believe that we're well-positioned to fully capitalize on market opportunities going forward. Over the last several months, we've seen a market improvement in U.S. housing. We closed 2019 with 1.29 million housing starts, and we anticipate continued growth in 2020. A variety of reasons for that, really, builder sentiment is strong, mortgage rates are low, generally solid foundation for the economy, low unemployment. We think these will continue to drive demand for housing in the U.S. Additionally, some drivers, I think, that will carry out over a number of years, the demographics from millennials aging into their 30s. So a lot of strong demand fundamentals going forward. Similar story on repair and remodel. We've got aging housing stock. We've got growing home equity, low interest rates, these are all supportive, we believe, of continued growth in repair and remodel. Moving over to lumber. With the curtailments of the manufacturing capacity in British Columbia, combined with a pickup in construction activity, we've really started to see pricing increase over the last several weeks and months. This is really translating, I think, into a stronger lumber market than we saw for the majority of 2019. For Weyerhaeuser, our quarter-to-date realizations in lumber are about $20 per thousand, above Q4 averages and current realizations are about $30 per thousand relative to Q4. Similar story on OSB. With the curtailments and the reduction in manufacturing capacity that we saw last year, combined with the pickup in housing activity, we have seen upward momentum on OSB pricing as well. There's a little bit of a time lag on OSB for us because of the length of order files. But our quarter-to-date realizations in OSB are up $5 per thousand relative to Q4. Our current realizations are up $30 per thousand relative to Q4. So we've seen some good momentum of late there as well. Moving over to Timberlands. Starting in the Western system. We've seen solid demand in Q1. The pickup in lumber manufacturing across the West Coast, solid demand from our Japanese customers have supported this market. There's been a little bit of an offset, given what's been going on with China. And so we've seen a reduction in the amount of logs that are being exported into the China market, and those have stayed largely domestic. So a little bit of a headwind on pricing there, but all of that was contemplated at the outset of the quarter and was reflected in our Q1 guidance. Moving to Southern logs. We've seen solid demand, solid pricing across Q1 comparable to what we've seen recently. A few markets where there's been additional precipitation, a little bit more attention, but on balance, generally solid across the Southern regions. We do think looking out into the future, with all of the lumber manufacturing capacity that's coming into the U.S. South, ultimately, we think that's going to drive a slow improvement in sawlog pricing over time. Just quickly touching on climate change for a moment. We do believe that given the increased amount of awareness around climate change and global warming, the role of forest and sustainable wood products, as part of the solution, will become more and more evident. Our forest -- our millions of acres of forest capture carbon out of the atmosphere, our wood products sequester that carbon for the lifetime of those products. Wood products have a lower embodied greenhouse gas emission and alternative building products like steel and concrete. And so we think the discussion around carbon and climate will ultimately drive incremental demand for our products and potentially open up new opportunities in our space as well. So in summary, with our unmatched portfolio, our industry-leading performance, our record of disciplined capital allocation and our strong ESG leadership, we believe we're well-positioned to deliver superior value for shareholders both today and into the future. So with that Collin, I'd be happy to take any questions.

All right. Thank you, Devin. One area I wanted to start the discussion with is just maybe a little bit more update on current markets and some of the trends you're seeing currently. Specifically, let's maybe start a little bit more on the lumber and OSB side on the Wood Products. Just talk a little bit more, you touched on kind of a combination of maybe less supply in the market, better housing fundamentals, but just maybe elaborate a little bit more on what you're seeing in terms of the, again, I look at random lengths up by 11 consecutive weeks now in terms of lumber pricing. Just maybe expand upon that a little bit that would be good.

Right. Well, it all begins really with U.S. housing. And by that, I mean both new home construction, but also repair and remodel. And really, as we rolled into last fall, we saw housing market start to improve. It took a while for the pricing to catch up, I think, a variety of reasons for that. One of which we saw a number of mill curtailments over the course of last year. And whenever a mill closes down, you typically see a little bit more of that volume hitting the market as they transition down and close those mills. So it was a little bit noisy last fall. But really rolling into December and January, with the strong housing that we saw, I think repair and remodel has stayed fairly solid. That's really started to translate into the supply-demand dynamic across the markets. And with the reduction in capacity, both in lumber and OSB, I think what you're seeing as we gear up for the housing season, people have thin inventories and they have projects they're trying to support with lumber and other building products. And so that's really had an upward pressure on pricing really across most of the products.

Okay. Now we think about some of the domestic strength, if you will, with housing and some of the activity in repair and remodel, but maybe just update us as it relates to the Timber business, on what you're seeing from the coronavirus in terms of log exports. You have a slide on there that goes through some of the exposure between Japan, China, Korea maybe. Just talk a little bit more through how exposed are you to the export market. And what are you currently seeing? I mean given some of the challenges with the labor force, particularly at the mills in China? Are you still sending logs over there? Same thing with Japan, that's obviously a higher-margin business for Weyerhaeuser, historically, what are you seeing in that?

Right. Yes, with the export market, I think it's important just for context to remember that 7% of our revenues are to the export market, and the vast majority of that is to the Japan market. And so our China business, in particular, is a relatively small piece of our business. And so really, for us, that moves the needle really only around the margins. And so in the Pacific Northwest, frankly, we had already seen a little bit of a slowdown in the China market related to the European salvage volume that was coming into that market. So we had dialed back our China exports already even before the coronavirus. Certainly, I think the activity in China has slowed. I don't think that's a secret. And so I think that will be choppy for a little while. But again, the rationale behind having a diverse mix of customers is that we have opportunities to flex that volume. And so we had already started doing that in flexing some of that China volume back to the domestic market for higher-margin opportunities. In Japan, to date, we really haven't seen any impact from the coronavirus. We continue to have solid order files from our Japanese customers. Obviously, it's a dynamic situation. So we'll continue to watch that, but to date, we haven't seen any real impact there.

Okay. And in terms of pricing in the Pacific Northwest. Just recognizing, while it's a small part of -- China is a small part of Weyerhaeuser's business, there are some -- it does play a role in supply-demand dynamics for the overall region. Just maybe any sort of update or thoughts on what you're seeing in terms of log pricing in the Pacific Northwest here?

Yes. Sure. And really, if you think about the Pacific Northwest, you've got a strong domestic market, and you've also got an export market. And those flex back and forth depending on what's going on in the pricing environment. In the West, what I would say is the lumber activity has really picked up, of late, you can see that reflected in Doug fir lumber prices, which is a good proxy for lumber manufacturing in the West. Those are up pretty dramatically here over the last several months. And so there's a strong demand domestically for logs out of the Pacific Northwest. So I think that's tempering, perhaps what you might otherwise have seen with the China market falling off a little bit. So between the Japan market that stayed solid and the stronger domestic lumber market, I think that's offset some of the downside that you've seen from the China market. So a little bit of a headwind, but maybe not as dramatic as you might think.

Okay. Shifting gears, I did want to touch on capital allocation. To your slides earlier, obviously, the dividend has been a key component of returning capital to shareholders, also been very active in investing in your mills, really across the board and helping reduce some of that -- the cost structure over the last several years. Maybe just going forward, recognizing obviously, the stocks pulled back here recently, put in context kind of how you look at balancing those different capital allocation alternatives when continuing to invest in kind of the Wood Products manufacturing business, looking at timberland acquisition opportunities versus dividend and potentially share repurchases?

Yes. Sure. And really, it starts with our balanced approach. And so as we laid out -- so we have some core priorities around returning cash via the dividend, reinvesting back in the businesses and maintaining an investment-grade credit rating and an appropriate capital structure. To the extent that we have liquidity over and above that to put to work, it's really opportunistic and whether that's share repurchase or acquisitions, we really balance those opportunities against our other capital allocation priorities.

I have a few others things that I would like to cover, but by all means, if there's questions from the audience, I want to field those as well. All right. One area that, obviously, highlighted in the slide deck here, but I want to touch a little bit more, I know one thing that we've spent more time communicating with the investment community recently is around some of the ESG, particularly some of the E, if you will, benefits associated with Timberland investments? So kind of my question on that, recognizing Weyerhaeuser already has really good disclosure around that, what are some initiatives that you're focused in on that front? And then in particular, maybe talk a little bit more, there's been more conversation around carbon credits specifically, and just Weyerhaeuser's thoughts on that front.

Sure. I think one of the things that's really beneficial for us around the whole ESG space, and that's the E, the S and the G, is these are by and large, things that we've been doing for a very long time. I mean, we've had sustainable forestry for 100 years. We've been investing back into rural communities. We've been investing in our people, good governance practices. And so as a general matter, these are largely things that we have done for a very long time. I think the challenge for us in the near-term is really more around helping people better understand the story for both Weyerhaeuser and the industry as a whole. I don't know that people fully appreciate the environmental story around Timberlands. You think about the primary vehicle in terms of mitigating climate change and global warming by removing carbon from the atmosphere, that happens via trees. And so our industry and the way that we manage timberlands, that in and of itself, I think, is a very positive story around the environmental sustainability, and similar, I think, with the Wood Products, right? And so when you think about building things out of wood versus steel and concrete, there's a much better environmental story to tell around that. I think that's really starting to resonate with mass timber, cross-laminated timber. I think there's some additional opportunities there as well. So in the near term, I would say, there's just -- there's a big opportunity for us to help educate the broader public around the beneficial aspects of our business. Around carbon credits, certainly, that's something that we are looking at. It's in -- I would say, it's infancy at this stage, both from a regulatory standpoint, but also from a private market standpoint. Clearly, with 11 million acres of timberlands, that's a space that we're going to be very focused on, but we want to make sure that as that market develops, that it's done in the right way and that we capture the right economics from any programs that get put into place.

Switching back to -- I want to recircle back to the capital allocation question a little bit more. And in particular, one thing that Weyerhaeuser has done over the last several years. And to your point, you've made a number of acquisitions, but you've also disposed some larger pieces of timberland over the last few years. How are you thinking about the transaction markets right now? Just more specifically on the acquisition markets, what are you seeing in terms of volume, pricing and just Weyerhaeuser's appetite? A little bit more specific on growing that Timberland book there?

Yes. Sure. Well, we're always in the market, both on the buy side and the sell side, looking for opportunities to create value. I would say on the buy side, with 11 million acres and being the largest private timberland owner, we can be very disciplined about how we look at deals. And so there are very few deals that come to market that we don't take a look at. We pull the trigger on relatively few. We have a pretty specific criteria around value creation that we use to execute on those deals. I'd say the market, as a whole, has been somewhere in the kind of $2 billion per year in transaction value. That stays relatively consistent. Every year or 2, you might see a bigger transaction that pushes that value up a little bit. But I'd say on balance, the pricing has remained solid. Obviously, there was a transaction recently in the Pacific Northwest that shows, I think, the value of timber in that region. And so I think the markets remain solid to strong, and we would anticipate that continuing.

And then going back to portfolio and kind of current market trends, if you will. Just in terms of the U.S. South, less focused and while the recent conversations, but just maybe update us on what you're seeing in the U.S. South in terms of log pricing and recognizing it. Again, when you cut down a tree, you only move it 50 to 100 miles typically, how are the different micro markets in the U.S. now? How do you see that dynamic evolving over the next few years?

Yes. Well, I think you make a good point. We often talk about the Southern market as though it's A market. But what it really is, it's just a combination of micro markets. And as we've seen significant amounts of new lumber capacity coming into the market, really, each time you have a new mill that's located, you can draw a circle of 75-or-so miles away, and you're going to see tensioning within that wood basket. And so it's something that just -- it's going to take time. There has been a lot of inventory built up on the stumps since the Great Recession. That takes time to work its way through. We believe that over time, as all this capacity comes in, perhaps new capacity over and above what's been announced, export markets, et cetera, that you're going to see slow pricing recovery over time. It will really happen market-by-market as that new mill capacity comes online and really gets up to full capacity. But we do believe the trajectory over time is kind of a slow, steady improvement.

Well, thank you very much, Devin. Thank you, Beth. I really appreciate both of you making it down. Thank you, everybody.

My pleasure. Thank you.