Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Weyerhaeuser Company Annual Meeting. At this time, it's my pleasure to turn the floor over to Mr. Rick Holley. Sir, the floor is all yours.

Good morning and welcome to Weyerhaeuser Company's first-ever virtual annual shareholder meeting. I'm Rick Holley, Chairman of the Board of Directors. Before we begin, I want to acknowledge the unprecedented circumstances we've all been facing over the last few months. So many people around the world are dealing with the stress and uncertainty of this pandemic at home and at work. And I want to take a moment to thank everybody associated with Weyerhaeuser for their commitment and care during this challenging time. I want to thank our employees for staying focused on safely running our operations. I want to thank our customers and other partners for working so closely with us as we continue to deliver products people need. And I want to thank our shareholders for their patience and support as we manage through this crisis. We will start today's meeting with a formal part of our agenda. Once we begin, shareholders will be able to cast their votes and submit questions on the web portal where indicated. As a reminder, questions should relate to the business and affairs of the company and be of general shareholder interest. After the formal portion of our meeting, Devin Stockfish, our President and Chief Executive Officer, will give a presentation on the company's operations. Following Devin's presentation, we will answer as many submitted questions as time will permit. I now call this meeting to order. Joining me on the call today are the other members of the Board of Directors; Mark Emmert, Sara Lewis, Al Monaco, Nicole Piasecki, Marc Racicot, Larry Selzer, Michael Steuert, Devin Stockfish, Kim Williams and Chuck Williamson. Also participating are the other members of the senior management team; Adrian Blocker, Senior Vice President of Timberlands; Russell Hagen, our Senior Vice President and Chief Financial Officer; Kristy Harlan, Senior Vice President, General Counsel and Corporate Secretary; Jim Kilberg, Senior Vice President of Real Estate, Energy and Natural Resources; Denise Merle, Senior Vice President and Chief Administrative Officer; and Keith O'Rear, Senior Vice President of Wood Products. We are also joined by representatives of KPMG, our independent auditors, and Broadridge Financial Services, the Inspector of Elections. Representatives from each organization are available to respond to appropriate questions. And now I'm going to turn it over to Kristy Harlan to cover the business items on today's agenda. Kristy?

Thank you, Rick. I'd first like to go over some preliminary items. First, we have the meeting guidelines posted on the virtual meeting website. Please be sure to review these guidelines. As Rick mentioned in his remarks, you will be able to submit questions on the web portal. Questions will be answered at the end of the meeting after the business presentation. We will respond to as many questions as possible in the time permitted. As a reminder, only shareholders who have validated their identity with a control number may vote or submit questions. Our meeting record date is March 20, 2020. On that date, there were 746,205,956 common shares outstanding. Shareholders of record on the record date were mailed proxy materials and are entitled to vote on the 3 matters of business. A majority of outstanding shares are present in person or by proxy and, therefore, a quorum has been achieved for conducting business. There are 3 items of business on today's agenda. Each item is described in the proxy statement. First is the election of 11 directors for terms expiring at the 2021 annual meeting. Professional biographies of the director nominees are described in our proxy statement. The Board of Directors recommends that shareholders vote to elect each of the nominees. Second is an advisory vote to approve executive compensation as disclosed in our proxy statement. As a reminder, this vote is advisory and nonbinding. However, the Board of Directors and the Compensation Committee greatly value the opinions of our shareholders on this topic. The Board recommends that shareholders approve the company's executive compensation as disclosed in the proxy statement. Third and last is the vote to ratify the selection of KPMG as the company's independent registered public accounting firm for 2020. The Audit Committee has appointed KPMG to serve as the company's independent auditor for 2020. The Board of Directors asks as a matter of good corporate practice to ratify the committee's appointment on an advisory and nonbinding basis. If you wish to vote your shares during this meeting, the online voting polls are open. Shareholders are entitled to vote until the online voting polls are closed. If you have already voted by proxy, there's no need to vote now unless you're changing your vote. We're going to pause for a moment to allow shareholders to cast their vote on the 3 items of business. [Voting]

The polls are now closed. Mr. Chairman, I could now report on the outcome of the 3 items of business based on preliminary voting results. In the election of the directors, each of the nominees received a majority of the votes cast and, therefore, has been duly elected. With respect to the advisory vote to approve executive compensation as described in our proxy statement, the votes cast in favor of the proposal exceeded the votes cast against the proposal and, therefore, the proposal was approved. Lastly, with respect to the ratification of KPMG as the company's independent auditor, the votes cast in favor of the proposal exceeded the votes cast against the proposal and, therefore, the appointment of KPMG was ratified. The final vote tabulation for each item of business will be disclosed in accordance with SEC rules.

Thank you, Kristy. The formal portion of the 2020 Annual Meeting of Shareholders is now adjourned. Devin Stockfish, President and Chief Executive Officer, will now provide an update on the company's operations. Devin?

All right. Thanks, Rick, and thank you all for joining us this morning. These are truly unprecedented times, and I want to echo Rick's gratitude to our employees who have shown tremendous dedication to their work and care for their colleagues, to our customers who continue to work closely with us every day as we safely deliver our products to market and to our shareholders who have remained engaged in understanding as we manage through this pandemic. Today, I'm going to cover 3 main topics. First, I'll give you a brief overview of our performance in 2019; then I'll summarize the actions we're taking to manage through the COVID-19 pandemic; and finally, I'll talk about why our company is well positioned to come out the other side of this crisis in a strong position and ready to capitalize on the economic recovery. Before I begin, I'll note, I will be making some forward-looking statements throughout this presentation and the typical cautionary language applies. So let me start with a quick snapshot of what we accomplished in 2019, which I know seems like a very long time ago. But it's important to highlight what we've achieved because it has formed the foundation for why we will successfully navigate these challenging times, and it illustrates what this great company is capable of accomplishing in the future. I'll start with operational excellence. For the last 6 years, we've been focused on making sure we have a competitive cost structure and that we're continually improving our operating performance. In 2019, we achieved our target of $100 million of OpEx improvements across wood products and timberlands. And that was on top of the $550 million we'd already achieved in the previous 5 years. The culture of operational excellence that we've built at Weyerhaeuser is one of our greatest success stories, and I'll talk a little bit more about that later on. One of the reasons we've been so successful with OpEx is because we're focused on controlling the controllables. And in 2019, we reached record low controllable manufacturing costs in our OSB and lumber businesses. This low-cost structure helped us finish the year with the highest margin versus our peers in all of our manufacturing businesses. We also achieved record high EBITDA in our real estate, energy and natural resources businesses. And we achieved a 61% premium to timber value on our real estate sales, which was well above our target. Overall, our business performed very well in 2019, even with market headwinds that challenged our industry for most of the year, and we were able to return more than $1 billion of cash back to shareholders. But strong financial and operational performance is only part of the story. We also have a very strong focus on sustainability and an excellent story to tell there as well. For decades, Weyerhaeuser has been at the forefront of sustainability leadership. And for decades, we have routinely set and accomplished environmental, social and governance goals. I'll highlight just a few of our key results from 2019, starting with tree planting. Very few companies can say that sustainability is truly at the heart of their business, but that is certainly the case at Weyerhaeuser. Every year, we plant more trees than we harvest, about 150 million on average. Over the last decade, we've planted more than 1 billion trees. And our environmental stewardship goes well beyond sustainable forestry. We also reduced greenhouse gas emissions and improved energy efficiency in our manufacturing facilities. And the wood products that we make every year store the equivalent of 9 million metric tons of CO2 for the lifetime of those products, which has the same effect of taking 2 million cars off the road each and every year. We're extremely proud of our constantly improving environmental story at Weyerhaeuser, and we're equally proud of the progress we've made when it comes to social responsibility, both in our workplace and in our communities. Safety is particularly important to us at Weyerhaeuser. We have a long track record of excellent safety results. And last year, we continued to improve with a 35% reduction in injury severity year-over-year. We're also very focused on building strong leaders who know how to create an inclusive work environment. We've had formal leadership programs in place for many years. And in 2019, more than 300 people participated in those programs. And finally, for most of Weyerhaeuser's history, our people have been cultivating a strong connection to the communities where we operate. The company makes donations, of course, but I'm always most impressed by the time our people spend supporting causes they care about. In 2019, we logged more than 22,000 hours of volunteer time that our employees spent lending their expertise and energy to important projects that make our communities stronger. So I'm really proud of our overall sustainability performance. And we also receive a wide variety of external recognitions each year. Along the bottom of the slide, you can see just a few examples, and you can find many more on our website. So that's how we ended 2019 and entered 2020 with industry-leading operating performance, a deeply held commitment to our people and our communities and a healthy workplace culture. And while we could never have imagined that 2020 would bring the challenge of a global health pandemic, we are well positioned as a company to handle this challenging environment. So let me take a few minutes to talk about our response to this unprecedented situation. I'll start with our initial response, which was to ensure the health and safety of our employees. As I mentioned, Weyerhaeuser has a very strong safety culture. So for us, there was no hesitation as we took immediate action to implement strict safety protocols at all of our sites. We also established clear guidelines for our vendors, contractors and other visitors. We suspended all air travel and moved quickly to set up our office workers to work from home. Since early March, we've been in frequent communication with all of our employees to keep them up to date, motivated and connected as we manage through the pandemic together. From an operational standpoint, our sales volumes remained steady through the first quarter, even as housing activity began to weaken in March. And in fact, we delivered very strong financial results in the first quarter. In April, we began to take temporary downtime at targeted locations to balance production with lessened demand. And we will continue to dynamically adjust our operating posture as needed. Overall, our low-cost structure and strong customer relationships have served us well in managing through the initial stages of this crisis. That said, even with our strong operating position, given the current market conditions and economic uncertainty of this situation, we made the decision to take proactive steps to preserve our liquidity and financial flexibility as we manage through the months ahead. These actions included refinancing our 2021 debt maturities, reducing our capital expenditures and other discretionary spending and temporarily suspending our quarterly dividend. In alignment with all of these actions, we've also reduced executive and Board compensation for the remainder of the year. These actions are temporary, and we believe prudent to ensure that we have the financial flexibility we need to navigate through this uncertain period. But I want to be clear, our company is well positioned to navigate this challenging environment, and we will be ready to capitalize on opportunities as the economy starts to recover and we expect to generate long-term shareholder value for our shareholders. I say that with confidence because the quality of our assets remains strong. We continue to operate our businesses well, and we have remarkable people at Weyerhaeuser. No matter what's happening in the broader economy in our markets, we are always focused on 3 key levers to drive value for our shareholders; an unmatched portfolio of assets, industry-leading performance and disciplined capital allocation. And as we've done for over 100 years, it's all built on a strong foundation of environmental stewardship, social responsibility and good corporate governance, and I'll speak to each of these in a bit more detail, starting with our unmatched portfolio. Weyerhaeuser is the largest private owner of timberlands in North America with 11 million acres of high-quality, highly productive timberlands of the United States. We manage another 14 million acres in Canada. We also have a real estate, energy and natural resources business, which focuses on maximizing the value we get from every acre. And we're one of North America's largest producers of wood products with 35 manufacturing facilities and 18 distribution centers. All of our businesses have significant scale and industry-leading performance. Over the many decades of running these businesses, we've developed deep, unrivaled expertise in creating and capturing superior value across every step of our supply chain, that begins in our timberlands, where we grow proprietary seedlings and use customized planting practices that are specifically tailored to each acre we own. As the seedlings grow, we use targeted silviculture prescriptions to maximize the volume and value of the trees we grow. When our forests have grown to the point of financial maturity, we harvest them. We make data-driven decisions to merchandise each tree into the highest value mix of logs based on current market conditions. And we deliver those logs to a diverse mix of customers, including some of our own mills. Because we harvest and haul around 36 million tons of logs a year. We also have considerable operational and logistical advantages. This scaled delivered log model is a differentiator for us, and it's something our customers value and are willing to pay for. In our wood products business, we purchase logs from either our own timberlands or other timber growers, and manufacture them into high-quality lumber, OSB and engineered wood products. Our mills are efficient, reliable and low cost. We focus on producing the highest margin mix for a diverse set of customers through a variety of channels, including our own distribution centers. And in addition to this efficient end-to-end supply chain, we're also continually evaluating every acre we own to ensure that we're capturing the highest value. That includes capturing value through premium land sales in our real estate business and royalty and lease income from energy and natural resources. Across all of our businesses, there's 1 consistent theme, we're constantly striving to be the best and to drive incremental value at every step of the process. So that's a high level snapshot of how our businesses work. Now let me turn to each of our individual business lines. At the foundation of our company is our timberlands business. Weyerhaeuser has an unrivaled portfolio of timberland assets with substantial enduring value. As I mentioned, we're the largest private owner of timberland assets in North America and our forests are truly a unique asset class, that's because our trees continue to grow in size and value every year regardless of what's going on in the markets. Historically, timberland acreage not only holds its value well across market cycles, but also grows in value over long periods of time. So our 11 million acres of timberlands are a truly irreplaceable portfolio of species diversity, unmatched scale and optimal regions for both domestic and international log sales. Our diversified customer base positions us well to capture the full value of those timber assets. We're aligned with a broad mix of third-party customers. Our timberlands are located near our internal manufacturing facilities, and we have great access to ports in the west and south to reach key export markets as well. This robust customer mix allows us to flex supply across our customer base to meet dynamic market demands and capture new opportunities. Managing a large diversified portfolio presents opportunities beyond core timber to drive incremental value back to the acre. Our real estate, energy and natural resources business is laser-focused on maximizing the value of every acre we own. A key aspect of that is identifying the acres across our portfolio where we can capture a premium to timber value. We do that by analyzing a multitude of different attributes on our land to identify tracks that would support a premium that requires minimal investment. We are very disciplined about what we sell. It's been less than 1% of our acreage annually, and we have consistently captured a substantial premium to timber values. Our energy and natural resources business captures incremental value of our acreage by generating lease and royalty income from a variety of non-timber resources. This includes things like construction materials, oil and gas or other renewable resource characteristics on the land base. Overall, our real estate need in our business has demonstrated its ability to generate consistent, reliable cash flow over time to support our capital allocation priorities. And finally, we're one of North America's largest wood products manufacturers with unmatched scale, brand and reputation, diverse mix of products and an industry-leading cost structure. Our manufacturing facilities continue to outperform our competitors even under the most challenging circumstances. In this business, we produce lumber, oriented strand board and engineered wood products at 35 mills across the U.S. and Canada. These facilities are well aligned with our timber base, and our 18 distribution centers are strategically located in prime markets. This mix of assets and geographic coverage allows us to serve a broad mix of customers across North America. We primarily serve the new residential market, but we also serve the repair and remodel in commercial markets. This mix allows us to flex when needed and capitalize on opportunities under a wide array of market conditions. We have long-standing relationships with virtually all of the key homebuilders, distributors and big-box retailers in the U.S. and Canada. And our customers value our quality, consistency and reliability. So we have an outstanding portfolio of assets, but generating value from those assets also requires intense focus on constantly improving our operating performance, which we've been focused on for several years. We call this work operational excellence, or OPX, and it's the second part of our investment thesis. Since 2014, we've captured $650 million of OPX improvements across our businesses. This accomplishment is a testament to the great work our employees have done to make OPX a core part of our culture. And we now have a competitive cost structure that serves us well under any market condition. Our OPX work has also translated into outstanding relative performance, and we currently hold top competitive positions in all of our business lines. Although we've made great progress with OPX, we're never satisfied and we know that we need to keep pushing to improve as a company. This year, we rolled out what we're calling OPX 2.0, the evolution of operational excellence at Weyerhaeuser. You can see in the large green box that we will continue our relentless focus on driving margin improvements, but we're also layering in 3 additional focus areas: future value, cost avoidance and efficiency. As our employees continue to drive OPX improvements in all of these areas, I'm convinced we will be able to continue generating even more value for our company and shareholders over time. Now let me turn to the final pillar of our investment thesis, which is disciplined capital allocation. We know that this is essential for driving shareholder value over time. At Weyerhaeuser, we're committed to balancing our 3 key capital allocation priorities, returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure. As you can see in 2019, we again stayed true to this balanced approach by returning over $1 billion in cash to shareholders, investing $380 million back into our businesses through a disciplined CapEx program and taking actions that reduced our future pension obligations by over $1.5 billion. As we announced last week, we have made several prudent and temporary adjustments as we navigate this uncertain environment, including a temporary suspension of our dividend. But I'll reiterate, we're committed to reinitiating a quarterly dividend as soon as practicable, and our Board will continue to review this on an ongoing basis. With our unrivaled assets, industry-leading performance and disciplined capital allocation philosophy, we believe we're well positioned to weather the uncertain market conditions we face this year and fully capitalize on market opportunities as the economy recovers. We ended 2019 with 1.29 million housing starts in the U.S. For much of 2020, we do expect continued housing growth after we get through this pandemic and the economy begins to recover, that's primarily because there is still a significant amount of underlying demand for housing in the U.S. Unlike where we were coming out of the great recession in 2008, 2009, there's currently a shortage of housing in the United States. Over the last decade, we have severely underbuilt single-family homes when you look at population growth and household formation data. In addition, the long-term fundamentals for repair and remodel remain intact as aging housing stocks should drive demand into the future. And there's another reason to be optimistic about the future of our company and industry. As society continues to focus on the impacts of climate change and global warming, we believe the role of forests and wood products are a key part of the solution. Our growing forests absorb carbon dioxide from the atmosphere. When we harvest a mature tree to make wood products, the carbon is sequestered in that wood for the lifetime of the product. Wood products are, of course, endlessly renewable, and they also require fewer emissions to manufacture compared with alternatives such as concrete and steel. They really are the ultimate green product. We believe our company and our industry can be part of that solution. So in closing, I'd just like to share our company's vision. In challenging times, I personally find it comforting to be associated with the company that has such solid core values, a deep commitment to its people and a relentless focus on excellence in everything we do. These are the attributes that define Weyerhaeuser, and they are our guidepost during times of uncertainty. This vision is also a reminder of how far we've come as a company, all of the challenges we've risen to meet during our 120-year history. I have no doubt that we will weather these challenging market conditions, as we always have done, and come out the other side even stronger than before. And so with that, I think we will open up the line for questions.

Okay. Devin, our first question is, can you talk about how the company is thinking about dividend and share buybacks?

Sure. Well, maybe I'll start with just a little context for the actions that we announced on May 1. Now obviously, these are extremely difficult decisions, and we really look at those through the context of the environment and the market conditions that we see. Obviously, this is really an unprecedented situation in terms of what's going on with the pandemic, with broad swaths of the global economy being shut down, unemployment at really record levels and I'd say no clear trajectory on the path of recovery. And so really, that's the lens through which we really look at what's going on. And with those things, we're expecting an erosion in housing and residential construction and, to some extent, larger repair and remodel activity here in the near term. And so we're really in the early stages of seeing what that's going to look like, and we expect that it's going to be challenged in a choppy pricing and demand environment for our products in 2020. And so that's really -- that's the backdrop for the decisions that we made. Obviously, with respect to the CapEx and the dividend decision, those are difficult decisions and one that we don't take lightly. But we are committed to reinitiating a quarterly dividend as soon as practicable. The Board is going to continue to look at that on an ongoing basis. And really, the considerations for when that will be reinitiated are really a function of seeing firm evidence of stabilization and recovery in business conditions. And obviously, how that flows through to our customer demand and cash flow and liquidity positions, et cetera. And so again, we'll continue to watch that and look to reinitiate the dividend as soon as possible. With respect to share repurchase, as we've said, share repurchase can be a good tool for returning cash to shareholders under the right circumstances. I think we look at the underlying value of the company, not necessarily being fully reflected in the stock price now. And so that may be something that we look to in the future. But we're going to balance share repurchase against our other capital allocation priorities. And I would say, as conditions start to improve, we're likely to prioritize reinitiating a cash dividend over share repurchase here in the near term.

Okay. Our second question is, what are your thoughts on future merger and acquisition activities for the company?

Yes. So obviously, we are always looking for opportunities to create value for our shareholders. And at times, mergers and acquisitions can be part of that strategy. I would say here in the near term, while we'll never foreclose looking at opportunities that create value, I think our primary focus right now is managing through this environment and getting the dividend reinitiated. Certainly, as we come out of this period, we're going to be in a stronger financial position because of some of the actions that we've taken recently, and so certainly with a strong balance sheet that positions you to take advantage of those opportunities when they arise. So we're always keeping our eye open for opportunities to create value, and we'll continue to do so going forward.

Okay. Our next question is, how has the use of robotics increased in your business?

Sure. Well, first, I guess I'll speak specifically to robotics and then maybe broaden that up to talk about automation and technology more broadly. We are using robotics in our manufacturing facilities, and that's something that has been increasing over the years. And it's obviously something that when used appropriately can create value, and we're seeing good returns on investment for some of the robotics projects that we've got in our wood products manufacturing. You know I'd say over and above just specifically robotics, we are continuing to look for opportunities to drive further automation into our businesses as a whole. And we see that certainly on the wood products manufacturing side, we see it in the timberlands operations as well. A great example of that has been the work that we've done on steep slope logging and leveraging more automation and technology to both improve efficiency, but also improve safety in our operations there. We've really been looking to find new applications for drones across our businesses. And so I think technology will continue to be an opportunity for us to drive value that really cuts across all of our businesses and our corporate functions as well. It's one of the things I think that is really exciting about where we, as an industry, are and look forward to finding more of those opportunities for automation and technology in the future to drive value for the company and improve safety for our employees.

Okay. Next question is, how are you thinking about China right now? And do you think any of the rising tensions will have any impacts on your operations?

Sure. Well, I'll answer that in the near term. We've recently seen opportunities open up in China. We've had a longstanding trade dispute going on with China that resulted in some retaliatory tariffs on our products being sent into that market, and that was a little bit of a headwind for us. We had to continue to ship into that market. But as of the last month, 1.5 months, those retaliatory tariffs on imported logs have gone away. And so that's opened up an opportunity for us into that market. And so we've been ramping up our production both out of the west and the south into the China market. I think over the long term, China remains an opportunity for us to continue to grow into that market. They don't have a domestic fiber supply, and so they need to import logs and other wood fiber from other countries. North America will continue, I believe, to be part of that opportunity. And so in terms of the current trade relationship with China, it's certainly been rocky, things change sometimes on a day-to-day basis, but we'll continue to manage through that. We've got good, longstanding customer relationships there. And so I expect we'll continue to navigate through just fine.

Great. And this will be the last question. As you manage through the current pandemic, how have you been engaging with shareholders?

Well, we always spend a lot of time reaching out and engaging with our shareholders. We think that, that is an important part of our value proposition is being available to participate in that engagement. Certainly, after the decisions that we announced on May 1, we've been spending a lot of time with our shareholders, helping them understand the rationale and the context for the decisions and kind of how we're viewing the future. And so that's something we'll continue to do. It's an important part, I think, the shareholder engagement, and so we expect that to be continuing to be at the forefront for us. Okay. I believe that was the last question. So at this point, we'll go ahead and conclude the meeting. I'll just end by saying thank you for joining us today, and thank you for your continued support of Weyerhaeuser Company. Take care.