Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

Good afternoon to those on the East Coast. I'm Collin Mings, the Timber REIT Analyst here at Raymond James. I'm pleased to be joined today by members of the Weyerhaeuser leadership team. In a minute, I'll turn it over to Devin Stockfish, President and CEO, to take us through the formal presentation. I'll then follow up the formal presentation with some Q&A focused on current events, obviously headlined over the last month or so by a sharp increase in lumber prices as well as management's outlook moving forward. We will also take questions from the audience, so please submit your questions through the platform and we'll try to get to those as well. With that very brief introduction, Devin, I'll turn it over to you.

All right. Great. Thanks, Collin. Appreciate the opportunity to speak with everyone today to talk about Weyerhaeuser Company. In addition to following along on your screen, a copy of today's materials are also available on our website. So we'll go ahead and get started. At Weyerhaeuser, we focus 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 ESG foundation, and I'll speak to each of these in a bit more detail. But first let me spend a moment on the COVID-19 pandemic. Although we expect market conditions to be challenged for much of 2020, Weyerhaeuser is well positioned to successfully navigate these unprecedented times. We have a strong safety culture. Our businesses have industry leading scale, cost structures and supply chain expertise, and an unmatched diversity of customers, products and geographic coverage. We have an unrivaled portfolio of valuable timberland assets and a Wood Products business with a proven ability to generate cash through adverse market conditions. And we've taken prudent and decisive actions to preserve Weyerhaeuser's financial flexibility, maintain our capital structure and ensure we have sufficient liquidity to weather this uncertain period, and I'll speak to each of those actions more in a moment. Let me move on to our portfolio, which is truly unmatched in the industry. Weyerhaeuser is the largest private owner of timberlands in North America with 11 million acres of high-quality, highly productive timberlands across the United States. We're also one of North America's largest producers of wood products with 35 manufacturing facilities that produce lumber, OSB and engineered wood products. We have 3 business segments: Timberlands, Real Estate, Energy and Natural Resources and Wood Products. All of our businesses have significant scale and industry-leading performance, and we manage them within a tax-efficient REIT structure. In fact, we are one of the largest REITs in the United States. Over the many decades of running these businesses, we've developed deep, extensive expertise in creating and capturing superior value across every step of our supply chain. From our proprietary seedlings to our efficient low-cost manufacturing facilities, we're constantly striving to be the best and to drive incremental value at each and every step of the process, and that includes capturing incremental value through our HBU land sale and energy and natural resources leasing activity. It's not just about being the best though, equally important is that we're doing it in the right way. We've been operating our businesses with integrity and a strong focus on ESG for over 100 years. Our commitment to environmental stewardship starts with our commitment to sustainable forestry practices, which goes back to the early days of our company. We're also very focused on minimizing the environmental footprint of our manufacturing operations, and our forest and wood products are natural climate solutions. Our millions of acres of forest capture carbon from the atmosphere, and we sequester 9 million metric tons of CO2 each and every year in the wood products that we produce. We also have a strong commitment to social responsibility and governance. These strong ESG practices help us attract and retain top talent, support strong relationships with our stakeholders and ensure that we're managing our business and resources in the right way for the long term. At the foundation of our company is our Timberlands business. Weyerhaeuser has an unrivaled portfolio of timberland assets with substantial and enduring value. As I mentioned, we're the largest private owner of timberland assets in North America. This is an unmatched portfolio of timberlands with both scale and diversity. We have 11 million acres of highly productive, high-quality timberlands across key growing regions. Of that, about 3 million acres are in the West. These are some of the best growing regions in the world, and these are premium assets: high-quality Douglas fir, strong domestic and export markets. We also have nearly 7 million acres in the U.S. South, high-quality Southern Yellow Pine plantations that allow us to access all of the key markets across the Southern U.S. And in the North, we have 1 million acres with a broad mix of species, including high-value hardwood sawlogs. Our diversified customer base positions us well to capture the full value of our timber assets. We're aligned with a broad mix of third-party domestic customers as well as our own internal manufacturing facilities, and we've got great access to ports to serve key export markets as well. Our robust customer mix allows us to flex supply across our customer base to meet dynamic market demands and capture new opportunities. Our export business out of the West is focused primarily on Japan, and it has been a significant value driver for Weyerhaeuser for decades. We have a unique business supplying premium logs to the post-and-beam housing market. We also have long-term relationships with key customers in a number of other Asian export markets, including China, and we're well positioned to serve these growing export markets over time. Timberlands have a number of unique characteristics that make it an attractive asset class. The key assets, the trees, continue to grow in size and value each and every year regardless of what's going on in the markets. Timberland acreage not only holds its value well across market cycles, but it has also grown in value over long periods of time. 85% of our assets are in our timberlands, and the enduring value of our timber portfolio has supported the underlying value of Weyerhaeuser over time and through market cycles. We're also very focused on disciplined management of our Timberlands portfolio. At the core of our portfolio management philosophy is the focus on continually optimizing and upgrading our holdings with a view towards owning the most valuable acres that will generate the highest returns for our shareholders over time. Managing a large diversified portfolio presents a number of opportunities beyond core timber to drive incremental value back to the acre. Our Real Estate and ENR business is very 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 unlock value by capturing a premium to the timber value. Our AVO, or Asset Value Optimization program, looks at a multitude of different attributes that can support a higher and better use valuation. We refresh this analysis routinely and have identified 1.3 million acres that have the potential of getting a premium value. This is a nimble, low overhead business that requires minimal investment. Our Energy and Natural Resources business looks to capture incremental value off the acre by generating lease and royalty income from a variety of nontimber resources. This includes things like construction materials, oil and gas or other renewable resource characteristics on the land base. The Real Estate and ENR business has shown an ability to generate consistent, reliable cash flow over time. Even with so much uncertainty from the COVID pandemic, we still anticipate generating around $200 million in EBITDA from this business in 2020. And finally, we are one of North America's largest wood products manufacturers. As I'll cover momentarily, we've made significant improvements in our Wood Products businesses that have reduced costs and improved profitability to maximize our margins through the business cycle. Our Wood Products business is an industry-leading, low cost producer of lumber, oriented strand board and engineered wood products. We have 35 mills across the U.S. and Canada that are well aligned with our timber base. We also have 18 distribution facilities. Our mix of assets and geographic coverage allow us to serve a broad mix of customers across North America. Our diversified mix of customers and end markets allows us to capture opportunities across a wide array of market conditions. We have long-standing relationships with virtually all of the key builders, distributors and big box stores. And our customers value our quality, consistency and reliability. We've been very focused on improving our operating performance across our Wood Products businesses, and we've made tremendous progress. Significant reductions in our cost structure have yielded real benefits, and we can now say that we've reached black at the bottom. Meaning, we're positioned to generate positive cash flow even in a pricing environment similar to the Great Recession. A core part of our overall strategy as a company has been our tireless effort and intense focus on improving our operating performance across the entirety of Weyerhaeuser. At the heart of this effort has been our operational excellence journey. Since 2014, we've captured $650 million of margin improvements across our businesses. It's been an incredible effort and has positioned our company to generate superior returns from our operations well into the future. This effort has cut across every aspect of our business and has become core to how we operate our company. And you can see how this has translated into improved relative performance versus our competition. We've made significant improvements over the last several years, and we now have industry-leading positions across all of our Wood Products businesses. Although we've made great progress in our operating performance, we know that we need to keep improving. So in 2020, we're rolling out what we're calling OPX 2.0. This is an evolution of operational excellence at Weyerhaeuser. We're maintaining our disciplined focus on cost and margin improvement opportunities just as we've been doing for the last several years, but we're also adding in future value creation, cost avoidance and efficiency. We believe that incentivizing these activities and behaviors will create a better business today and position us well for the future. Now let me turn to the third pillar of our investment thesis, which is disciplined capital allocation. We know this is a critical lever to driving long-term shareholder value. At Weyerhaeuser, our balanced capital allocation philosophy has 3 key priorities: returning cash to shareholders, reinvesting in our businesses and maintaining an appropriate capital structure. And while we've made several prudent and temporary adjustments to help navigate this uncertain and challenging environment, we remain committed to our core capital allocation priorities moving forward. As our market conditions deteriorated in April and early May due to the pandemic, we reduced our Wood Products operating postures and our Southern Timber harvest volumes to align with lower customer demand. We also announced a number of actions to preserve liquidity and financial flexibility and to ensure an appropriate level of leverage for the company. This includes, among other things, refinancing our 2021 debt maturities, reducing our 2020 CapEx, eliminating nonessential costs, reducing Board and senior management compensation and temporarily suspending a quarterly dividend. Now obviously, this is a very difficult decision, however, we believe it was prudent and appropriate in light of the highly uncertain impacts of the COVID-19 pandemic on our markets and the broader economy. Returning cash to shareholders through a sustainable dividend remains a key component of our long-term capital allocation approach. We've returned $8 billion in cash back to shareholders since 2014, and we're committed to reinitiating a quarterly dividend as soon as practical. Our Board will continue to review this on a regular basis. We're also investing back into our businesses through disciplined capital expenditures. These are organic investments to sustain and enhance our Wood Products and Timberlands operations. These projects have been a key part of our operating improvements and cost reductions. As I noted, we have reduced our CapEx for 2020 down to $270 million for the year. And the final part of our balanced capital allocation approach is maintaining an appropriate capital structure. Core to this is maintaining an investment-grade credit profile. We do have investment-grade credit ratings from both agencies. We have a net debt-to-EBITDA target of 3.5x over the cycle. With a softer pricing environment in 2019 and the challenged environment in 2020, our leverage ratios are expected to remain above the 3.5x target until markets and business conditions improve. We've taken a number of positive steps benefiting our capital structure, including extending our $1.5 billion revolver to 2025, refinancing our 2021 debt maturities at very favorable rates and reducing our future pension obligations by nearly 50%. With our unrivaled assets and industry-leading performance, we believe we are well positioned to fully capitalize on market opportunities going forward. While we started off the year on a very strong note in terms of housing activity, the COVID-19 pandemic has changed our outlook for the next several quarters. We're seeing record levels of unemployment, consumer confidence is down and credit availability has tightened, all of which are typically strongly correlated to residential construction. Collectively, we're expecting these factors will negatively impact new residential construction as well as, to some extent, the larger repair and remodel markets over the course of 2020. There are a few areas that are holding up better than others. Demand for fiber logs that go into the tissue and paper towel markets have been okay, as many of those end products have been in high demand in the current environment. Additionally, we've seen strong demand from the home improvement warehouse, do-it-yourself market, which makes sense given how much of the population has been stuck at home and taking on home projects. Some of that demand, we believe, is likely incremental demand, while some of it is pull forward of projects that would have been undertaken later in the year. So remains to be seen what the demand in that segment will be as we get deeper into summer and people start going back to work. We have seen some fairly significant improvement in pricing over the last several weeks in lumber and OSB. We believe that's largely a result of dealers, distributors and others in the channel taking their inventory levels down to very low levels and now needing to cover for deliveries as builders and contractors work through backlogs and finished projects. At the same time, significant production came out of the market in April and May, so there wasn't as much available product. We do expect the reduced new home starts will really start to impact lumber and OSB demand over the next couple of months as the current work in process is finished up, and we've already seen that starting to happen in the EWP market. As I referenced back on Slide 31, we are continuing to adjust our operating postures across our product lines to address the current market conditions. In April, we reduced our operating postures by 15% to 25% across our manufacturing businesses. Demand for our products improved sequentially in May. And compared with the first quarter, we're now expecting second quarter Wood Products production will be approximately 10% lower for lumber, 5% to 10% lower for OSB and 20% to 30% lower for engineered wood products. And we'll continue to adjust our production to meet profitable customer demand and market conditions moving forward. Notwithstanding our view that we're going to see a choppy few quarters in U.S. housing, our confidence in the underlying thesis for U.S. housing over the longer-term remains very strong. In contrast to the period following the Great Recession, U.S. housing is now severely underbuilt and evolving societal preferences as we emerge from this pandemic are likely to support strong demand for single-family homes in the future. We're likely to be in a low interest rate environment for quite some time, which should help on affordability. In the repair and remodel market, U.S. housing stock has continued to age, and we expect there to continue to be strong interest in the segment in the market in the future. So we're confident as U.S. housing growth will resume, as the economic fundamentals in the economy and consumer confidence rebound and stabilize, and this will be very supportive of demand for our logs and Wood Products. So lastly, just a brief comment here on climate change. As society continues to focus on the impacts of climate change and global warming, the role of forest and wood products as a key part of the solution will become more and more evident. The growing conversation around climate and carbon will, we believe, help drive incremental demand for our sustainable building products as well as potentially opening up additional market opportunities in our space. So in closing, we are in unprecedented times right now with this pandemic. This is having, and we expect it to continue to have, significant impacts on the global economy, on our markets and our business. We've taken a number of actions to position our company to weather this challenging time, but I'm very confident that with our portfolio of assets, our operating expertise, our industry-leading cost structure, our strong culture, our great employees and our track record of disciplined capital allocation, we're well positioned to navigate this environment and drive superior value for shareholders well into the future. And so with that, Collin, I think we can go ahead and open it up for questions.

Great, Devin. Great overview. Appreciate all the detail, covered a lot of topics there. But a few things I want to follow-up on. And again, as a reminder for those that want to participate through the platform, again, please submit your question, and we'll try and cover that as well in the remaining time. First thing I wanted to pick back up on a little bit is your prepared remarks on the Wood Products side of the business. Obviously, a sharp decline in March and early April, and you touched on some of the drivers you think that are now helping lift lumber pricing. Can you maybe just elaborate on the price improvement that you have seen here? Again, benchmark pricing is up, I want to say, for 7 consecutive weeks. But again, just elaborate a little bit more on the pricing, both really on the lumber and OSB side. And then you referenced kind of a ramp back in production. And again, you kind of had to be somewhat nimble on this front given the market dynamic. Maybe just elaborate a little bit more on what you're doing as far as bringing some of that capacity back online.

Yes, sure. Well, so let me start with the lumber and OSB pricing. And Collin, you well know, there's both a supply side and a demand side aspect to this. And I think really, what we've seen over the last several weeks is the perfect storm, where you saw inventory levels come down to really, really low levels across the channel. And really, when you go back to when the COVID pandemic really started to hit, there was a pause across the market in buying, and people did not want to carry inventory levels because of the level of uncertainty that was in the market. And so inventory levels came down pretty low. And when you think about the level of building activity, it didn't stop completely. Construction activity was deemed essential in most markets. There were some where you did see the construction activity have to pause because of local regulations. But by and large, you did see continued construction activity. And as the builders and the remodeling -- repair and remodeling segment continue to work through backlog and finish up projects that were underway, you saw continued construction activity, so there continue to be some demand. At the same time, that inventory levels ran really low and the industry as a whole reacted very quickly in terms of taking supply out of the market. And really, it was a pretty dramatic reaction when we saw whether it was 25%, 30% reduction in operation and production for lumber and something in that general neighborhood in OSB, that is a lot of capacity to come out in a short period of time. And so as customers were out trying to buy product to fill customer -- their customer orders, there just wasn't the availability that you typically see. And so that really, in our view, has been what's been causing that pricing to go up. I think as we think out over the course of the summer, obviously, there are a lot of things when we look out into the future that we don't know, but there are some things that we do know. We do know that new home sales and starts went down in March and April. We think they'd probably stabilize somewhat in May. But they're still lower than they were earlier in the year, and that needs to work its way through the process, and that takes time. So our expectation is you're not really going to see the full impact of that from a lumber and OSB perspective until you get probably late June and into July. I think as we look forward and think about pricing, we have -- we, Weyerhaeuser, have increased our operating rates, given the pricing and the demand that we're seeing in the market. It's hard to say for sure, but it's not unreasonable to think that others in the market are bringing production back as well. So the concern from our standpoint is if you see demand start to drop off a bit in July at the same time that you see all the production coming back on, that could be a headwind from a pricing perspective.

Got it. And then shifting gears over to the timberland operations. And again, you alluded to this in the comments as well, some of the adjustments you're making on the harvest side. Maybe just update us on what you're seeing in terms of pricing, both in the U.S. South and the Pacific Northwest, as again, some of these mills again obviously took some downtime, are now slowly ramping production back up. If you can just elaborate on the timber side, that would be helpful as well.

Yes. So I think in the West, we probably didn't see as much pullback in production across the system, which makes sense. It's a more tensioned wood basket than we have in the South. I think what we said on the Q1 earnings call was we expected pricing to be down slightly in the West, and that still sounds about right in terms of what we're seeing. Similar story in the South in terms of pricing and our expectations coming out of the Q1 earnings call. We did take some -- the harvest level down over the remainder of the year about 10%. Several others made public statements to that effect as well. We have seen some lumber production coming back up in the South. I would say there's still production that's not back in the system at this point. We're seeing lumber customers who -- if you were just reducing hours at the mill or kind of taking rolling production downtime, that's a little easier to add back in. I think you're seeing some of that come back on. If you completely eliminated a shift, though, or you've taken significant downtime, our sense is that folks are being a little bit more cautious in bringing that back until they have visibility on what's going to happen later in the summer. So I think the overall demand is probably not that far away from kind of what we were seeing at the earnings call, maybe slightly better, but not dramatically so.

Okay. Moving to capital allocation. Again, we've got one question on this as well from the audience. Just walk us through a little bit more of the decision to temporarily suspend the dividend last month. Can you just specifically discuss what led the Board to suspend the dividend in its entirety versus just reducing it? And as you look forward, what will Weyerhaeuser be focused on as it relates to reinstating a payment?

Yes. Well, what I would start with is just the context in the backdrop for making that decision. And really, it's both what we're seeing in the macro environment, the market conditions that we're seeing, but really also just the level of uncertainty that we have about what's going to happen over the back half of the year. And again, when you look at a global pandemic, a health pandemic, there's just inherently a lot of uncertainty around that. We know that we're seeing historic levels of unemployment. We're going to have a really dramatic drop-off in GDP in Q2. Consumer confidence, while maybe it's bottomed, it's still quite a bit lower than we saw earlier in the year. And I think there's just a lot of uncertainty around what is the trajectory to a recovery look like. And so that's the backdrop. Historically, when you see unemployment levels at 20% and a GDP reduction of 40%, that's not generally conducive to strong housing activity. And so notwithstanding the fact that certainly I think we're a little bit more optimistic on the depth that we would see in the contraction around housing, just given that May didn't drop off or doesn't seem to be dropping off as far as we had expected, I think there's still, at least from our perspective, some real concern and caution about how the remainder of the year is going to look from a residential construction standpoint. Again, when you just -- because you look at the overall state of the economy, unemployment, tightening credit, those things, generally speaking, are a headwind for housing construction. So as we look at all of that and overlay it on the uncertainty around just the trajectory of coming out of this and whether we're going to see another wave of COVID-19 outbreak in the fall, there are a lot of factors out there that led us to the conclusion in this environment with this level of uncertainty, the prudent course of action is to preserve liquidity, to ensure that we have the financial flexibility to weather this regardless of what path it takes and again to ensure that we're maintaining the right level of leverage and not continue to borrow to cover the dividend. So that's the backdrop. The decision of a suspension versus a cut, part of that is really trace back to the level of uncertainty on what the back half of the year is going to look like. But that all being said, we remain committed to returning cash to shareholders as soon as we see what we believe as things start stabilizing and we feel like we have some real visibility on how things are going to recover, both in magnitude and time line, we're going to continue to look at that. And as soon as we have visibility on what things look like from a financial market perspective and translating into our cash flows, then we'll look to reinitiate the dividend at that point. So it's something we're going to continue to look at it on a regular basis.

Okay. Well, appreciate the update today, Devin. We are about out of time. So I do want to thank again the Weyerhaeuser team for participating today as well as all of the audience members for joining the virtual Nareit meeting. So again, thank you very much, and have a great rest of the conference.

Terrific. Thanks, everyone.