Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

I'm very pleased to have with us today Devin Stockfish, the CEO of Weyerhaeuser. It's actually a very interesting time to have him with us. Just last night, we got the mid-week lumber and panel prices. They all hit new all-time record levels on Tuesday evening. So with that, I'm going to turn it over to Devin. He's going to talk with us, I think, not only about sort of what's going on in the downstream processing businesses, that are a part of Weyerhaeuser's taxable REIT subsidiary, but also, we're going to focus most of our time on the timberland, which really is the core of Weyerhaeuser's asset base. It is the largest timber company in the world, and has some of the premier assets in the United States in timberland. So with that, Devin, take it away.

All right. Great. Thanks, Mark. Well I appreciate the opportunity to be here with you today, virtually, to talk about Weyerhaeuser Company. I have a few prepared slides that we'll go through, and then we'll just open it up for Q&A for most of the time. So if you want to go ahead and click the slide. As usual, I will be making some forward-looking statements. So the typical cautionary language does apply to those slide -- those statements. Go ahead and click the next slide. So as I think many of you are aware, we have 3 key levers that we focus on to drive value for shareholders: an unmatched portfolio of assets, having industry-leading performance and disciplined capital allocation. In terms of our portfolio, as you may know, we are, by far, the largest private owner of timberlands in North America. We have 11 million acres of high-quality, highly productive timberlands across the key growing regions in the United States. We're also one of North America's largest manufacturers of wood products. We have 35 mills across North America, where we produce lumber, oriented strand board and engineered wood products. We've been on a journey over the last several years, really to improve our operating performance. A big piece of that has been our OpEx initiatives, where we've captured nearly $650 million of OpEx opportunities. Since 2014, we've identified another $50 million to $70 million for 2020. That's been a big part of what we've been doing at the company, and really it's positioned us to be across all of our business, driving industry-leading performance, which really set us up well going forward. And then the third pillar around our shareholder value is just really around disciplined capital allocation, and I'll touch on that more in just a moment. You want to click to the next slide for me. But first, let me just spend a few minutes talking about some of the things that we've been doing at Weyerhaeuser over the last several months to drive value for shareholders. Starting with strong performance. Really, I couldn't be more pleased with how our organization has responded and navigated to the pandemic. We've continued to drive very strong performance across the organization, notwithstanding the challenges that we've seen around markets, supply chains and just the general safety challenges of operating a business during a global pandemic. So really pleased with how the organization has performed through this period. We're also taking steps to reduce our leverage, a couple of exciting transactions in Oregon. And really, the essence of this is really optimizing and improving our overall timberland holdings in the state of Oregon. It's a combination of transactions whereby we're selling some lower quality, lower-performing timberlands in Southern Oregon, and purchasing some really high-quality timberlands that are right within our wood baskets, key wood baskets, in Mid-Central Oregon. The net-net of this transaction is going to be an incremental approximately $20 million per year of EBITDA over the next 15-or-so years. I think it's a great example of the work that the team is doing to continue to find ways to optimize and improve our portfolio of timberlands. We recently announced some leadership and organizational changes that will have Russell Hagen moving from the CFO role into a newly created Chief Development Officer role. I'm really excited about this organizational change, and it's really a function of bringing our real estate, our A&D, our ENR and our business development teams, all under one single leader, to make sure that we're aligned and really facilitating collaboration from end-to-end as we manage our portfolio of businesses. As many of you know, Russell has a very unique background. He's got a background in real estate. He's done ENR. He's a great deal guy, and obviously, has a really strong financial acumen. So I'm super excited about what Russell is going to bring to this new organization going forward. He's going to do some great things for us there. We also recently announced a new sustainability strategy that lays out some ambitious goals around sustainability and commitments over the next decade. It really builds on the strong foundation that we've had for a very long time around environmental stewardship, social responsibility and strong governance. And it really, I think, highlights that sustainability is built into the day-to-day operations of our company. We're also highlighting, as part of that, what we're calling 3/30. It's 3 focus areas where I think we're uniquely positioned to drive some real meaningful benefits to society around climate change solutions, sustainable housing for people and thriving rural communities. And lastly, we did make some changes and announcements that are temporary in nature earlier in the spring to really position ourselves to maintain our financial strength and flexibility as we navigate this pandemic. So overall, not only have we not been standing still during this time, we've been taking concrete actions to make the company stronger. And so I'm very confident we're going to exit this pandemic time period in a stronger position than we went in. You can go to the next slide. So coming back to disciplined capital allocation, the 3 key priorities for us around our balanced capital allocation approach are returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure. As I noted, we did make some temporary changes to really maintain that flexibility and financial strength. But our core focus on these 3 areas remains unchanged. In the near term, we're really focused on continuing to bring down our leverage and reinitiate the quarterly dividend. We'll continue to look for opportunities to incrementally improve our portfolio and our assets. But overall, our commitment to these 3 key priorities has remained unchanged. Go on to the next slide. So turning to markets here for a moment. The last several months have been really just a remarkable, if albeit somewhat surprising period, particularly in the lumber and OSB markets. And I think that's a function really of 3 things. First, the torrid pace of repair and remodel activity, and that really goes back to the beginning of the pandemic. It's remained strong for the entire period. It has been a key driver, I think, for the overall demand. The second piece has been just the recovery in residential construction, which has been stronger and quicker than we had anticipated a few months ago. And then you overlay that against a very low level of inventories throughout the channel that was primarily a result early on of so much of the industry reducing capacity and production when we're at the early stages of the COVID pandemic. And so when these 3 things came together, it's really just been the perfect storm, and it's resulted in, as Mark alluded to earlier, historic levels of pricing for lumber and OSB. In terms of the log market, as is typically the case, there's a pretty strong correlation between Western log demand on the domestic side and what's going on in the Western lumber market. So as the lumber markets have improved in the West, we've seen the Western log markets improve as well. On the export side out of the West, as we mentioned on our last earnings call, the Japan market has softened a little bit. That's primarily a result of just lower housing starts that we've seen in that market as a result of COVID and a little bit around the increase in the consumption tax. In the China market, again, as we mentioned on our earnings call, with the New Zealand volume coming back into the market post-COVID, and that European salvage wood coming back into the China market, after they worked through some of their logistical challenges related to COVID, that has put more volume into that market, softened pricing a little bit. So we have really swung more of that China volume back into the domestic market in the West just to take advantage of the better pricing and margin opportunities. And then, lastly, on the Southern log side, I'd say the Southern log market is okay. We've seen that market hold up okay, reasonably well. The log decks across most of the South on the sawlogs side, I'd say, are in pretty good shape, if not a little full. Not all that unusual for this time of year. We're probably going to see a little bit of an impact from Hurricane Laura in parts of Louisiana and Arkansas, but I would expect that to normalize reasonably quickly. So overall, looking across all of our markets, I'd say, certainly, they're in better shape, in certain cases, in much better shape than we anticipated just a few months ago. You can go to the last slide for me. So again, the investment thesis, where we drive value for shareholders, is about having the best assets, doing the best job at managing those assets and having industry-leading performance and being very thoughtful and disciplined around our capital allocation. The only other thing that I would mention here is just the company's long-standing commitment to ESG. And that goes back to the early days of the company in terms of how we've sustainably managed our timberland portfolio. We're also very focused on minimizing our footprint across our manufacturing environment. And I think the wood products and the timberlands are really a key part of climate change solutions, which, as we, as a society, really focus more and more on global warming and climate change, I think the role of sustainable wood products and the forest as part of the solution will become more and more evident, which, ultimately, should drive incremental demand for wood products and perhaps open up opportunities around the carbon markets and other environmental services. So that's really what I had in terms of prepared remarks, Mark. I'd be happy to open it up for questions and answer anything that people have on their mind.

Okay. Well listen, I think to start off, let's just talk a little about the dividend. And I don't want to get you in front of your Board of Directors. But maybe as we think about dividend restoration and clearly, you've got a lot of tailwind now with these stronger products markets. Can you just give us some thoughts about what kind of potential timing? And then just your dividend strategy going forward?

Sure. Yes. Well as we were talking before the call here, Mark, if you would have asked me earlier in the year, what I thought our markets would be doing with double-digit unemployment, a 30-plus percent reduction in GDP and tighter lending standards, certainly, I would have had a different view on what market conditions would be than where we're standing today. So certainly, we've been encouraged by what's been going on in our markets. And as you say, that's been a tailwind. So as we look at this, and this is something that our Board is continuing to look at, we're watching markets. We're watching macro conditions. I would say as this has extended further, and we're now into September, and the markets continue to remain strong, I think that gives us a lot more optimism around the strength of this market as we go deeper into the fall and winter time period. So what I would say about the dividend in terms of timing, I think, at this point, it's definitely sooner rather than later. It's something we're continuing to watch. And I'd say in terms of the structure, Mark, a few comments there. First, the commitment to returning a significant amount of our cash back to shareholders, that remains unchanged. That's a fundamental tenet of our capital allocation philosophy, and that will continue. In terms of how we structure the dividend to accomplish that goal, I think we're going to be very thoughtful about a few different things. Number one, obviously, the dividend has to be structured so that we can cover that dividend across business cycles so that we can cover the dividend with the operating cash flow that we're generating from the businesses. And I think taking into consideration the cyclicality of some of our industries, and the variability of cash flow in certain of our businesses. And so as we think about setting that dividend going forward, again, it's about making sure that we're returning a significant amount of cash to the shareholders, but also doing it in a way that's sustainable and appropriate for our portfolio of businesses and the cyclicality of the industries that we're in.

Okay. I think that's really, really helpful. Is there a way -- are there ways that you've been looking at that can provide more stability and certainty to that dividend during recessions? I mean if we really -- if we just look back, not only the suspension earlier this year, but the fact that Weyerhaeuser had to cut its dividend by 90% in '08 and '09, are there mechanisms or structures that you might use to provide public investors with a more predictable, more certain dividend stream?

Yes. I think there are, Mark. And we're looking at a number of different structures to accomplish that goal. But as you think about our portfolio of businesses, we have some businesses, obviously, where there's a little bit more clarity and certainty around the cash flow, and that starts with the Southern Timberlands business, Western Timberlands business, the real estate and ENR business. Those are all fairly predictable cash flows. You'll see a little bit of variability in the West. But generally speaking, we have pretty good line of sight as to the cash flow in those businesses. When we think about the Wood Products businesses, the EWP business is relatively stable, but there's variability in terms of the OSB and the lumber businesses. I think we've done a good job, over the last several years, with the cost structure to take a little bit of that downside away and push the floor up. But that being said, it is just the nature of those businesses that there's variability in their cyclicality. And so I think as we think about this going forward, we're thinking about a lot of different types of structures, one of which could be a base dividend that's really structured off of those more predictable cash flows with a variable piece on top of that, that's more tied to the wood products, more cyclical businesses. So we're looking at a variety of options, but I do think there's a way to accomplish that goal going forward to provide more certainty around the cash flows and tying the dividend to what we can see in the future.

Okay. Just a couple of other questions along the same line. One is share repurchase activity, because at points in the past, Weyerhaeuser has done share repurchase. How do you think about that as part of your equation going forward in terms of returning value?

Right. Well I think, certainly, in line with the commitment to return cash to shareholders, that share repurchase can be an appropriate way to do that under the right circumstances. And so for us, as we think about going forward, really, when we find a situation where there's a disconnect between where the share price is trading and where we think the intrinsic value is, I think those are the moments where share repurchase can be a good way to create value for shareholders. So again, it's more opportunistic. It's more of that situation where we feel like there's a real disconnect between where the share prices are trading and where we think the true intrinsic value of the company is.

Okay. And again, along the same line, just as we look forward, how are you thinking about managing the balance sheet? And what sort of an appropriate level of leverage is for Weyerhaeuser's? It's constituted right now with kind of a mix of very stable businesses, but also the volatility from wood products.

Yes. Well I think certainly, part of what we're doing right now in reducing the overall leverage is to really bring that down to a point where when you're in the down part of the cycle, as we saw for a good portion of 2019, and frankly, a few months ago where we thought we were going to be for most of this year, that you don't have as much pressure on that leverage ratio. I think we found ourselves trading well above that 3.5x net debt-to-EBITDA target level that we've had. And so we're really focused on bringing our gross debt down over the course of this year to give us more flexibility and less pressure when we do find ourselves in those down periods, which will come from time to time because that's just the nature of the industry.

Yes. And I guess just one final question along those lines. You mentioned the fact that you're in a CFO search right now. Are there particular kind of skill sets or kind of experiences that you and the Board are thinking about as you look for a new CFO?

Yes. Well first and foremost, we're looking for a seasoned, experienced finance executive that's got experiences with large publicly traded companies. I think part of what we're always looking for is someone that is a good cultural fit and buys into the core values of the company. I think having some background in an industrial environment or other environment where operational excellence is a key part of the strategy is something that we're looking for. To the extent we can find someone that has experience in commodity markets, or natural resources, or in the REIT space, I think all of those things can be helpful as well. And I think at the end of the day, we're looking for someone that can come in and really lead a world-class finance organization, have a good reputation and good rapport with our investors and other stakeholders and really help us drive the strategy forward.

Okay. All right. Let's start over and just talk a little bit about portfolio. I'm curious as to whether you're pretty comfortable with the portfolio as it is right now. Or whether you could see this moving to more just a kind of a timber-focused company rather than a company that's got both the kind of stable timber business as well as the more cyclical wood products businesses?

Yes. I think at this point, Mark, we like the portfolio as it is. That's not to say that we're not always tweaking around the margins. Obviously, on the timberland side, we're going to continue to look for ways to optimize. But in terms of the manufacturing businesses, I think there's a nice synergy between the Timberlands business and the Wood Products business, particularly on the lumber side. I think we're still looking for more opportunities to drive more of those synergies between the two. And really, as we think about how we run those businesses, we've really focused on making sure that we're industry-leading in each aspect of the business so they can stand alone and then look for opportunity to drive incremental value between the two. And I'm just really pleased with how much progress we've made on the Wood Products side, I think really just a dramatic improvement. Have a lot of confidence in the leadership team that's running our Wood Products business now to continue to drive further improvements in the business on the cost side and just overall operating performance. So again, pleased with, I think, the portfolio as it stands. But as we've always done, we continue to look at that. And if we think there's a way for us to create value by making changes, then, certainly, that's something we would look at.

Okay. All right. That's helpful. And then, I guess, just toggling over to your timber business. One of the striking features over the last decade has been the fact that we've had good lumber markets and we've had bad lumber markets, but we've continued to have relatively weak sawtimber pricing in the Southern U.S. And then -- and when I talk to people in the industry, some people go, "Well you have to -- you're going to have to bring this accumulated inventory down." Other people say, you've just got to get the inventories moving down rather than down to any given level. I mean what are the pieces of the equation in your view for improving that kind of sawlog pricing? Because effectively today, it's at about 55% or 60% of where it would have been 15 years ago.

Yes. Well I mean, it comes down to supply and demand, and that's really the question within each individual wood baskets. And to the extent that you've got a large oversupply of inventory that is going to weigh on pricing. And I think the way that I look at it is, it's going to be something that improves over time and it's going to happen wood basket by wood basket. I think, in some markets, it's going to be slow, where you have a lot of inventory on the stump. If wood products manufacturers have lots of different places they can go, then there's negotiating leverage with respect to price. As that inventory level comes down over time, that comes a little bit more into balance. The thing, though, I do think that gives me some optimism that we are on the upswing there over time, is just the amount of new capacity that has come into the South and the amount of new capacity that I'm anticipating coming in, in the years to come. The U.S. South is, in my opinion, one of the best places in the world to manufacture lumber. And we may have seen a little bit of a pause this year in terms of new announcements because of just the circumstances with the pandemic, but I have every expectation that, as we get into the end of this year and early next year, you're probably going to see some new announcements coming, and people will continue to reinvest. And so anytime you put a greenfield mill into a wood basket, as I've said, you can draw a circle, 70 to 80 miles around that, and that's about 1 million tons for a medium-sized mill of additional demand. And so as you see those continue to come over time, you'll see that tension up. But I think in some markets, it's just -- it's going to be a slow process.

So would you -- just on average for kind of the -- for the investors, how would you have them think about sort of the pacing and timing of what they might anticipate kind of across the saw? Because it's a big lever for you guys. I mean, that the price of the sawlog right now is probably $22, $23. 15 years ago, it was $40. You probably do what 1.5 tons per acre to 2 tons per acre per year. So incrementally, it's a big issue in terms of your timberland cash flows.

Yes, sure. And as we've said, about a $5 per ton increase in Southern sawlog prices is in the neighborhood of $70 million of EBITDA. So no question that we've got some leverage there. Mark, again, it's going to be differential depending on the geography. I think when we think about the South as a whole, it's just going to be slow, steady improvement over time. Now that could accelerate depending on the amount of new sawmill capacity that comes in, that could accelerate to the extent we can continue to ramp up export activity in some of the key markets and something, obviously, that we're very focused on within our own wood baskets, and that's part of Russell's role in the business development side is to make sure that as people are contemplating new capacity, that we try to bring them into wood baskets where that benefits our sawtimber. But unfortunately, I don't think it's going to be something that just jumps up dramatically next year or the year following. It's just going to be a gradual improvement over time.

Okay. And when you think about your land portfolio, Devin, you exited Montana last year, you exited my home region, up in Northern Michigan, last year. It looks like actually, you did that really well. You've still got areas that are really not kind of plantation forestry, whether it's kind of the northern part of Upper Appalachia, or up into New England. Should we expect more portfolio moves over time? And will we see kind of net additions as well as kind of subtractions from the portfolio?

Yes. So the way that I would answer that, Mark, is for us, it's really less about the number of acres that we own. It's really about the underlying value of those acres and the returns that we can deliver off of those assets. And so I think the transaction in Oregon is a good example of how we think about our portfolio. If we have assets that are just not generating strong cash returns, are not the highly productive timberland acres that we feel we're best positioned to capture the full value, over time, we're going to look to exit some of those lower quality, lower productivity lands and redeploy that into higher productivity lands in wood baskets that we think are strategic and then have growth opportunity over time. So that's going to be ongoing for the foreseeable future. Now whether that results in a fewer number of acres or more acres, to me, that's less the question than really what does the underlying value look like, and what are our returns on those assets look like over time. Because that's really what we're trying to grow is the value and the return on assets over time. And that's really how we look at the portfolio.

Yes. And just to follow up on something you said earlier. As regards portfolio, in regards to the transaction yesterday, did you say that you were estimating $20 million a year incremental over the next 15 years?

Correct. Yes.