Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

Okay. Good morning, good afternoon. You've got Paul Quinn, RBC's Forest Products Analyst, and I've got the CEO of Weyerhaeuser, Devin Stockfish with us. Good morning, Devin.

Good morning, Paul.

Sorry about the technical issues, it's interesting because this is the first time I've worn a suit and tie. Well, not the tie, but the suit in probably 6 or 7 months. So you're looking casual. Thanks very much for joining us this morning. I think we'd like to start with maybe just a quick overview of Weyerhaeuser. I think you've got a couple of slides you'd like to go through quickly, and then I can get into some questions.

Yes. That sounds great. Thanks, Paul. Appreciate the introduction. Appreciate the opportunity to talk to you today about Weyerhaeuser. I do have a few prepared remarks that we'll go through, and then we can open it up for Q&A. So just a quick note, I will be making some forward-looking statements on the call today, so the typical cautionary language does apply to those statements. So at Weyerhaeuser, we have 3 key levers to drive value for shareholders, an unmatched portfolio of assets, industry-leading performance and disciplined capital allocation. In terms of our portfolio, we are the largest private owner of timberlands in North America. We have 11 million acres of timberlands in the U.S. across key growing regions. We're also one of the largest manufacturers of wood products in North America. We have 35 mills where we produce lumber oriented strand board and engineered wood products. We also realized that -- yes, you can go ahead and see here. I'll go ahead and advance the slides, okay? We also realized the disciplined capital allocation is a key part of creating value for shareholders, and I'll touch on that more here in just a moment. But before I get into that, I wanted to just highlight a few things that we've been doing of late to drive value for shareholders. I think it would be an understatement to say that the last 6 or 7 months have been unusual, uncertain and challenging. But I couldn't be more proud of the way our people have responded and the way that our organization has navigated this pandemic. Not only have we not stood still during this period of time, we've taken a number of actions that I believe will create value and drive additional shareholder value over time. So let me just highlight a few of those. Starting with operating results. Our folks have done a remarkable job of continuing to serve our customers and drive industry-leading performance, notwithstanding the challenges that come with operating in a pandemic from supply side challenges, supply chain challenges, market condition challenges and just the general challenges around safety of operating at pandemic. Our folks have done just a remarkable job in that respect. We've taken a number of actions to further strengthen our balance sheet. We've paid down our revolver. We recently announced paying down $325 million of notes that are due in 2023. And we anticipate paying down additional debt over the back half of 2020. We recently announced a couple of timberland acquisitions and divestitures in the state of Oregon. A great deal for us that involved us divesting some lower quality, lower productive timberlands in South Oregon and repurchasing some high quality, highly productive timberland assets in the mid coast region of Oregon. Collectively, this is a great transaction for us. It's immediately accretive from a cash flow standpoint. We expect it will generate in the neighborhood of $20 million per year and incremental EBITDA for us just by virtue of this transaction. And I think it really demonstrates what we're trying to accomplish with our portfolio optimization work. We recently announced some leadership and organizational changes that have our CFO, Russell Hagen, moving from the CFO role into a newly created Chief Development Officer role. Really excited about this opportunity to really put all of our portfolio management under a single leader from the real estate, ENR, acquisitions and divestitures, business development. I think this will really facilitate some increased work around the emerging carbon opportunity for the company. So really excited about what Russell is going to do for us in this role. We also recently announced a new sustainability strategy that really builds on some of the strong work that we've been doing around the environmental and social aspects of our business. We laid out some, I think, really aggressive goals and objectives over the next decade and really looking to advance in 3 key challenge areas around sustainable housing, mitigating climate change and thriving rural communities. So really excited about some of the work that we're doing there. And then finally, we did take some action earlier in the spring that really positioned us to maintain our financial strength, financial flexibility as we manage through this pandemic. So again, just really pleased with the work that our teams are doing under some very uncertain and challenging environments. And I truly believe that we're going to exit this pandemic in a stronger position than we went in. So turning to disciplined capital allocation. Again, we know that this is a key lever for us in driving value for shareholders. We've got 3 key priorities in capital allocation, returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure. And our priorities here really haven't changed. We did take some action earlier in the spring to really provide, as I said, some additional flexibility for us as we navigate this pandemic. But we really are focused in the near term on 2 key pieces of this capital allocation approach and that is reinitiating a quarterly dividend and paying down debt, reducing our leverage. But overall, our general priorities around capital allocation haven't changed. Let me turn to market conditions here for a minute. This last several months has really been a remarkable, albeit somewhat surprising run for lumber and oriented strand board. And that's really I think, a reflection of 3 things. First, just the Torrid pace of repair and remodel demand going back to the spring. Additionally, the recovery in residential construction, which has been much quicker and stronger than we had expected several months ago. And that's against the backdrop of really low inventory levels across the challenge -- across the channel. And that's largely due to the significant reduction that we saw from many producers back in the springtime as they were addressing the COVID reduction in demand at that point. And that's really been the story over the last several months, and it's resulted in historically high pricing in lumber now versus what we're seeing today. On the log side, in the western system, as is typically the case, Western log low demand is Hypo related to what's going on in the lumber market. And so as we've seen the lumber markets improve over the last several months, the western domestic market has followed as well. We have seen a little bit softer demand in the Japan market as we announced on the Q2 earnings call. That's largely a result of a reduction in housing starts in Japan following some COVID disruptions and to some extent, some impacts from the consumption tax increase at the back half of this year, still a solid market but a little softer than we saw in the first half of the year. The China market, as we mentioned, again, on our Q2 earnings call, we have shifted a little bit of the volume we had been sending to China in Q2 back to the domestic market. Largely, that's a result of the stronger pricing and better margin opportunities we're seeing in the domestic market, still a strong market for us. We have seen more New Zealand volume and European salvage volume being flowing into that market over the last few months as well. And so again, we're moving some of that volume back to the domestic market. I would say, overall, in the south, the southern log markets are fine. I would say, generally speaking, the log yards across the south are in reasonably good shape and full in some instances, a little bit of disruption following Hurricane Laura. But generally speaking, that's starting to normalize at this point as well. So overall, I would say our markets are better, in some cases, substantially better than we had anticipated earlier in the spring. I will just, for a moment, talk about what's going on with the fire situation in the Pacific Northwest. I'm sure many of you have been following. It's been a pretty serious situation across much of the West Coast for us in Oregon and Washington. Really, the high temperatures that we saw last week, the relatively low humidity levels, and the strong winds created a very extreme fire situation across much of the Pacific Northwest. We have seen fires burning on 4 of our tree farms in Oregon. It's been a challenging environment across much of Oregon and parts of Washington. Really at this smoke, we really haven't had an opportunity at this point to put much in the way of boots on the ground to assess the impact on our tree farms. We anticipate that as the weather improves, the humidity level is improving. We expect some rain this week, and that should give us a little bit more opportunity to get on the ground and assess the damage. Obviously, we will provide further disclosure in the weeks to come as we get more information. One other note from the fires, we did have to take some downtime, a few shifts from our mills in Oregon, around air quality. They're largely back up and running, no impacts in terms of fire damage in any of our mills but certainly a challenging situation in Oregon and parts of Washington from the fire. So really, again, the investment thesis for us is around having terrific unmatched portfolio of assets, industry-leading performance and disciplined capital allocation, a commitment to ESG. We're also always focused on reducing our environmental footprint across our manufacturing operations. And our forests and our wood products are really natural climate solutions. And we think that with the conversation around climate change and global warming, just continuing to intensify the role of the forest and sustainable building products will continue, I think, to be a bigger and bigger part of the conversation and ultimately drive incremental demand for our sustainable building products as well as potentially creating carbon opportunities for us in the forest. So with that, Paul, really, that's what we had in terms of prepared remarks. So happy to open it up for Q&A.

Great. Maybe just sticking with the fire situation, you mentioned that you've got currently burns on 4 of your tree farms in Oregon. Anything in Washington? And then how are you sitting in terms of log supply in front of the sawmills, anything getting low? I suspect there's very limited logging going on right now.

Yes. So in terms of the impact on our Washington operations, we don't currently have any fires on any of our timberlands in Washington. We're continuing to watch the situation. There are certainly a number of fires going on in the state of Washington, but nothing on us at present. In terms of log supply across the system in Oregon, logging has, by and large, been shut down over the course of last week, the fire restrictions are still in place. So I think things will get pretty tight here, depending on how long this continues. I wouldn't be surprised if you see some of the mills really struggling to log -- to keep the log supply in front of the mills, obviously, with our integrated business. We have a little bit more flexibility there. But yes, I think it will get tight in terms of log supply across the west.

Okay. And then the #1 question that I keep getting asked is we're in unprecedented times for lumber and OSB prices. How long will it last? So I thought I'd throw that over to you for an easy answer.

Yes. Well, as you probably know as well as anyone, it's very hard to predict what commodity prices will do. And that's certainly the case now as well. As we think about the next several months, I think a couple of things that are top of mind for us. Number one, the inventories throughout the channel are still extremely low. That's been a big driver of what has caused the pricing to get up to these record high levels. There's really not a whole lot of additional supply, I think, coming on to the market here in the near term. In fact, as you think about in the West with some of the mills having to take downtime and some of the challenges perhaps with log supply, I think there could be some disruptions from lumber supply out of the Pacific Northwest on top of that. So I think it's really going to be a question of what happens with the demand over the coming months. Our view in talking to our customers in talking to the homebuilders, the momentum around residential construction and new home construction, we think is going to continue really into the fall and until the weather really starts dialing that back. I think there's just been a very strong demand for single-family homes, and the builders are trying to satisfy that as much as they can. In the repair and remodel side, demand, I wouldn't say is at the torrid level that it was for much of the summer, but it's still stronger than we've seen historically for this time of year. So as long as that continues into the fall, I do think you're going to see pricing stay relatively strong. I'm not going to suggest that $900 lumber is the new norm. But I do expect pricing to hold up reasonably well into the fall. At some point, we're going to start having weather dial back construction activity. You're not going to have people building homes when it's snowing outside. People aren't going to be building decks when it's 40 degrees. But until the weather really starts dialing that back, I do think demand should hold up reasonably well into the fall.

Okay. And then from the conversations we had with other companies, especially on the lumber and OSB side in Q2, it seems like very few companies are able to take extra advantage of the really high pricing, i.e., increased production. What is your ability to be able to add extra hours or extra shifts? Is that pretty limited right now?

Yes. What I would say, and I'll kind of talk about OSB and lumber differently. On the OSB side, as you know, the typical operating posture is 24/7 there. And so as a general matter, it's hard to flex up much on the OSB side. And for us, and I would expect that would generally be the case. People are generally running as much as they can on the OSB side. Lumber is a little different. The operating model is not 24/7. You do have some additional opportunity to flex shifts and add weekend time. And we're certainly doing that to some extent, across our portfolio. One of the challenges that you have, and particularly in the south, where there's a little bit higher rate of COVID incidents, the ability to staff-up for additional shifts has been somewhat limited. And you think about that when you have an employee that gets diagnosed with COVID, he or she has to be quarantined, the folks that they come into contact have to be quarantined. It doesn't take too many of those to really start impacting your ability not only to your shift -- existing shifts or staff existing shifts, but to come up with the staffing levels to add extra shifts. And I think to some extent, you've seen that across the south. So yes, we've flexed up a little bit to the extent we can, but there are limitations on how much you can realistically do that in this environment.

Okay. And when I started becoming moving from the corporate side to being an analyst 15 years ago, Weyerhaeuser was pretty much mid pack in terms of costs and performance on the Wood Product side. And now you're kind of right up at leading the industry with a couple of others. And just wondering how much more opportunity you've got to be able to lower your costs or increase your margins in Wood Products?