Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

I think we just went live. So with that, let me introduce myself. My name is Buck Horne. I'm the Raymond James timber analyst as well as now a long-time housing analyst covering all things residential, so timber is part of the portfolio. And really thrilled to be able to introduce you the team from Weyerhaeuser including Devin Stockfish, the CEO from Weyerhaeuser; and we've also got that Beth Baum, the Senior VP of Investor Relations available. So we're going to go through a few slides in the deck here. Devin has got some opening remarks and give you a high level overview. They will reserve about half the time for a little bit of Q&A. [Operator Instructions] As we're going through the presentation or as I'm asking a few questions, I will integrate those into the discussion as best I can, and we'll use the time as efficiently as we can. So with that, I'm going to hand it over to Devin and will take you through the overview.

All right. Well, thanks, Buck. Appreciate the introduction. Always appreciate the opportunity to talk to folks about Weyerhaeuser company. In addition to following along on the screen, a copy of the presentation materials is also available on our website. Just quickly, I will be making some forward-looking statements this morning, so the typical cautionary language will apply to those. So we'll go ahead and get started here. So 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. 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. First, let me just briefly touch on some things that we've been doing at Weyerhaeuser over the last several months. I don't think it would be an understatement to say that this year has been unusual, unpredictable and challenging. But I'll tell you, I couldn't be more proud of how our organization has navigated the pandemic thus far. We've continued to run our business as well, and we've taken a number of actions that are positioning our company to drive increased shareholder value into the future. So just a few examples I'd highlight, starting with operating results. Our teams have done a remarkable job of continuing to serve our customers and deliver industry-leading performance really across all of our businesses despite market disruptions, supply chain disruptions and just the general safety challenges of operating through a pandemic. We've also taken a number of actions to reduce leverage and improve our balance sheet. We've reduced our net debt by around $1 billion this year, and these actions are going to meaningfully strengthen our balance sheet going forward. As we announced on our earnings call, we've reinitiated a quarterly dividend and implemented a new dividend framework, and I'll discuss those in more detail here in a few minutes. We announced a timber transaction that's going to improve our timberland portfolio in Oregon. This included the sale of some lower-productivity timberlands in Southern Oregon and the purchase of some very high-quality premier timberlands in the mid-coast region in Oregon. The deal is progressing as expected. We expect it to close in the next several weeks. Collectively, this is going to be immediately cash flow accretive for us. And really, it's just a great example of the ongoing work we're doing around our portfolio. We recently announced a leadership change in a reorganization that will have Russell Hagen moving from the CFO role into a newly-created Chief Development Officer role. And I think this new structure is really going to facilitate increased collaboration across our real estate, A&D, ENR and business development teams, really ensure a unified approach to portfolio management and support the company's increasing focus on the emerging carbon opportunities. So really excited about that. Over the summer, we announced a new sustainability strategy that really maps out our goals and commitments over the next decade. It really, I think, demonstrates that sustainability is fully integrated into the day-to-day work for our company. It also intensifies our focus on 3 critical areas where we think we can make a unique contribution: climate change solutions, helping provide sustainable homes and helping rural communities thrive So again, even with all of the things that have been going on this year, we've been busy continuing to make Weyerhaeuser a better company, and I'm really just extremely confident that we're going to emerge from this pandemic even stronger than we went in. So let me move now to our portfolio, which really is 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 U.S. We're one of North America's largest producers of wood products with 35 manufacturing facilities that produce lumber, OSB and engineered wood products. All of our business segments have significant scale and industry-leading performance, and we manage them within a tax-efficient REIT structure. In fact, we're one of the largest REITs in the U.S. Over the many decades of running these businesses, we've developed deep, I would say, unrivaled expertise in creating and capturing superior value across every step of our supply chain. But it's not just about being the best. Equally important is that we're doing it in the right way. We've been operating our business with integrity and a strong focus on ESG for well over 100 years. Our commitment to environmental stewardship starts with our commitment to sustainable forestry practices, which really goes back to the early days of the company. We're also very focused on minimizing the environmental footprint of our manufacturing operations, and our forests and our wood products are natural climate solutions. Our millions of acres of forest capture CO2 from the atmosphere, and we sequester carbon in the wood products that we produce. We have a strong commitment to social responsibility and governance. These strong ESG practices really help us attract and retain top talent, support strong relationships with our stakeholders and ensures that we're managing our businesses and our 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, 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 timber-growing regions in the world. And these are premium assets, high-quality Douglas-fir or strong domestic and export markets. We also have 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 a million acres with a broad mix of species, including valuable 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 customers as well as our own internal manufacturing facilities. And we've also got great access to ports to serve key export markets as well. This robust customer mix allows us to flex supply across our customer base to meet dynamic market conditions and capture new opportunities. Our export business out of the west is primarily focused on Japan. It's been a significant value driver for us for many decades. We have a unique business supplying premium, top-quality logs to the steady post and beam housing market in Japan. We also have relationships with key customers and a number of other Asian export markets including China and India, and we're well positioned to serve these growing markets over time. 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 portfolio, really with the view towards owning the most valuable acres that will generate the highest return for us over time. And our recent Oregon transactions, I think, are another great example of the work that we've been doing to improve our timber base. Managing a large, diversified portfolio presents a number of opportunities beyond just core timber for us to drive incremental value back to the acre. Our Real Estate and ENR business is very focused on maximizing the value of every acre that we own. A key aspect of that is identifying 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 higher better use valuation. We refresh this analysis routinely, and we've identified around 1.3 million acres that have at least the potential of getting a premium value. Our Energy and Natural Resources businesses look 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 COVID this year, we still anticipate generating around $235 million of EBITDA from this business in 2020. And finally, we're one of North America's largest wood products manufacturers. As I'll cover momentarily, we've made significant improvements in our Wood Products business that have reduced costs and improved profitability, really to maximize our margins throughout the business cycle. Our Wood Products business is an industry-leading, low-cost producer of lumber and 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, and we have 18 distribution facilities as well. This mix of assets and geographic coverage allows us to serve a broad mix of customers across North America. The diversified mix of customers and end markets that we serve 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 really value the quality, the consistency and the reliability that we bring. We've been very focused on improving our operating performance all 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 that we're positioned to generate positive cash flow even in a pricing environment similar to the Great Recession. Now 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 around $650 million of margin improvement across our businesses. This effort has cut across every aspect of our business and really has become core to how we operate our company. And you can see how this has translated into our 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 manufacturing businesses. In 2020, we rolled out what we're calling OPX 2.0, and this is really just an evolution of operational excellence at Weyerhaeuser. We're maintaining our disciplined focus on cost and margin improvement opportunities just as we have for the last several years. But we're also adding in future value creation, cost avoidance and efficiency. We've made excellent progress against our $50 million to $70 million full year OpEx goal, and I'm confident we're going to achieve this target by year-end. So now let me turn to the third pillar of our investment thesis, which is disciplined capital allocation. We know that this is a critical lever to driving long-term shareholder value. At Weyerhaeuser, our balanced capital allocation philosophy has three key priorities: returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure. As we announced on our earnings call, we've reinitiated a quarterly cash dividend and institute a new dividend framework, and we think this new dividend framework is going to enhance our ability to return meaningful and appropriate amounts of cash to shareholders across a variety of market conditions while positioning Weyerhaeuser to deliver superior long-term value creation. In this framework, we're targeting an annual payout of 75% to 80% of adjusted FAD. This targeted payout, I think, underscores our commitment to returning a significant portion of our free cash flow back to shareholders. The new dividend framework includes 2 components. The first is a sustainable quarterly base cash dividend, and this remains our core mechanism for returning cash. It's supported by the cash flow from our Timberlands and Real Estate and ENR segments, and we intend to grow this base dividend over time. Secondly, each year, we will supplement that base dividend with an additional return of cash to achieve the targeted 75% to 80% of adjusted FAD. We expect to deliver this primarily through a variable supplemental dividend. This will generally be paid annually in the first quarter based on the prior year's cash flow. However, we may also utilize opportunistic share repurchase to return cash under certain circumstances. So on this slide, we show our adjusted FAD and adjusted EBITDA going back to 2017 when our current portfolio was established. Over this period, Timberlands, Real Estate and ENR results have been relatively stable, while earnings for our Wood Products business have fluctuated with lumber and oriented strand board pricing. The base plus variable supplemental dividend framework will enable our shareholders to more fully benefit from the mix of cash flow profiles generated by our businesses. Shareholders will receive a stable income stream that's fully supported even in adverse market conditions, and they'll also benefit from significant upside in strong commodity markets through the variable component. The remainder of our cash generation, that's the cash that's in excess of our base and supplemental dividends, will be deployed consistent with our stated priorities for opportunistic allocation. These include value-enhancing growth opportunities, liability management and opportunistic share repurchase. We're committed to allocating this excess cash in a disciplined manner to grow our base dividend and drive superior long-term shareholder value. Again, returning cash to shareholders is a key component of our capital allocation strategy. We've returned around $8.5 billion in cash back to shareholders since 2014, and we remain committed to returning cash to shareholders through our new dividend framework going forward. We're also investing back into our businesses through disciplined capital expenditures, rather. 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. And as we announced earlier, we did reduce CapEx for 2020 in light of the pandemic, but we have ample opportunities for continued investments going forward that will drive value for the company. And the final part of our balanced capital allocation approach is maintaining an appropriate capital structure. So core to this is maintaining an investment-grade credit profile. We've taken a number of steps this year to strengthen our balance sheet. We'll have reduced our debt by around $1 billion, and we'll end the year well within our net debt-to-EBITDA target of 3.5x. We have ample liquidity, and we're going to end the year in a very strong financial position. So with our unrivaled assets, industry-leading performance, we believe we're really very well positioned to fully capture on market opportunities going forward. So let me just briefly comment on market conditions. So first, with respect to housing. Notwithstanding the macro headwinds from the higher than normal unemployment, uncertainty around COVID, potential fiscal stimulus, the housing market has really remained strong into the fall. Low mortgage rates, preferences for getting into larger single family housing, demographic tailwinds, they've all continued to support robust housing activity. Of course, we're going to see some seasonal slowdown as we get into the winter months, but our expectation is that the builders are going to continue to build as much as possible until winter weather really starts restricting building activity. From the conversations that we've had with our homebuilder customers, they're seeing very strong demand, and we're anticipating a strong year next year in terms of residential construction. Similarly, with respect to repair and remodel, that has been at a very favorable level, really coming out of the spring. In fact, over the summer, I would say, it was at a torrid pace. We are seeing some seasonal slowdown at this pace or at this point in the year as we always do, but I'd say the activity is somewhat above normal for this time of year. And given the aging housing stock, lower interest rates, we're anticipating the repair and remodel is going to remain strong into next year as well. Turning to lumber and oriented strand board. With the strong housing, repair and remodel that we've seen over the summer into early fall, combined with really low inventory levels throughout the system, we saw pricing run up to historical highs in August and September. As expected, lumber pricing has corrected a bit as we've seen some seasonal slowdown, particularly with repair and remodel. OSB pricing has come down a little, not quite as much as lumber. Although we think in each case, these pricing levels are still very healthy relative to historical measures. Turning to log market in the west, lumber prices being where they are, some mills in the west has been running full out. And with the fires in Oregon and some of the restrictions around fire activity in Washington, mills came down in terms of inventory quite a bit, and so that market tension has really provided for a strong log market coming into the fall. That's easing a little bit as the lot supply has improved over the last several weeks. But nevertheless, really good domestic markets. The export markets have remained solid as well. Japanese housing has come down a bit this year, but our customer demand has remained solid. Similarly, with China, they've recovered largely from some of the slowdowns earlier in the year from COVID. So that demand has remained strong as well. So overall, the western markets remain strong as we head into the fall. In the southern markets, demand for sawlogs has remained somewhat better than earlier in the year. I think there has been an improvement to some extent, but there's also been adequate log supply into that market, which has kept pricing relatively flat. The fiber markets have remained generally stable over the last several months with respect to the export markets. When the tariffs have come off into China with the exemptions being permitted on log imports, we began ramping up our exports out of the south. Still a small percentage of our overall harvest, but an opportunity, we think, to continue to grow that over time. So lastly, just a brief comment on climate change. Society continues to focus on the impacts of climate change and global warming. We really think that the role of forest and wood products as part of a solution will be more and more evident. The growing conversation around climate change and carbon is going to help and drive increased demand for sustainable building products as well as potentially opening up some additional market opportunities in our space. So I guess just with closing, this has been an unusual year. It's been a challenging year with the pandemic, the fires in the west, multiple hurricanes in the south. Through all of the challenges of 2020, we've continued to operate our businesses well to serve our customers, to keep our people safe. We've taken a number of actions, including paying down significant amounts of debt, implementing a new dividend framework that really positions us well going forward. And so I'm confident with the portfolio of assets that we have, our deep operating experience, industry-leading cost structure, our strong culture, our phenomenal employees and our track record for disciplined capital allocation. We're just really well positioned to drive superior shareholder value well into the future. So with that, Buck, I think we can go ahead and open it up for questions.

Sure. Perfect. All right. We've got a few in queue. I'm just going to fire away with one upfront and just go back to the dividend for a second. And maybe -- I think you did a great job articulating the rationale behind the new framework, and it does make a lot of sense. One question we've gotten from some investors over time has been the decision to push the first supplemental dividend into 2022 as opposed to early '21. So maybe explain just the thought process behind the cash flow and why the first supplemental will come in '22.

Yes, a couple of things there. The first thing I would note is we really have, over the course of 2020, prioritized a little bit more of the cash flow towards reducing debt and getting our balance sheet really where we want it to be. So when you think about the $325 million we paid down in Q3, the $500 million in Q4, we've got another $150 million earmarked for the remaining 2021 maturities, the bulk of the cash flow that we've generated in 2020 has really gone towards debt paydown. Obviously, we did also pay down some -- or pay off some dividends with the Q1 dividend and then the Q4 dividend. In terms of the payment of the first variable dividend being in Q1 of 2022, what we're really trying to articulate there is as a general matter, the new dividend framework is going to be an annual payment looking back on the prior year's cash flow generation. Now that being said, as we mentioned on our earnings call, 2021 is somewhat of a transition year, and so I wouldn't want to imply that we've completely shut the door on any sort of incremental supplemental dividend in 2021. That is something that the Board will continue to assess and something that we remain open to. But again, as a general matter, the new framework with the supplemental dividend is going to be on an annual basis, looking back to the prior year's free cash flow.

Got you. Okay. That makes sense. I appreciate that clarification. That's great. Maybe just talk a little bit about the sustainability initiatives and things around the carbon topic that you guys are developing here. Does the election outcome or with a divided government with the new administration, does it change your thought process around the viability of developing carbon trading markets or carbon sequestration tax credits? Or something along those lines, what do you think is possible with the new government coming in and maybe the outlook longer term for these potential monetization opportunities?

Yes. So I'd just say at the outset, we're really excited about the new sustainability strategy. I think it just continues to evolve, something that we've been focused on for well over 100 years. When we think about specifically the new strategy, and I think the 2 of the things you're specifically alluding to whether that is the carbon markets or just the increased, I think, view that building with wood building products as opposed to other building materials is an environmentally beneficial and friendly way to do construction. I think there's a place for government. And with the Biden administration, there will be puts and takes. Certainly, our expectation is when you think about the democratic administration and platform, climate change is a key component of that. And so certainly, from a regulatory standpoint to the extent that the Biden administration really wants to advance their climate change solutions agenda, I think there are opportunities there for us. In terms of a federal cap and trade type of arrangement, frankly, with the divided government, I'm a little skeptical that, that's going to happen at a federal level, but that's okay. I think that there are other opportunities for the carbon markets to develop even outside of government. You just look around and see all of the big companies that are talking about becoming carbon neutral or even some of them being carbon negative. There's really no other technology that I'm aware of that is as efficient for taking carbon dioxide out of the atmosphere relative to forest and trees. And so I do think those companies are going to have to look to the forest to some extent, and private markets will begin to develop. I think we're starting to see a little bit of that now, definitely at its infancy. So I don't know that we necessarily need the federal government to make that happen. I think that, that can happen just through private markets. I would also say, just the other piece of that, whether we're talking cross land, any timber, mass timber or just building with wood more generally, I do think there's a growing appreciation for the environmental benefits of that. We've started to see more momentum there, and that's something I think that regardless of what happens at the federal government level can really start building on that momentum to create an incremental demand signal for wood products.

Great. One follow on coming in from an investor on this particular topic, kind of related to what you're mentioning here. But this question is your oil and gas, the leasing business, seems small and inconsistent with the ESP strategy. Would you consider phasing out the leasing of land for oil and gas extraction to further your sustainability goals and be more attractive to ESG investors?