Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

Good morning. You are joining the Weyerhaeuser Company shareholder meeting. I'm pleased to introduce Rick Holley, the company's Board Chairman.

Good morning, and welcome to Weyerhaeuser's Virtual Annual Meeting. I'm Rick Holley, the Chairman of the Board of Directors. Before we begin, I would like to acknowledge the unprecedented circumstances we've all been facing over the last year. With the stress and uncertainty caused by the pandemic, which has lasted well over a year now, I want to take a moment to thank everyone associated with Weyerhaeuser for their commitment and care during this challenging time. I want to thank our employees for staying focused on safely running our operations. I want to thank our customers and other business partners for working so closely with us as we continue to deliver products people need. And I want to thank our shareholders for their patience and support as we continue to manage the company through this situation. We will start today's meeting with a formal part of our agenda. Once we begin, shareholders will be able to cast their votes and submit questions on the web portal where indicated. As a reminder, questions should generally relate to the business and affairs of the company and be of general shareholder interest. After the formal portion of our meeting, Devin Stockfish, Weyerhaeuser's President and CEO, will give a presentation on the company's business. Following Devin's presentation, we will answer questions or as many questions as time will permit. I will now call this meeting to order. Joining me on the call today are the other members of the Board of Directors, including 3 directors who will be retiring from the Board effective today: Mark Emmert, Sara Lewis, Deidra Merriwether, Al Monaco, Nicole Piasecki, Marc Racicot, Larry Selzer, Michael Steuert, Devin Stockfish, Kim Williams and Chuck Williamson. Also participating are other members of the senior management team. We have Adrian Blocker, who is Senior Vice President of Timberlands; Russell Hagen, who is our Senior Vice President and Chief Development Officer; Kristy Harlan, Senior Vice President, General Counsel and Corporate Secretary; Nancy Loewe, our new Senior Vice President and Chief Financial Officer; Denise Merle, Senior Vice President and Chief Administration Officer; and Keith O'Rear, our Senior Vice President, President of Wood Products. We are also joined by representatives of KPMG, our independent auditors; and Broadridge Financial Services, the inspector of elections. Representatives from each organization are available to respond to appropriate questions. Before turning it over to Kristy Harlan, I want to thank and say a few words about our 3 retiring directors, Marc Racicot, Mike Steuert and Chuck Williamson. Marc has served on the Board since the merger with Plum Creek in 2016. And prior to that, Marc served on the Plum Creek Board for 7 years. Both Mike and Chuck had served on the Weyerhaeuser Board for 17 years. They've all served on various committees, and Mike has chaired the Audit Committee, and Chuck has chaired the Compensation and Executive Committee. Chuck also served as the Chairman of the Board for the 8 years prior to the Plum Creek merger. Speaking for your fellow Board members, we will miss your sage advice, counsel, hard work and dedication. On behalf of the Board, the management team, employees and our shareholders, I want to thank you for all you've done to make Weyerhaeuser the great company it is today. You will be missed. Now I'll turn it over to Kristy Harlan to cover the business item on today's agenda. Kristy?

Thank you, Rick. First, I'd like to go over some preliminary items. We have the meeting guidelines posted on the virtual meeting website. Please be sure to review them. As Rick mentioned, you will be able to submit questions on the web portal. They will be answered at the end of the meeting after the business presentation. We will respond to as many questions as possible in the time permitted. As a reminder, only shareholders who have validated their identity with a control number may vote or submit questions. Our record date for this annual meeting was March 18, 2021. Shareholders of record on the record date were mailed proxy materials and are entitled to vote on the 3 matters of business. We have confirmed that a majority of outstanding shares is present in person or by proxy. And therefore, a quorum has been achieved for conducting business. There are 3 items of business on today's agenda. Each item is described in the proxy statement. First is the election of 9 directors for terms expiring at the 2022 annual meeting. Professional biographies of the director nominees are described in the proxy statement. The Board of Directors recommends that shareholders vote to elect each of the nominees. Second is an advisory vote to approve 2020 executive compensation as disclosed in the proxy statement. As a reminder, this vote is advisory and nonbinding. However, the Board of Directors and Compensation Committee greatly value the opinions of our shareholders on this topic. The Board recommends that shareholders approve the company's 2020 executive compensation as described in the proxy statement. Third and last is the vote to ratify the selection of KPMG as the company's independent auditor for 2021. The Audit Committee has appointed KPMG to serve as the company's independent auditor for 2021. The Board of Directors asks as a matter of good corporate practice to ratify the committee's appointment on an advisory and nonbinding basis. At this time, the online voting polls are now open. Shareholders are entitled to vote until the online voting polls are closed. If you have already voted by proxy, there's no need to vote now unless you are changing your vote. We will pause for a moment to allow shareholders to cast their vote. [Voting]

Voting has now ended and the polls are now closed. Mr. Chairman, I can now report on the outcome of the 3 items of business based on preliminary voting results. In the election of the directors, each of the nominees has received a majority of the votes cast and, therefore, has been duly elected. With respect to the advisory vote to approve 2020 executive compensation as described in the proxy statement, the votes cast in favor of the proposal exceed the votes cast against the proposal, and therefore, the proposal has been approved. Lastly, with respect to ratifying KPMG as the company's independent auditor, the votes cast in favor of the proposal exceed the votes cast against the proposal, and therefore, the appointment has been ratified. The final vote tabulation for each item of business will be disclosed in accordance with SEC rules.

Thank you, Kristy. The formal portion of the 2021 Annual Meeting of Shareholders is now adjourned. Devin Stockfish, our President and Chief Executive Officer, will now provide an update on the company's operations. Devin?

Thank you, Rick. Good morning, everyone, and welcome to Weyerhaeuser's 2021 Annual Meeting. Thank you for joining us this morning. I'll start off this morning by sharing some highlights from our performance for 2020. Then I'll spend a few minutes highlighting the critical components of our investment thesis which illustrates how we intend to continue generating superior value for our shareholders. And then we'll wrap up and take any questions that you have. Quick note here that I will be making some forward-looking statements, and so the typical cautionary language will apply. So we'll go ahead and get started with a look at our performance in 2020. As we all know, last year started out like any other and then quickly became something none of us had ever encountered before. However, despite all the uncertainty and distractions, our people stayed safe and focused, and ultimately, delivered record operating results, with the best EBITDA performance we've seen in 15 years, plus an additional $100 million of operational excellence improvements across our businesses. We also took actions to reduce our leverage and improve our balance sheet. We reduced debt by $900 million and today, we're comfortably below our target leverage ratio with a strong balance sheet that supports our solid investment-grade credit profile. We implemented a new dividend framework that will return significant amounts of cash to our shareholders and be sustainable across business cycles, and I'll discuss this in a bit more detail here in a few moments. We took a number of steps to further cement our position as an industry leader in ESG. Our work in this area is anchored in the launch of our new sustainability strategy, which maps out ambitious commitments and goals for the next decade and beyond, and I'll talk more about that here in a few minutes. We also made some significant leadership changes with the appointment of Nancy Loewe as our new CFO. She's been a great addition to our team. And now that we have Nancy on board, Russell Hagen has fully transitioned into our new Chief Development Officer role, where he'll be focused on driving a unified approach to portfolio management and supporting our increasing focus on natural climate solutions. And of course, as I mentioned, all of this work was against the backdrop of the pandemic, which introduced extreme uncertainty, particularly in the early months and ongoing distractions and challenges as the year unfolded. Thankfully, we have an outstanding safety culture at Weyerhaeuser, and that served us well throughout this difficult period. Our employees embrace the health and safety protocols that we quickly put in place for our organization and they've been very engaged and innovative, in finding ways to keep our workplace safe and efficient for well over a year now. Like everyone, we're all anxious for this to be over so that we can return to normal operations. But I'm fully confident that our people will continue to do whatever is needed to keep each other safe, keep our operations running and continue to serve our customers no matter what obstacles we face. This spirit of working together against a common goal is fundamental to our culture and part of why we've been successful for more than a century. And our strong workplace culture really is the fuel from what I want to talk about next, the critical components of our investment thesis, which together drive ongoing value for our shareholders. It starts with our unmatched portfolio of assets to which we add industry-leading performance and a commitment to disciplined capital allocation, plus a strong foundation of environmental stewardship, social responsibility and corporate governance. We think this is a winning formula, and I'll speak to each of these in a bit more detail. I'll start with our portfolio, which truly is unmatched in the industry. Weyerhaeuser is the largest private owner of timberlands in North America, with nearly 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. 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. It's not just about being the best or the biggest, though. Equally important is that we're doing things in the right way. We've been operating our businesses with integrity and a strong focus on ESG for over 100 years. And our new sustainability strategy further builds on that strong foundation. We're excited about this work, and I'm encouraged that the broader market is starting to better appreciate what a great ESG story we have. We're especially looking forward to making meaningful progress against our new 3 by 30 initiatives, which focus our attention in the areas where we think the company is uniquely positioned to positively impact the world. For us, that means understanding and acting on the role our forest play in providing climate solutions, helping to ensure that people have sustainable homes to live in and doing our part to make sure rural communities across North America continue to thrive. And as I mentioned, we're doing this work from a strong foundation of ESG results that have been decades in the making. Our commitment to environmental stewardship starts with our commitment to sustainable forestry practices, which really goes back to the early days of our company. This is a core part of how we run our operations for many, many decades. We're also focused on minimizing the environmental footprint of our manufacturing operations. And our forest and wood products are natural climate solutions as well. Our millions of acres of forest capture CO2 from the atmosphere and store carbon in the wood products that we produce. We also have a strong commitment to social responsibility and governance. This covers a wide array of activities, including driving continuous improvement in safety, making intentional investments and growing our people and accelerating our progress in diversity and inclusion. These strong ESG practices help us attract and retain top talent. They support strong relationships with our stakeholders and ensure that we're managing our businesses and our resources in the right way for the long term. From that foundation, let's take a few moments to talk about each of our businesses, starting with timberlands. 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 nearly 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, with high-quality Douglas fir forest and strong domestic and export markets. We also have nearly 7 million acres in the U.S. South, with 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 about 1 million acres with a broad mix of species, including high-value hardwood sawlogs. We're also focused on disciplined management of our Timberland portfolio. At the core of our portfolio management philosophy is the focus on growing our timber base and continually optimizing and upgrading our holdings, with a view toward owning the most valuable acres that will generate the highest returns for our shareholders over time. Our recent Oregon, Alabama and North Washington transactions are great examples of the work that we've been doing to improve our timber base and maximize the returns that we generate from our portfolio. Now managing a large diversified portfolio presents a number of opportunities beyond core timber to drive incremental value back to the acre. Our Real Estate, Energy and Natural Resources business is focused on maximizing the value of every acre we own. This includes the work we've historically done around capturing higher and better use premiums and unlocking value through our ENR business. We're also very excited about some emerging opportunities in the natural climate solutions and carbon space. If society continues to focus on the impacts of climate change and global warming, we believe that 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 where we believe help drive incremental demand for our sustainable building products as well as potentially opening up additional market opportunities around carbon and climate solutions. That's why we formed a new team under Russell Hagen to accelerate our work in this area, and I'm really excited about the role our company is poised to play as these markets continue to develop into the future. Our work on climate solutions is just one piece of the overall business segment, which will continue to focus on 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 higher and better use valuation. We refreshed this analysis routinely and have identified approximately 1.3 million acres that have the potential of capturing a premium value. And the final segment of our portfolio is our Wood Products business. We're one of North America's largest wood products manufacturer. And as I'll cover momentarily, we've made significant improvements in this business that have reduced costs and improved profitability so that we can maximize our margins throughout 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 to our timber base. We also have 18 distribution facilities as well. This mix of assets and geographic coverage allows us to serve a broad mix of customers all across North America. We've been very focused on improving our operating performance across our Wood Products businesses for a number of years. And we've made tremendous progress, significant reductions in our cost structure have yielded real benefits, and we now have reached black at the bottom, meaning that we're positioned to generate positive cash flow even in a pricing environment similar to that of the Great Recession. And with the pricing environment that we're experiencing today, our low-cost, highly efficient operations provide us with a lot of operating leverage. Which is a great segue to the next pillar of our investment thesis, which is an 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 nearly $750 million of margin improvements across our businesses. This effort has cut across every aspect of our business and has become core to how we operate our company. We're continuing to maintain our disciplined focus on cost and margin improvements just as we've been doing over the last several years, and we've now expanded our OpEx efforts to include future value creation, cost avoidance and efficiency. To this end, we've targeted an additional $50 million to $75 million of OpEx for 2021, and our teams are making good progress against that target. Finally, let me turn to the third pillar of our investment thesis, which is disciplined capital allocation, which we know is a critical lever for driving long-term shareholder value. At Weyerhaeuser, our balanced capital allocation philosophy has 3 key priorities: returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure. As we announced at the end of last year, we've instituted a new dividend framework, which we believe enhances our ability to return meaningful and appropriate amounts of cash to our shareholders across a variety of market conditions, while positioning Weyerhaeuser to deliver superior value creation over the long term. In this framework, we're targeting an annual payout of 75% to 80% of adjusted funds available for distribution. This targeted payout underscores our commitment to returning a significant portion of our free cash flow back to shareholders. The dividend framework includes 2 components: first is a sustainable quarterly base cash dividend, this remains the core mechanism for returning cash. It's supported by the cash flow from our Timberlands and Real Estate and ENR segments, and we fully intend to grow that base dividend over time. Secondly, each year, we'll supplement that base dividend with an additional return of cash to achieve the targeted 75% to 80% of adjusted FAD. We expect to achieve this primarily through a variable supplemental dividend. In the pricing environment that we're currently experiencing, we expect to generate a lot of cash, most of which is going to go back to our shareholders. This supplemental dividend will generally be paid annually in the first quarter based on prior year cash flow. And we may also utilize opportunistic share repurchase to return cash to shareholders under certain circumstances. 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. We're planning for $420 million of CapEx in 2021, and this includes the beginning of our recently announced Holden sawmill modernization project. 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. And we took a number of steps last year to strengthen our balance sheet. We reduced our debt by $900 million and ended the year well within our net debt-to-EBITDA target of 3.5x. We also further reduced our pension obligations by $765 million through a retiree annuity purchase transaction, and we have cash earmarked to pay down an additional $150 million of debt later this year. With our unrivaled assets, our industry-leading performance, disciplined capital allocation approach and a strong ESG foundation, we believe we're well positioned to fully capitalize on market opportunities going forward. And that's great news, especially given the significant actions that we've taken over the last year to pay down debt, implement a new dividend framework, deepen our OpEx culture and further refine the value-generating power of our overall timberlands portfolio. Against the backdrop of the best housing markets we've experienced in over a decade, I'm very confident that with our unmatched assets, deep operating expertise, industry-leading cost structure, strong culture, talented people and a track record of disciplined capital allocation, we're well positioned to drive superior value for our shareholders well into the future. And I want to close just by sharing my sincere gratitude to all of our Weyerhaeuser employees who've worked so hard to serve our customers and deliver strong results in the face of an unprecedented challenges over the last year, to our senior management team and to our Board of Directors who have guided our journey with steady and supportive leadership. I'm truly honored to lead this great company and I want to close by adding my thanks to all of our shareholders as well for your ongoing trust and ownership of our company. And with that, I think we can go ahead and open up the line for questions.

Okay. Devin, our first question is, will the company consider stock buybacks as part of its capital allocation priorities in 2021?

Yes. So great question. Our view is that share repurchase can be a great way to return cash to shareholders. If you look back over the last several years, we have done a fair amount of share repurchase. But we really look at that opportunistically. And so when we think that the shares are trading at a meaningful discount, that's a great way to return cash to shareholders. And so we'll continue to look at that. But again, we view that opportunistically, and the Board is going to continue to consider that going forward.

Okay. Our next question is, can you talk about the current wood products pricing environment and how long you expect prices to remain at current levels?

Sure. We are certainly in a remarkable period for wood products pricing, and that's really across the board for all of our products: lumber, OSB, across our engineered wood products businesses. And it's really a function of a few things. First of all, we've seen just remarkable demand, and that's residential construction, that's repair and remodel. Just the overall demand for housing in the United States has been off the charts of late. And that's really pulled a lot of demand into all of our wood products. And what we've seen across the system is that, with that level of demand, there's just not a lot of inventory in the channel. And so the pricing environment really just reflects more demand than we have available supply at the moment. In terms of how long this is going to last, my view is we are in for a period of fairly strong housing. That's certainly our belief over the course of 2021. But I think against the backdrop of vastly underbuilt housing in the U.S. over the last decade, we really think housing is going to stay strong for a number of years. And similarly, for repair and remodel, just with the aging housing stock, we think people are going to continue to put money into repairing and remodeling their homes. And so that's just to say that the demand signal, we think, is going to last for an extended period of time. In terms of this really high level of pricing, it's hard to say how long this will last. Certainly, in the near term, as we remain in the heat of the building season, it's hard to see that the demand is going to fall off significantly. So we're expecting strong pricing here, certainly through the building season, and we'll see how that progresses through the end of the year. But again, with the demand that we're seeing and expect to see for really -- for the foreseeable future, we think we're going to be in a good environment for wood products demand and pricing.

Okay. Our next question is, can you talk a bit more about what shareholders should expect with respect to the base on the supplemental dividend over the next few years?

Yes, sure. And so with respect to the base dividend, I'll start there. As I mentioned a few moments ago, that was really set to be sustainable across business cycles. It's largely based off of our Timberlands, Real Estate and ENR earnings. And so we certainly do expect to grow that base dividend over time. That will largely be based off of growing the cash flow from our Timberlands, Real Estate and ENR business. Certainly, we've been doing a lot of work in that respect of late. We've had several transactions that we've announced recently in Oregon, North Washington, some acquisitions in Alabama. So we are looking to grow that business, which will support growing that base dividend over time. And so that's certainly our expectation around the base dividend. With respect to the supplemental dividend, again, the goal here is to pay out ultimately, 75% to 80% of our annual FAD to shareholders, that's largely going to be covered through the base dividend and the supplemental dividend. And when you think about a year like 2021, with the pricing environment that we're seeing, as I mentioned, we have a lot of operating leverage for every $10 of price in lumber, that's about $45 million of incremental EBITDA per year. And so as you can imagine, we're going to be generating a lot of cash in this environment. So we'll show on a quarterly basis what our year-to-date FAD looks like so you'll be able to track how that is progressing over the course of the year and model that out. But certainly, we would expect a fairly sizable supplemental dividend this year, just reflecting the good business conditions that we have.

Our next question is, will Weyerhaeuser consider major mergers and acquisitions or other tuck-in acquisitions?

Yes. Let me answer that really in a couple of different ways. First, with respect to timberlands, we are always in the market to grow and optimize our timber base. And that's really both in terms of adding acreage, and certainly, we look at that. There are very few deals that come to market that we aren't looking at, that's also with respect to optimizing. And our transactions in Oregon, I think, were a great illustration of that. We sold some lower quality timberland. We purchased some higher quality timberland, net-net, it was about $20 million of incremental EBITDA per year as a result of those Oregon transactions. So that's a good illustration of the optimization work that we're doing. So we're always looking at ways to grow and improve our timber base. That's true today. That will be true next year. That's really just a core part of what we're doing. Really important, though, to make sure you're doing that in a disciplined way. And so even though we look at a lot of deals, we're really only going to pull the trigger on those that we really think create good value for the company and our shareholders. So that will continue to be an important part of how we're looking at that business. Beyond that, we're certainly open to, and we do look at opportunities on the wood products side. As I've said before, that's most likely in the near term, really going to be tuck-in, bolt-on acquisitions, maybe a mill or two here or there. Particularly if it's in a region where we have fee timberlands, and we can drive synergies there. So some opportunity there. What I would say on the Wood Products side, though, it's important to remember we have been organically growing that business over the last several years, both through our OpEx work and the incremental capital expenditure work that we're doing. For example, we've announced several brownfield modernization projects with Dierks and Millport. That's added about 300 million board feet of capacity. We recently announced another modernization project at our Holden facility that will add another $100 million board feet of capacity. And so those, at least from our standpoint, are a way to really get high returns with relatively low risk across our existing footprint. So that's another avenue of growth on the Wood Products side that we have been doing.

Devin, this will be our final question today. Will President Biden's new infrastructure plan create additional opportunities for Weyerhaeuser?

Yes, absolutely. We think it will in a number of instances, and maybe I'll walk through those. So first of all, as part of the infrastructure bill that the President has proposed, there is a housing component. As I mentioned earlier, we're vastly underbuilt across the United States in terms of housing and the infrastructure bill appreciates that. And so there could be incremental demand just from the housing component itself. Second, there is a component of wood products demand that comes with bridge and highway and some of those other infrastructure projects. And so we'll see the absolute magnitude of what the infrastructure bill looks like as it progresses further. But I think we could easily see 1 billion to 1.5 billion board feet of incremental lumber from an infrastructure program just on roads, bridges, other types of infrastructure there. And then the last thing I would say is there's a growing appreciation, certainly within the administration, I think, broadly across society, of the environmental benefits of building with wood. And so I think just more broadly, as the government looks to invest in new buildings and other types of infrastructure of that nature, I do think that there will be a growing appreciation for the environmental benefits of building with wood, so there could be another tailwind of demand just from that. So overall, absolutely, an infrastructure bill would be supportive for our business. So I think at this point, that was our final question, and we'll go ahead and conclude this morning's meeting. Again, I'd like to thank everyone for joining us today, and thank you for your continued support of Weyerhaeuser.