Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

All right. Everyone, I think we are at 11:00, so we're getting started with our next session at NAREIT Conference. Thanks for joining. My name is Buck Horne. I'm the Housing Analyst and Timber REIT Analyst at Raymond James covering all things residential, and part of that coverage is now including the wood products industry and all the derivatives thereof. So we're really thrilled to be able to introduce you -- the presentation, Weyerhaeuser. We've got Devin Stockfish on the line, as you can see him there. And also the new CFO of Weyerhaeuser, Nancy Loewe, is also available for us. We're going to run through the presentation. Maybe get a quick operating update. That should take about 15 minutes. Then we'll have plenty of time for Q&A. Fire away in the chat session. We will filter through those questions as they come in. I will try to moderate and curate some of those, and we will get as many answered as we can in the time allotted. And I've got my own list that we can work through as well. But with that, let me turn it over to Devin and get the quick update on Weyerhaeuser.

All right. Well, great. Thanks, Buck. I always appreciate the opportunity to talk to everyone about Weyerhaeuser company. We've got some slides we'll go through here today, and then we'll leave time for some Q&A at the end. Quick note, I will be making some forward-looking statements. So typical cautionary language will apply to those statements. So let's go ahead and get started here. At Weyerhaeuser, we're focused on 3 key levers to drive value for our shareholders, an unmatched portfolio of assets, industry-leading performance and disciplined capital allocation. And as we've done for over 100 years, it's all built on a strong ESG foundation. We think this is a winning formula, and I'll speak to each of these in a bit more detail. We've been doing a lot of great work over the last year at Weyerhaeuser in each of these areas; portfolio, performance, capital allocation, ESG leadership, in a way that really positions us very well to deliver long-term value for our shareholders. Starting with operating results across all of our businesses, our teams are doing a remarkable job of serving our customers and delivering industry-leading performance. The past year, we were able to deliver the best EBITDA performance in 15 years, capture an additional $100 million of OpEx. And that momentum really carried into the first quarter, where we delivered another record quarter. In 2020 and 2021, we've taken actions to reduce our leverage and improve our balance sheet. We've reduced our debt by more than $1 billion. And today, we're comfortably below our target leverage ratio, with the strong balance sheet that really 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 that in a bit more detail here in a few minutes. Last year, we also took a number of steps to further cement our position as an industry leader in ESG. For example, last summer, we announced the launch of a new sustainability strategy that we're really excited about. It maps out ambitious commitments and goals for the next decade and beyond, and we've continued to enhance our efforts around diversity, equity and inclusion, and I'll talk more about our ESG programs here in a moment. Really excited about some of the recent leadership changes that we've made. Nancy Loewe, who is here with me today, recently joined as our new CFO, just a great addition to the team. And with Nancy now on board, Russell Hagen has fully transitioned into the Chief Development Officer role. This new structure will ensure a unified approach to portfolio management, and really support the company's increasing focus on natural climate solutions. And lastly, I just know, we've got some very strong tailwinds in terms of the markets right now. And importantly, I think there are several emerging market trends that could be very constructive for our businesses. And in particular, the growing demand for building with wood, including things like CLT and mass timber, as well as the growing opportunities around carbon and climate solutions. I also think it's worth noting here at the outset that we're experiencing one of the best housing backdrops that we've seen in over a decade. And as we've said previously, we have a massively underbuilt housing sector in the U.S., we have demographic trends that should be very supportive of growing millennial homeownership, low mortgage rates and the demand for housing is just incredibly strong right now. And as U.S. housing drives much of the demand for our products, Weyerhaeuser should be a significant beneficiary of the stronger housing market in the years to come. So let me turn to our portfolio, which truly is unmatched in the industry. We are one of the largest private owners of timberlands in North America with nearly 11 million acres of high-quality, highly productive timberlands across United States. We're also one of North America's largest producers of wood products, with 35 manufacturing facilities that produce lumber, oriented strand board and a variety of other 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 it in the right way. And we've been operating our businesses with integrity and a strong focus on ESG for over 100 years. And our new sustainability strategy really further builds on that strong foundation. We're excited about the work, and we really look forward to making meaningful progress against our 3 by 30 initiative. I'm also encouraged that the broader market is really starting to better appreciate what a great ESG story we have. So just to cover the ESG aspect in a bit more detail here. 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 the company, and it has been for many, many decades. We're also very focused on minimizing the environmental footprint of our manufacturing operations. And our forest and wood products for that matter are natural climate solutions. Our millions of acres of forest capture carbon from the atmosphere. And that CO2 that we sequester from the atmosphere stays stored in those wood products that we produce for many decades. We also have a strong commitment to social responsibility and governance. This covers a wide array of activities, including with respect to safety and some of the things we've been doing around diversity and inclusion. These strong ESG practices really help us attract and retain top talent. It supports strong relationships with our stakeholders. And it ensures that we're managing our business and our resources in the right way for the long term. Now at the foundation of our company is our Timberlands business. Weyerhaeuser has an unrivaled portfolio of timberland assets with substantial and enduring value. As I mentioned, we are 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 really premium assets, high-quality Douglas fir, strong domestic and export markets. We also have nearly 7 million acres in the U.S. South, high-quality southern yellow pine plantations that allow us to access all of the key markets across the southern U.S. And in the north, we have around 1 million acres with a broad mix of species, including high-value hardwood sawlogs. We're also very 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, really with a view towards owning the most valuable acres that will generate the highest returns for our shareholders over time. And our recent Oregon, Alabama and North Cascades transactions are great examples of the work that we're doing to improve our timber base and maximize the returns that we're generating 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 and ENR business is very focused on maximizing the value of every acre we own. This includes the work that we've historically done around capturing higher and better use premiums and unlocking value through our ENR business. But we're also really excited about some of the emerging opportunities in the natural climate solutions and carbon space. Now a key aspect of our real estate business is identifying the acres across our portfolio where we can unlock value by capturing a premium over the timber value. Our AVO, or Asset Value Optimization program, looks at a multitude of different attributes that can support a higher, better use valuation. We refresh this analysis routinely and have identified approximately 1.3 million acres that have the potential of getting a premium value. And finally, we are one of North America's largest wood products manufacturers. As I'll cover momentarily, we've made significant improvements in our Wood Products businesses that have reduced costs and improved profitability to maximize our margins through the business cycle. Our Wood Products business is an industry-leading, low-cost producer of lumber, oriented strand board and engineered wood products. We have 35 mills across the U.S. and Canada that are well aligned with our timber base, and we have 18 distribution facilities as well. This mix of assets and geographic coverage really allows us to serve a broad mix of customers across North America. We've been very focused on improving our operating performance across our Wood Products businesses, and we've made tremendous progress, significant reductions in our cost structure have yielded real benefits, and we've now reached black at the bottom, meaning we're positioned to generate positive cash flow even in a pricing environment similar to 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. Now a core part of our overall strategy as a company has been our intense focus on improving our operating performance across the entirety of Weyerhaeuser. At the heart of this effort has been our operational excellence journey, a real success story. 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 really become core to how we operate our company. We're continuing to maintain our disciplined focus on cost and margin improvement opportunities just as we have been for the last several years. But we're also focusing our efforts on future value creation, cost avoidance and efficiency. We've targeted an additional $50 million to $75 million of OpEx for 2021, and we feel good about our ability to do that this year. Now let me turn to the third pillar of our investment thesis, which is disciplined capital allocation. We know this is a critical lever for 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 at the end of last year, we've instituted a new dividend framework. We believe this new dividend framework enhances our ability to return meaningful and appropriate amounts of cash to our shareholders across a variety of market conditions, while still positioning Weyerhaeuser to deliver long-term shareholder value. Now in this framework, we're targeting an annual payout of 75% to 80% of adjusted funds available for distribution. This targeted payout really underscores our commitment to returning a significant portion of our free cash flow back to shareholders. Our dividend framework includes 2 components. First is a sustainable quarterly cash base -- base cash dividend, and 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 this 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 this pricing environment, we expect to generate a significant amount of cash, most of which is going to go back to our shareholders. Now this supplemental dividend generally will be paid out annually in the first quarter based on prior year cash flow. We may also utilize opportunistic share repurchase to return cash 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 the cost reductions that we've experienced over the last several years. We're planning for $460 million of CapEx in 2021, and this includes the beginning of our recently announced Holden sawmill modernization project. We recently increased our '21 CapEx outlook by $40 million to include some high-return capital projects that will expedite OpEx opportunities across our businesses. 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. Over the past year, we've taken a number of steps to strengthen our balance sheet. We reduced our debt by $900 million in 2020 and ended the year well within our net debt-to-EBITDA target of 3.5x net debt-to-EBITDA. We also further reduced our pension obligations by $765 million through a retiree annuity purchase transaction. In 2021, we recently paid down a $225 million term loan at the end of May and have cash earmarked to pay down an additional $150 million later this year. With our unrivaled assets and industry-leading performance, we believe we're well positioned to fully capitalize on market opportunities going forward. And lastly, just a brief comment here on climate change. As society continues to focus on the impacts of climate change and global warming, we believe that the role of forest and wood products as the key part of the solution will become more and more evident. The growing conversation around climate and carbon will, we believe, help drive incremental demand for our sustainable building products as well as potentially opening up additional market opportunities around climate and carbon opportunities. 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. So in closing, we've taken a number of actions over the last year, including paying down significant amounts of debt, implementing a new dividend framework that will position us very well going forward. And I'm confident with our unmatched portfolio of assets, our deep operating expertise, industry-leading cost structure, our strong culture, great employees and our track record of disciplined capital allocation, we're well positioned to drive superior value for our shareholders into the future. And with that, Buck, I think we can go ahead and open it up for questions.

All right. Fantastic. So again, just a reminder, go ahead and fire away. If you have any questions, you'd like us to address, use the chat function. We will get to those as quickly as we can with the time we have. Let's dive in first on just the topic, I think I hear a lot from investors relating to what are you going to do with all of this cash? I think, obviously, the dividend strategy is fairly well articulated. But the story of 2021 and really 2020 is just remarkable run in lumber pricing, and wood products pricing across the board, obviously, driven by the strength of housing, which doesn't seem like it's going away anytime soon. There's just enormous demand still out there. So I guess the question is, aside from the stated dividend policy, you did mention also that one of the strategies here is to really grow and focus on growing the timber base or maybe growing the wood products franchise further. Does it make sense at some point to hold back some of this cash flow and maybe do some targeted or opportunistic acquisitions? How do you balance the opportunity sets versus the enormous cash flow and the supplemental dividend that could be paid out?

Yes. So maybe I'll just briefly touch on the acquisition question and then have Nancy speak to kind of how we're thinking about the dividend in that 75% to 80% framework. You're absolutely right, Buck, this has just been a phenomenal environment, great housing backdrop, which has translated into very strong pricing. And when you put that together with our strong operating performance, and the cost structure that we've built within our operations over the last several years, it's really a formula for a lot of cash flow. And so certainly, that's a position we find ourselves in now. With respect to acquisitions, we're always in the market to try to find ways to optimize, to improve, to grow our timber base, that's something that's true certainly in this environment, but it's really true in all environments. So we're going to continue to look for timberland opportunities. Every deal that comes to market we're looking at. And so I would expect us to continue to be active on that front. Obviously, you have to stay disciplined when we're talking about acquisitions, divestitures on the timber side. So we're going to continue to be very disciplined in how we think about that. But certainly, we expect it to be active in the M&A front on the timber side. Similarly, I'd say with Wood Products, as we've said, we're always looking for opportunities to do bolt-on acquisitions on the Wood Products side, if we can find 1 mill or 2 here or there, particularly if it's well suited within our timber base, those can be great opportunities for us. So we're looking at those as well, but again, in a very disciplined way. Just, I guess, in terms of holding back some of the dividend, I think we've said we're going to return 75% to 80% of our cash flow, FAD each year, so that's still the plan. Maybe I'll turn it to Nancy. Do you want to speak Nancy to kind of how we're thinking about that supplemental dividend and sort of how that framework is going to work?

Yes. Sure. Thanks, Devin. As we noted, under the new dividend framework, we're anticipating that the supplemental dividend, that variable portion will typically be paid out annually in Q1 for the prior fiscal year. And the primary reason for that timing is to ensure that we're matching the variable dividend component with the cash that we're generating throughout the year. However, that being said, we've indicated previously that we've not definitively ruled out the possibility of some short -- some sort of interim supplemental dividend later in the year. Considering this pricing environment, we are generating a significant amount of cash. So as we get further into the year, the Board will continue to assess our cash position, and we'll see how the rest of the year is playing out. So it is conceivable that we could do an interim supplemental dividend or some share repurchase at some point this year. However, even if we were to do the interim supplemental dividend later this year, we would still expect the majority of the supplemental dividend for the 2021 cash flow to be paid out in Q1 of 2022.

That makes sense. That's a great follow-on. That was going to be my next series of questions that you're right in, that was a great answer. So thank you for that. Also, in terms of the balance sheet and the debt pay down, so you took out $225 million of the term loan in May. Are there any other debt pay downs that would continue to make sense? Or is the balance sheet at this point about as efficient as it needs to be?

Yes, I'll jump in. Combined with the 2020 pay down and this recent pay down of the $225 million term loan that we did -- that we paid in May, we have $150 million of 2021 maturities that we'll pay down later this year. All of that combined, our gross debt level will come down to just over $5 billion, which we believe that level is appropriate and sustainable for the company across our business cycles. And I'd say that's in the ballpark of where we want to be from a leverage ratio perspective. And in terms of any additional debt pay down, we'll continue to look at opportunities as they present themselves. With the amount we've paid down over the last 6 to 9 months and the structure of our remaining maturities, we're in a good spot in terms of our leverage ratios. So we continue to think 3.5x leverage is still where we want to be across the cycle. That really means ensuring we're at a lower leverage ratio when -- where pricing is good across our key products like it is now, so that we don't see it elevating too high when we're in a challenged pricing environment like we saw in 2019. So really further debt pay down from here would really be more about maintaining dry powder for the future, so either acquisitions, share repurchase or other investments that could drive value in the future.

Okay. That's very helpful. The other question I get a lot from investors goes back to the ESG component and kind of the carbon opportunities that are out there. Just the optionality that kind of resides within this company's portfolio, which really hasn't been ascribed the true market value yet. But maybe just an update on kind of what is the status of some of the conversations about how to use Weyerhaeuser's timberland for carbon mitigation, whether it's offsets or some other sort of environmental credits. What kind of economic opportunity does that represent longer term, if we can establish some sort of market pricing for that?

Yes. Well, this is a really exciting area for us, Buck. And I think there are 3 things that I would really highlight in this general ESG topic. The first of which is, even before we get into the specific business opportunities, just at a company level, this realization that our business is a very green investment is something, I think, is really starting to occur to the broader stakeholder community. We're going to be putting out a carbon report later this summer, early fall, which really will quantify what a great carbon story we have. And I've said this before, but when you look at around -- you look around at other industries, it's pretty rare that a company can say they truly are carbon negative. And with our portfolio of Timberlands and the way we run our business, that's something I think that the broader investment community will more and more realize over time. But even beyond that general story from an investment thesis standpoint, when you dig into the specific business opportunities, there are a couple of really exciting opportunities for us. The first of which, I would say, on the Wood Products side, there is a growing recognition, I believe, that the environmental benefit of building with wood is really starting to take hold. And we're seeing some momentum around wood-based building. You're seeing that in mass timber, CLT. I think when you talk to the architectural community, they're starting to appreciate some of the environmental benefits, we're hearing that from the current administration as well. So I think there's some opportunities for incremental demand for Wood Products over time. But I think the other really big opportunity is in the forest with carbon mitigation opportunities, carbon offset opportunities. That's a big part of why we moved Russell into his new role as the Chief Development Officer, is to really dig in and grow those natural climate solution business opportunities. And whether that's mitigation banks, things of that nature or the really exciting opportunity, which is around carbon. And you think about a company like Weyerhaeuser, the largest private owner of timberlands with 11 million acres in the U.S., we sequester a lot of carbon dioxide from the atmosphere every year. And as we see these carbon offset markets continue to grow, which we think they will, when you look around at all of these companies that are talking about being carbon neutral, we think that the forest is a place that a lot of these companies are going to have to go to reach their long-term climate goal. So we're excited about that. We've seen this market really start to develop on the private market side, which is where we think a big opportunity will lie in the future. So it's still in the early stages of development, but something we're really excited about, and frankly, I think something that we're better positioned than anyone else in the industry to take advantage of as it develops.

Fantastic. We're down to our last minute, so I'll make this a lightning round question. Of course, everyone's got their own crystal ball on lumber pricing, but what are the -- what do you think the outlook here and the thesis behind potentially structurally higher for longer lumber prices? And what are the major downside risks that could pop up?

Yes. Well, I mean, look, we've been in a great environment for lumber pricing here over the last several months. It's really been a result of extraordinarily strong demand that hasn't been met by the available supply. As we think about going forward, I've said this before, I don't think $1,000 lumber prices are the new normal. But that being said, when you think about the amount of housing that we're going to have to build in the U.S. over the next 3, 5, 10 years, that's just a significant amount of demand for wood products. You layer on top of that, we believe you're going to have continued good, healthy repair, remodel demand. So the wood products demand that we're going to see, I really think over the next 5 to 10 years is going to be very strong. You'll have some supply response. We'll see continued supply coming on over a course of the next several years, but it's going to be coming on in kind of slow increments because it takes time for that new capacity. So our view is, we should be on a strong wood products pricing demand here for a number of years as this housing boom continues to develop.

I appreciate that. Well, that's a great concluding remark there. We are out of time. So thank you again for everyone joining us. We really appreciate it. Devin, Nancy, thank you again as well. And we're going to hear more from you in the near future. Congratulations, keep it up.

All right. Very good. Thanks, Buck. Take care.

Thank you.