Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

Thank you again for joining [indiscernible] and really, really introduced to you, Weyerhaeuser, and CEO of Weyerhaeuser, Devin Stockfish, [indiscernible]. Weyerhaeuser, they are a rather impressive company, a top 10 REIT, one of the largest private landowners in the United States. Of course, owning over 11 million acres of forestry assets as well as just the second largest Wood Products and Lumber Producing Business in North America. So it is an amazing time to be in the lumber business. I know there's a lot going on internationally as well. Lots to talk about. Certainly, we're still seeing tremendous housing tailwinds that will -- we think will continue to benefit Weyerhaeuser longer term. And of course, it's a really interesting time for investors because the stock is not reflecting any of these fundamentals, at least in our view. So with that, I'm going to let Devin to explore some of those, and then we'll jump in for some questions at the end. So Devin, take it away.

All right. Well, thanks, Buck, appreciate it. Good to be back with everyone in person, Nice to see faces live as opposed to over Zoom. I appreciate the opportunity to come talk to you about Weyerhaeuser and some of the really exciting things that we're doing. I will be making some forward-looking statements today. So typical cautionary language will apply to those. So we'll go ahead and get started. I'll begin with our investment thesis. At Weyerhaeuser, we really focus on 4 key levers to drive value for our shareholders: an unmatched portfolio of assets, industry-leading performance, strong ESG foundation and disciplined capital allocation. And I'll speak to each of those in a bit more detail, but first, just a few comments about 2021. As many of you know, we've really been focused on driving improvements across all of the value levers at Weyerhaeuser. And in 2021 alone, we made significant improvements in our portfolio through some transactions that we did in Alabama. In Washington, we launched a new natural climate solutions business. We continue to improve our operating performance. We captured an additional $70 million of operational improvements. And we really showed last year when you combined a good cost structure, industry-leading performance with strong pricing, we can generate a lot of cash flow with our platform. We continue to build on our strong ESG leadership position through our greenhouse gas reduction targets, and we released our new carbon record, which really details the tremendous carbon story that we have at Weyerhaeuser, and I'll speak to that more in just a few minutes. In 2021, we continue to strengthen our balance sheet. We paid down additional debt. We're at $1.2 billion of debt paydown over the last couple of years, and importantly, we returned over $2 billion of cash back to shareholders based on 2021 results. So really just a phenomenal year from the team in what was frankly a pretty challenged environment for most of the year. As we look forward, I think we have a really nice backdrop for many good years to come. And I'll pivot here to just speak to some of the fundamental drivers that we think are really going to be tailwinds for our business, and in particular, 4 macro trends that we think will drive growth in demand for our products as well as open up new and potentially meaningful business opportunities for both our industry and our company. So number one, as I've said, we're very bullish on U.S. housing. We've been under building for over a decade. There are strong demographic support for continued homebuilding in the U.S. similar with repair and remodel. We think this is going to drive a lot of demand for our products in the years to come. Number two, we do see more and more usage of wood in construction, primarily in the early stages, a reflection of the environmental benefits of building with wood. But over time, we think the economics for building with wood will continue to drive growth in that space as well, which will be another increment of demand for our products. We think on a global basis, we're going to continue to see a growing demand for wood fiber. And Weyerhaeuser, with our strong portfolio and our export opportunities, really is well positioned to capitalize on that trend as well. And then lastly, I think we've all seen the impacts of climate change and global warming and the continued focus that society has on solving those problems. As the largest private owner of timberlands in North America, one of the largest producers of climate-friendly wood products, we're really well positioned to play a role in mitigating the impacts of climate change, and our new Natural Climate Solutions business will be a key part of that in delivering cost-effective solutions to companies as they try to meet their Net Zero commitment. So a lot of really, I think, positive macro trends supporting our business in the next several years, but really for many years to come. So let me pivot now to our portfolio, which really is unmatched in the industry. As many of you know, we are the largest private owner of timberlands in North America. We have just under 11 million acres of timberlands across the United States. We're also one of the largest producers of wood products in North America. We manufacture lumber, oriented strand board and a variety of engineered wood products. We have 18 distribution facilities in key markets across the United States. And then finally, our Real Estate, Energy and Natural Resources business is really focused on maximizing the value of every acre that we own, including through our new natural climate solutions business. Each of these businesses has significant scale, industry-leading performance. We manage it within a tax-efficient REIT structure. As Buck mentioned, we are one of the largest REITs in the United States. Over the many decades of being a leader in the forest products industry, we've really developed unmatched skill set in creating and capturing value across each and every stage of the supply chain from the proprietary seedlings that we use to start the forest, the way that we manage the forest over a growth cycle, our low-cost, efficient manufacturing facilities all the way through to the end customer. We're always focused on being the best at everything we do, and that extends to the way that we capture value through our HBU sales and the other non-timber resources that we capture off of our portfolio. It's not just about being the best though, it's also about how you do it. And we have been focused on running our business with integrity and a strong focus on ESG for over 100 years. And with our new sustainability strategy that we rolled out in 2020, this will continue to be a core part of how we run our business for many, many years to come. As you can see from this slide, we've got a lot going on in the ESG space. Our commitment to environmental stewardship starts with our focus on sustainable forestry. This goes back to the early 1900s, the early days of the company. We're also very focused on minimizing our environmental footprint in our manufacturing business. And importantly, our businesses, our timberlands, our wood products businesses are natural climate solutions. Our Timberland portfolio captures millions and millions of tons of CO2 from the atmosphere every year. We store that carbon in the wood products that we manufacture. We are significantly carbon negative, meaning we sequester more than 4x the amount of carbon dioxide every year that we emit. No other company can say that. It's a really, really positive story from a carbon standpoint. We also have a strong commitment to social responsibility and governance, and this covers a wide array of activities, including safety and citizenship, the work we're doing around diversity and inclusion. And this is important because it helps us attract and retain top talent, maintain positive relationships with our stakeholders and really ensure that we're managing our business 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 and enduring value. As I said, we have 11 million acres across the United States. We also manage another 14 million acres in Canada under long-term license agreements, really just from a scale standpoint, from a diversity standpoint, unmatched in the industry. Of the 11 million acres, approximately 3 million are in the Pacific Northwest. This is one of the best tree growing regions in the world. These are premier assets. High-quality Douglas fir plantations, great access to both domestic and export markets. We have 7 million acres across the U.S. South. Again, high-quality Southern yellow pine plantations, and this really allows us to access all of the key markets across the Southern United States. We have 1 million acres in the Northeast, a wide variety of species, including some high-value hardwood sawlogs. We have one of the best export businesses in the industry. This business has been primarily focused on the Japan market historically. We've got decades of experience sending high-quality sawlogs to the steady post and beam market in Japan, highest margin business within our Timberlands organization. We also have long-standing relationships with customers and other key Asian export markets, including China and Korea. And we're really well positioned to grow this export business over time, both out of our existing scale platform in the West as well as our emerging platform out of the U.S. South. And we remain committed to growing this business. We will obviously continue to optimize and improve the portfolio through the work that we do year after year, but we're also targeting an additional $1 billion of acquisitions in the timberland space over the next several years. Of course, we'll be disciplined in how we go about it, but we're really going to look to leverage our competitive advantage in the space. So things like our scale, the integrated nature of our business, our export programs, and the work that Russell Hagen and his team are doing on really unlocking the optionality from the land base to make sure that we're driving good returns from these acquisitions. Now managing a large diversified portfolio of timberlands also presents opportunities over and above the timber value, and our Real Estate, Energy and Natural Resources business is focused on just that, maximizing the value of every acre we own. This includes the work we've historically done around higher better use properties, construction materials, renewables, but it also includes some of the work that we think is really exciting in the carbon space. Now a key aspect of this business has historically been and continues to be identifying acres across our portfolio where we can unlock value through activities over and above base timber values. This AVO, or Asset Value Optimization, program really looks at attributes across the portfolio that can support a higher, better use valuation. We refresh this analysis routinely. We've identified in the neighborhood of 1.2 million acres across our portfolio that we think has the potential to get an uplift on value over and above timber over time. The Energy & Natural Resources business, which includes the Natural Climate Solutions business, is really focused on capturing additional incremental value back to the acre through lease and royalty payments from other non-Timber based resources. And so our Natural Climate Solutions business, which I mentioned we launched last year, is really focused on 4 areas, 2 of which we already have in our portfolio. We've been working to grow those over time, and that includes things like mitigation banking and conservation as well as renewable energy. These businesses, we think, have a lot of upside and growth over time, and we're working to grow those parts of the business. But we think the 2 pieces of this new business that have a lot of opportunity, really exciting on the carbon space, both in terms of carbon capture and storage, where you take CO2 and you store that deep underground and some of our subsurface ownership as well as forest carbon. So carbon offsets from the forestry work that we do. These are really exciting opportunities, both still in the early stages, but we think have a lot of growth over time. We're looking to grow these businesses to a $100 million business by the end of 2025. I think most of that growth is going to come in the early years from renewables, but over time, again, I think the carbon piece of this business has a lot of upside. Both of those businesses are really in the early stages. I would also note with respect to the $100 million, this is really a comment to 2025. We think there's a lot of opportunity over and above that. The need for natural climate solutions over the next 5, 10, 20 years from all of the companies that have made Net Zero commitments, it's a really big opportunity. And I think there are very few companies that are better positioned than Weyerhaeuser to take advantage of that. And then finally, we are one of North America's largest producers of wood products as I'll cover in a moment. We've done a lot of work to improve this business to really take it to an industry-leading wood products manufacturing business. We've reduced costs. We've improved profitability, really to allow us to maximize the margin across business cycles. Our Wood Products business, as I said, is one of the largest in North America. We have 35 mills across the United States and Canada. They're well aligned to our timber base. We have 18 distribution facilities as well. And this mix of assets and geographic coverage, it allows us to serve all of the key markets across North America. And we really have transformed this business over the last number of years. The work that we've done through disciplined capital investments, operational excellence, cost cutting, innovation, have really transitioned this into, I think, a premier industry-leading wood products business. And we're looking to continue to improve on that, continue to drive efficiencies, drive down costs, improve reliability in our mills to increase the competitive advantage that we have in this space. Additionally, as we announced at our Investor Day last year, we're looking to grow our lumber business organically 5% per year through 2025, and that's really just organic capital investments in our existing mills. So no green fields. It's all investing in mills where we know the people. We have the supply chains in place, very low-risk investments into this business. And just for context, when you think about the 1 billion board feet that we're adding organically, that's the equivalent of building 4 to 5 greenfield mills, but at a lower cost and a lower risk. So really excited about some of the work that we're doing in the Wood Products space. A key part of our overall strategy as a company for a number of years has been our intense focus on improving our operating performance across all of our businesses. And as you can see, we've made meaningful improvements really across the board at Weyerhaeuser. In 2021 alone, we captured an additional $70 million of OpEx improvements. That's on top of the $750 million in OpEx improvements that we've captured going back to 2014. We're really taking these businesses to being industry-leading. In 2021 alone, we generated record EBITDA from these businesses. The cost structure is in good shape. From a margin standpoint, we're #1 or #2 in all of these businesses. And I know we're not done. This is really cultural at Weyerhaeuser to strive every day to improve how we run our company, and so we've got another $175 million to $250 million of OpEx improvements targeted over the next several years. So let me turn to capital allocation. We really do believe that disciplined capital allocation is a key part of delivering shareholder value over time. I'll start just with a quick review of our capital allocation philosophy. At Weyerhaeuser, we have 3 key priorities: returning cash to shareholders through dividends and share repurchase; investing in our businesses through disciplined capital investments and value-enhancing growth opportunities, all while maintaining an investment-grade profile. So just real briefly on our capital, our cash return framework. This framework is really targeting a payout range of 75% to 80% of our annual adjusted FAD every year. And I think this really underscores our commitment to returning a significant amount of our cash flow back to shareholders. The framework has 2 key components, the first of which is a sustainable quarterly base dividend. This is really set to be sustainable across all parts of the business cycle. We've committed to growing this base dividend by 5% per year through 2025. And then that quarterly base dividend will be supplemented every year with an additional return of cash. That's primarily going to come through a supplemental dividend to get up to that 75% to 80%, but we can also utilize opportunistic share repurchase for a cash return as well. And as you can see, we returned over $2 billion of cash based on 2021 results last year. That was, I think, really reflecting the strength of this capital allocation framework as well as our commitment to returning cash back to shareholders that equated to approximately 79% of our adjusted FAD for 2021. Brief comment on share repurchase. We did increase our share repurchase authorization up to $1 billion last year. I think this just gives us a lot of flexibility to do share repurchase. I anticipate we'll continue to allocate capital to share repurchase on an opportunistic basis as we look to maximize shareholder value. We do continue to invest back in the business through capital expenditures. These are organic investments back into our Timberlands and Wood Products business. This has been a key part of the cost reductions and the operating improvements that we've had at the company. We're targeting $440 million of CapEx in 2022 and will generally be within the $420 million to $440 million range over the next several years. And then the last part of the capital allocation approach is really maintaining an appropriate capital structure, and to us, this really means maintaining an investment-grade profile. We've done a lot of work to strengthen the balance sheet over the last couple of years. We've paid down $1.2 billion of debt since 2020. We finished 2021 well within our targeted range of 3.5x. I would note -- not on the slide, but we are in the midst of refinancing some higher-cost debt right now, which should reduce our annual interest payments and extend out some of the maturities at very favorable rates. And so we'll be reporting on that a little bit more in the coming days. So just a few comments about market condition. As I said, from a housing standpoint, housing activity has been strong. We've seen residential construction really operating at a favorable rate here for some period of time. Similar with repair and remodel. Our view is just with underbuilding the low level of inventory, demographic trends. We see these markets, both residential construction and repair and remodel, holding up very well in 2022. That's the same story we hear when we're talking to our homebuilder customers, our big box retail customers, the dealer network. So expecting this to be a good year from a demand standpoint. Moving into the specific product lines, both lumber and OSB, what we've really seen over the last several months is a repeat of what we saw a little over a year ago, which is strong demand with a limited ability to flex up supply, combined with low inventory levels, we've seen pricing for lumber and OSB get back up to really, really historically strong levels. As we think about just where we are in the year, heading into the spring building season, inventory levels are, by and large, still pretty low. So as long as we have a reasonable spring building season, I think the setup for lumber and OSB is pretty strong. Turning to log markets, both in the West and the South. Similar to lumber and OSB, we've seen a pretty good demand signal for logs coming out of the market. That's partially a reflection of the strong end markets for lumber and OSB and some of the other end markets for logs. Again, heading into the spring season, feeling pretty good about both of these markets, particularly the West, which is a very, very tensioned market. We're seeing really strong log markets in the Pacific Northwest. And I would say, steady and really for this time of the year, pretty solid log pricing in the South as well. So obviously, there are concerns about mortgage rates, what's that going to do to demand, supply chain issues we're all aware of. We're watching those closely, but on balance, we're feeling very good about 2022 and really as we head into the spring building season, I think we have a good setup. Now just kind of turning to the future. We really do think there are some opportunities over the next several years for us to deliver a lot of value for our shareholders. At our Investor Day last year, we laid out a lot of very specific multiyear targets. You can see those on the page. We're committed to meeting or exceeding those targets in just kind of walking through those. Of course, on the portfolio side, we'll continue to optimize and improve the portfolio of assets that we have. We're going to put $1 billion to work in Timberland acquisitions to continue to grow the value of that business. We're going to grow the Natural Climate Solutions business to $100 million per year by 2025. We will absolutely stay committed to improving our operating performance going forward, not just to stay as an industry leader, but really to try to widen that gap to our competition. We're going to grow our lumber production by 5% a year. We feel very confident in our ability to do that. We're going to continue to build on our strong ESG foundation. Obviously, we'll continue to reduce our greenhouse gas emissions and the commitment we made there, but really, we're going to be spending a lot of time making sure that the market understands the ESG story that is Weyerhaeuser's. So we'll really be doing a lot of work to position Weyerhaeuser as a premier ESG investment opportunity and particularly, around the carbon space. I think that's a big opportunity. When you put together our portfolio, the performance that we've been demonstrating, the macro tailwinds I mentioned, we expect to generate a lot of cash over the next several years. And with our capital allocation framework, we expect to return a majority of that -- the vast majority of that back to shareholders. So we feel very good about our ability to continue to drive value for our shareholders over the next several years. So in closing, we've been doing a lot of work really to improve across all of these value levers. We've got a lot of opportunity out ahead of us. We're very focused on capturing these opportunities going forward. And when you put these actions together with the growth targets that we've set out, we think we're well positioned to drive superior value for our shareholders going forward. So I think with that, Buck, maybe we move to Q&A.

Yes, we've got about 5 minutes. Anybody have a question you want to start with? Yes, right there.

[indiscernible]

Yes. I think from an investment-grade standpoint, the good news is, we've got a lot of room. We're sub 1 right now against the 3.5x target. So we do have some dry powder in there, and we've been intentional about that. We do have some cyclicality in our business. And so as we think about what that right leverage target is, we think about that across the cycle. So obviously, in an environment like today where pricing is strong, you're going to see that leverage ratio come down, but there will be blips over time, and so we need to manage through that. I don't think the leverage that we have currently really restricts us at all in terms of doing share repurchase. In fact, we did $100 million last year. I expect us to continue to put capital to work. It works really well within that new capital allocation framework that we have. So that 75% to 80% does contemplate some amount of share repurchase being included in that. So that's an area that we look to deploy capital into under the right circumstances, where we think it can create value.

[indiscernible]

It is, yes.

Yes, go ahead in the back.

[indiscernible]

Yes. So the question is really about fire in the West and the risk associated with that. No question, more fire risk in the West. We've seen that really every year over the last several years. The good news from a Weyerhaeuser standpoint is, because of the way that we manage our timberlands, generally speaking, we have a relatively low level of impact from fire every year. So for example, in 2021, a lot of fire activity in the West, we had under 5,000 acres that were impacted by fire. And part of that is, we are intensively managing our forests to keep them healthy. We have a good road network, which is a natural fire break. We have helicopters, foresters on the ground to make sure that if we do see a fire, we get on it early. I can tell you that there's no risk. Obviously, in 2020, it was a little bit bigger fire season. Frankly, one of the worst we've seen in a long time. And even then, it impacted less than 4% of our forest. We got out, we captured the value. So it is a risk, I think we do a good job of mitigating the risk. The question about insurance, as a practical matter, it's just not cost effective to get insurance on timberlands of any magnitude.

All right. I got a question. Given some recent international events that have been happening out there, and seems like Russia is in a little bit of precarious position. It seems like some of those Russian logs may -- that may have gone to Europe or may have gone to Japan, things are going to be disrupted for a while. So how does that change the export opportunity or add tension to the global supply chain or demand for logs? How does this all adjust in the new world order that we're looking at now?

Yes. Well, I mean, first, I'll just say, obviously, heartbreaking what's going on in Ukraine and really feel horrible for the folks that are having to deal with that situation. From a macro standpoint, global standpoint, from a wood flow perspective, Russia, they're responsible for a lot of wood flow throughout the globe. Just from a lumber standpoint, call it, 20% of the world's lumber comes out of Russia. Now I think as we consider how this is all going to play out, there -- it's going to be noisy here for a little while. I expect they're going to have to turn pretty much all of that supply to China and some other countries that aren't putting sanctions. It is going to limit the amount of wood going into Europe from Russia, which I suspect will mean more of that European supply is going to have to stay within Europe, which means less exports to the United States, less exports to Japan. So all things being equal, I would expect that to have an upward lift on pricing in both the U.S. and Japan in the near term. And we'll see kind of how this plays out. China, there are a lot of puts and takes. Some of the European lumber is going to have a hard time getting into China because the rail goes through Ukraine and Russia to get to China. So maybe a little less there, but more coming from other parts of Russia. So I think it's going to be noisy for a little while. Probably moderately net positive from a U.S. market standpoint.

Would the tension more on the West side or the U.S. South? Do you think...

I think it will be equal. I think it will be equal. There's just going to be a lot of additional tanks in the global supply chain for moving wood around, and I think it's going to be hard to say, over the next 3 or 4 months, exactly how that's going to play out. But again, there's just going to be less wood fiber going into European markets from Russia, which will have a knock-on effect.

Guys, that's all we have time for in this room, but we have a breakout downstairs. Lots more to talk about. So we'd be happy for you to join us. Thank you for coming in. Thank you so much.