Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

All right, we're at 11:00. So thank you so much for joining us. My name is Buck Horne. I'm the timber REIT analyst as well as covering the housing sector, both multifamily, single-family rental and homebuilding, for Raymond James & Associates. Really thrilled to introduce to Devin Stockfish, CEO of Weyerhaeuser, this morning, and lots to talk about, lots going on in the timber industry and with lumber and with housing. So with that, we're going to do a few opening comments, brief, little maybe operating update and then we'll dive into some questions. So Devin, the floor is yours.

Yes, great. Thanks, Buck, appreciate the introduction and the opportunity to talk to you about Weyerhaeuser Company. We don't have a lot of time, so I'm going to keep my prepared remarks pretty brief here, just cover a little high-level overview, and we can dive into questions. So I will say for anyone that's interested, we do have a deck with a lot more detail that's available on the REITweek app and on our website as well. So just a quick overview of the company for those that aren't quite as familiar. We are the largest private owner of timberlands in North America. We have nearly 11 million acres across the United States. We manage another 14 million acres across Canada. We're one of the largest manufacturers of wood products in North America. We have 35 mills. We manufacture lumber, oriented strand board, a variety of other engineered wood products. We have 19 distribution facilities as well in key locations. And then finally, we have a Real Estate, Energy and Natural Resources business, which is really focused on maximizing the value of every 1 of those nearly 11 million acres. All of these business segments have significant scale, industry-leading performance. And they're managed within a tax-efficient REIT structure. In fact, we are one of the largest REITs in the United States. I'll dive in briefly to our investment thesis here in just a moment. But before I go there, just a few comments on 2021. As I think many of you know, we've been hard at work at Weyerhaeuser for a number of years across each one of the value levers of our investment thesis. In 2021 alone, we improved our portfolio through acquisitions and divestitures in Alabama and Washington. We started a new Natural Climate Solutions business, which I'm sure we'll touch on here today. We've continued to improve our operating performance. We've taken out an additional $70 million of costs through our OpEx programs. And really, that's gotten us to the position of being industry-leading across all of our businesses. We continue to be a leader in ESG. In 2021, we released our inaugural Carbon Record, which really just details the tremendous carbon story that we have at Weyerhaeuser. And then on a capital allocation standpoint, we significantly improved the strength of our balance sheet, returned over $2 billion based on 2021 performance through dividends and share repurchase. So just a lot of great work by the team and frankly in an environment that was pretty challenging at times across all of the different things that we faced last year. From an investment thesis perspective, we have four key levers that we use to drive value for shareholders. It starts with an unmatched portfolio of assets, it includes industry-leading performance, a strong ESG foundation and disciplined capital allocation. And just for the sake of time, I'm only going to touch on a couple of these but certainly happy to answer any questions that folks have. From an ESG perspective, we really are an industry leader. This has been a core part of who we have been as a company, sustainability ESG for over 100 years. And it starts with sustainably managing our forests. And that really goes back to the early days of the company. We also focus on reducing the environmental footprint of our manufacturing facilities. And I think the key point that maybe people don't fully appreciate until they think about it more is the carbon story associated with what we do. The millions of acres of timberlands that we manage as a company, the wood products that we manufacture, sequester CO2 out of the atmosphere and store those in the products that we make. And in fact, we are, I would argue, one of the best carbon stories anywhere. We are more than four times carbon negative. So in other words, we sequester four times as much CO2 from the atmosphere as we emit every year. And that's just something, I think, maybe that isn't fully appreciated in the market and something that will create both business opportunities for us as well as really positioning us as an ESG story for investors that are interested. As we think about the next several years, we've laid out some longer-term targets for the company. We laid those out in detail at our Investor Day. We announced that we will be growing our timber base by $1 billion over the next several years. To that end, we recently acquired some of the highest-quality timberlands come to market in quite some time in the Carolinas transaction. And we'll continue to be very active on that front. As I said, we did create a new Natural Climate Solutions business. We're looking to grow that business up to $100 million a year by 2025. I think there's a lot of upside beyond that in the years to come. We'll continue to focus on our operating performance, really looking not only to maintain the position as an industry leader but also to continue to grow that gap to our competition. And as part of that, we've announced $175 million to $250 million of more OpEx that we'll capture by 2025. From an ESG perspective, we'll continue to position the company as an ESG leader, continue to make progress against the greenhouse gas emission reduction targets that we announced last year and really position the company as a true ESG leader in the marketplace. When we combine the industry-leading performance with our portfolio, our growth story and our disciplined capital allocation approach, we really have an opportunity to generate a lot of cash flow and return that back to shareholders. And that will be a key part of how we create value and really position the company well as we progress in the coming years. So I think with that, Buck, maybe I'll turn it over to you, and we can just dive in to Q&A.

Thanks. There's certainly a lot there to get into. So we'll try our best to cover as much as we can. I thought we could start a little bit with kind of recent events in the transaction markets. There's obviously a big deal with some of your peers that happened. I know you're limited in what you can say about that directly. But the Carolinas transaction, you guys completed shortly before that deal was even announced at what did appear to be pretty significant pricing premiums relative to historical U.S. South averages. But we've seen now log pricing in the U.S. South probably reaching 10-year highs for the first time in a long time. So there's new tension in that market. So is this the beginning of a new pricing paradigm for how we should think about what U.S. South timber acreage is worth?

Yes. I mean, I think that's absolutely right, Buck. We've been saying this for a number of years. Our view is that the value of timberlands, and that's both in the South and in the West, is going up. And there are a number of reasons behind that. But I think of late, you've just seen a lot of interest in this asset class. And I think that's a reflection of a few things. First of all, I do think just the trajectory of log prices in the South is playing into valuations. But I think it's bigger than that. I think we've seen more players coming into the space. When you see JPMorgan buying Campbell, you see sort of private equity-type funds coming into the space to buy timberlands, I do think that there is a growing appreciation for some of the optionality that you see on timberland. Historically, the way timberland has been valued is you take the inventory, you'd run your harvest projection, you'd make some assumptions around log costs and log prices and you do a discounted cash flow. And that's kind of how you did valuation. What that doesn't capture is all of the other things that you can do with land. And one of the things that we, as a company, have really been focused on and Russell Hagen, our Chief Development Officer, has really been spending a lot of energy on this is really capturing all of those other values. So you think about solar and wind and mitigation banking, all of the opportunities around carbon, both forest carbon and carbon capture and storage and real estate, there are a lot of things that you can do with a land base that I don't think have historically been fully priced in to timberland valuations. I don't think we're all the way there to people fully underwriting all of those. But I do think that, that's playing into a lot of people kind of pushing the envelope on their value ranges. And so we've seen our deal, obviously in North Carolina, higher headline value. I would argue it's one of the best timberland packages that's come to market in a long time. But you've seen a number of other data points to that effect. The Potlatch transaction, you've seen some TIMO deals that have come to market that I think are getting priced at just a higher value than we've seen. And so I think those are just data points that reinforce our view the value of timberlands has gone up and is continuing to go up.

That's really interesting. And kind of diving into a corollary or I was going a little deeper with these opportunities, you've signed this new venture arrangement with this Occidental-backed subsidiary to do carbon sequestration, kind of deep-ground injection of CO2. Can you explain what the timetable is and how that maybe improves the economics of your acreage that's in the -- I guess, this Louisiana that you said you're doing this on? So yes, talk a little bit about that venture.

Yes, we're really excited about this opportunity. Our first deal that we announced here recently was with a subsidiary of Occidental Petroleum. And really what carbon capture and storage is, is you go to a facility that is emitting a significant amount of CO2. On-site, you capture the CO2, you liquefy it, you put it through a pipeline and then you pump it underground, typically around 10,000 feet below ground. And this, for us, is a great opportunity to again just drive more value back to our acreage. One of the things that's unique about our business is we do own subsurface rights on the vast majority of our timberland holdings. We've got good geological data that we can use to go to companies like Occidental, and there are a whole host of other companies that we're in conversations with, and say, "Hey, we think that the geological formation in this location is really accommodating to a carbon capture and storage opportunity. We've got a land base so that you can deal with just one player, one sophisticated party instead of trying to piece that together with a bunch of different landowners." So we're really excited. Occidental, they know how to do this. They have the technology, they have the desire to move this quickly. In fact, they had a recent Investor Day, where they kind of laid out their timeline. So we think that deal will come online somewhere in the neighborhood of 2025. I think we'll probably announce at least one more carbon capture and storage deal this year, if not two. And we're building a pipeline of additional deals. Now certainly, you can't do one of these on every acre that we own. It has to have the right subsurface geology. But we do think, over time, this is going to be a really nice little business for us.

Now when you do this, does this affect the harvest cycle or the growing of the timber on top? Does that -- how does that affect...

That's the beauty, Buck, is that it really doesn't impact how we operate the land base. You'll have a small strip where you'll give an easement for a pipeline and then there will be a little footprint where they actually have the facility to inject the CO2. But by and large, we continue to operate the land above ground just as we would before. So similar to -- I think, a good analogy is on wind, right? You build the wind turbines above ground, and we get paid for leasing them the land and the space, but we continue to operate the timberlands as we would. So it's a really nice, just additional increments of value that we drive back to the acre.

That's fantastic. So really interesting. It would be interesting to see how that changes the economics around the whole acreage and equation there. Maybe let's talk a little bit about lumber pricing and kind of what's happening. Obviously, lumber prices are in the down draft at the moment. They've been pretty volatile year-to-date. What are we seeing in terms of inventory that's in the channel. Obviously, there's a lot of housing data going on with the rise in mortgage rates that's kind of affecting things. But how do you see the lumber volatility for the remainder of the year? What's kind of -- what's happening out there recently?

Yes, I'll touch on some of the specifics of what's going on in the market today. And there's no question, we have seen a lot of volatility in lumber prices, OSB prices over the last couple of years. I do think it's always important as a preface to that conversation to just kind of step back and provide some context. We certainly have seen lumber prices come down a bit over the last month or so. But they're coming down from a position of really just historic levels. At any time pre pandemic, if you had come in the industry and said, "You're going to be looking at $600 or $700 lumber prices," which is kind of the range we're trading in now, people would have been very, very happy at those prices. So I think it is important to remember where we are relative to historical pricing, still very, very strong. We've seen really this year, and frankly just over the last 2 years with some of the volatility, is we've seen a strong level of demand, both from housing and repair and remodel, coupled with just a number of supply shocks. And that goes back to the early days of the pandemic with COVID, when things were shut down and a lot of capacity came out, to the COVID waves, to some of the weather events. When you have a really strong level of demand and supply just barely keeping up, if you have those supply shocks, what it means is the inventory levels get drawn down significantly. And you sort of get that panic-buying going. And that's really when you see lumber prices trade up at $1,500, $1,600 a thousand. That's typically what's going to be driving that. Now as we've seen over the last couple of months, the rail situation in Canada has eased just a little bit. You've got a little bit more of that volume coming in. And really, what we've seen in the past is when you get up to these high lumber levels, the prices, if you just get a little bit of breathing room in the system, that gives the buying community a little opportunity to tap the brakes and kind of see what happens on pricing. And once you start going down, it's like anything else, people are very cautious of building inventory in a falling price environment. So I think where we are now is, over the next month or so, you'll probably see things settle out, where people get comfortable that they're half or near bottom. You'll start seeing the buyers build inventory again and things will settle out.

So maybe break apart, there's things that are happening in the new home market from the homebuilding side of the equation. We've seen some slowdown more recently. But there's still an enormous backlog of homes that still need to be completed from the builders. Is there any differentiation between kind of order flow from the homebuilding segment versus what's happening in the repair and remodel segment?

Yes. Well, take repair and remodel first, that's a little bit easier. We're still seeing really pretty strong repair and remodel activity. That's certainly the case on that pro segment. That really hasn't slowed down. That continues to go at a very steady pace. And then the do-it-yourself market, what we have seen over the last couple of years is when lumber prices and OSB prices really get up to those peak levels, you do see some of that activity slow down a little bit. When people go into your Home Depot or Lowe's, there can be a little bit of sticker shock. So we've seen a little bit of that. Although as the prices have come down, I think that some of that pressure abates a little bit. On balance, repair and remodel year-to-date is pretty strong, not as strong as last year, which was really peak, all-time repair and remodel activity. But if you look back to '19/'20 kind of pre COVID, this year is stronger than those years from a repair and remodel standpoint. From a housing perspective, just at a high level, I would say I don't think we're nearly as pessimistic maybe on housing as some of the commentary that you hear, that sort of daily drumbeat in the news about housing. When we think about 2022, and I think this goes to your point, Buck, even if we do see a little bit of softening in new home sales, and obviously last month, we saw that, there's still a pretty significant backlog of homes that have been sold, permitted but not yet started and completed. And so our view is 2022 is still going to be a pretty good building year for residential construction even if you do see a little bit of choppiness as it relates to affordability, mortgage rates, et cetera. So I think 2022 is going to be just fine. I think it's hard to say over the next 6 to 9 months, maybe we do have to work through a little bit of an air pocket from a housing standpoint as people kind of adjust to 5.5% mortgage rates. But ultimately, regardless of whether that takes 6 months, 9 months, what have you, we're going to end up back in the same place we started, which is we don't have nearly enough homes in the United States to meet demand. And that's really what drove 20% year-over-year Price appreciation is just the sort of gap between supply and demand. And ultimately, over the next 3, 5, 10 years, we've got to build a lot of homes in the U.S. And so notwithstanding maybe some of the current angst about housing, we still have a pretty bullish view on housing over the mid- and long term.

Well, we certainly concur with that view, given the slides that we're calculating. I'd love to delve right back to the sawmill and wood product categories just briefly, trying to understand kind of how maybe private market valuations are changing for sawmill capacity, given the tallying deficit we see for the -- for many years ahead of us. We've seen some pretty heady prices around capacity expansions, pricing where people are paying upwards of $1,000 per thousand board feet of capacity for certain sawmills. And at the same time, it seems like the marginal cost of production out of Canada keeps increasing. So maybe kind of explain how you think about if there's a new pricing floor for lumber prices that -- whether that would lead to capacity reductions in certain parts of the North America versus what people are adding to the U.S. South.

Yes. I mean, I think if you think about the lumber market, in particular, in North America, there are three key regions to think about. There's British Columbia, there's the Pacific Northwest and there's the U.S. South. And you've heard a lot of commentary about what's going on in British Columbia. The reality there is there's just not enough fiber to meet the needs of all that capacity. And that's a result of pine beetle, fire, government regulation. And what that's resulted in is just British Columbia going from historically the low-cost producing region to the high-cost producing region. With log costs and some of the other expenses up in British Columbia, I think the price floor for lumber in North America has gone up. At some point, you can debate whether you think it's $550 or $600, there are a variety of views. At some point, you get lumber prices below that level. And a good percentage, I think, of the British Columbia markets is going to be cash flow negative. And so people may operate cash flow negative for a period of time, but they won't do it very long. And so I think what happens then as a result of that is if you do see pricing come down dramatically, ultimately that's probably going to have an impact on production. So that's kind of, I think, what's setting the new cost floor. As we talked about new capacity coming into the market. I don't think you're going to see a lot of new capacity coming into the Pacific Northwest. Log costs are too high. It's just a very tensioned wood basket. So there's just not a lot of extra fiber to build new capacity. And what you've seen is there has been a lot of new capacity coming into the market. But it's all going into the U.S. South. And that's just really a reflection of the U.S. South being the best place certainly in North America, frankly if not in the -- on the planet, to manufacture lumber. So we have seen a steady drumbeat of capacity coming into the U.S. South, which, by the way, is good for our Southern Timberlands business. And I think you'll continue to see that. Now the reality is it's taking a lot longer for that to come online. I think now, just given the delays in getting equipment for a new facility, you probably added 9 months, 12 months, something along those lines of time, to get a new greenfield up and running versus where you were pre pandemic. So I think that just stretches it out for a while. But we do expect to continue to see capacity coming into the South. And it will be offset ultimately by some capacity reduction in other regions.

Yes. We see a lot of headlines about some of these greenfield expansions and maybe some of the others' press releases. But you guys have a significant internal initiative to expand your existing footprint. I mean, what's -- can you put some perspective around the -- what you guys are doing internally that may not be catching the headlines?

Yes. I mean, the way that we're going about it is we also think there's opportunity to grow our production on our lumber business. And we've announced we're going to be growing that by 5% a year. And so what that means is, over a 5-year period, we're adding 1 billion board feet of capacity. And that's the equivalent of 4 to 5 new sawmills of capacity that we're going to be adding to our existing footprint. So our strategy has been a little bit different. We haven't gone out and done greenfields. Because frankly, we feel like we get a better risk-adjusted return investing that capital into our existing footprint. When we invest into an existing mill, we don't have to go out and try to hire 150, 200 new people in a tight labor market, logistics, residual offtake agreements. All of those other risks that go along with building a new greenfield mill, we sort of take those out and we invest into an existing footprint, which, by the way, are typically very proximate to our existing timberland base. So we think that, at least for the time being, is the right strategy. And that's kind of how we've been investing. It's not maybe as sexy as a greenfield mill. But I think from a long-term return standpoint, we're going to do pretty well with that strategy.

And what kind of target returns on capital or other metrics, how -- when you're able to expand, what kind of profitability these projects generate?

Across the Wood Products system, we generally look for north of 20% ROI on our capital investments. Now obviously, like anything, some are above that. For things that are a little bit more either regulatory or sustaining, you might get a little bit below that. But on average, we shoot for above 20%.

Got it. Maybe also let me zoom out for a second in terms of the global picture for wood supply. Given the events that have happened in Europe, the Russia-Ukraine events, there's a lot of -- obviously, there's been a lot of changing of the flow of wood out of Europe due to that. You've got changes now in terms of what's accessible in Russia longer term. So how do you think the events that have transpired this year may affect global wood markets for years to come?

Yes. Well, I mean, when you think about the global wood supply, it is truly a global market. And so when you have a situation like what we've seen in Russia and Ukraine, Russia is a very large producer of wood products. They've got a lot of forests. And so I think initially, what we're seeing is obviously -- Europe gets about 10% of their lumber from Russia and Ukraine and Belarus. And so that's effectively been stopped as of this point. So what's going to happen here in the near term is Europe is going to have to keep more of their production domestic to satisfy the needs of Europe to make up for that lost Russian supply. So that's going to have a couple of knock-on effects for us. The first of which, and this is probably the most material in the near term, one of our most important export markets is the Japan market. That's where we send our highest-value logs out of the Pacific Northwest. Our customers in Japan compete against European glulam supply. And what we've seen, both as a result of transportation disruptions but more recently with what's going on with Europe, is less of that European supply going into the Japan market, which has given our customers an opportunity to grow market share. So Japan has been a tremendous market for us for a long time. And I think that's going to continue to be the case. China is going to be a mixed bag. Russia will move as much of the wood that was going to Europe into China. Some of that is logistically challenged in terms of doing that. But I do think you'll see more Russian wood going into the China market. Now the flip side of that is you're going to see less European wood going into that market. So for us, I think, net-net, it's probably about neutral. We have a nice little niche market into China with our Douglas fir logs, so I don't think that's going to have a material impact on us. The other piece that we may see over time is to the extent that Europe has to keep more wood domestic, you may see less of that European lumber coming to the United States, which again is just less lumber supply, which over time you would expect to have at least some level of upward pressure on price and demand for domestic.

Got it. Very helpful. Maybe spend just a couple of minutes or maybe a minute on just balance sheet management, how you guys are thinking about capital allocations, whether that's any sort of debt maturities. The balance sheet is in obviously phenomenal position. That's been something you guys have worked on for many years now. But with all this capacity and all these opportunities to invest, how do you think about the right structure going forward?

Yes. We've done a lot of work on the balance sheet, made a lot of improvements. We paid down over $1.2 billion of debt over the last couple of years. We just refinanced some higher coupon debt, reduced our interest expense. So the balance sheet is really in as good a shape as we've seen it at Weyerhaeuser in a very long time. So I feel really good about the balance sheet. And when we think about capital allocation, the first part is pretty easy because we've committed to returning 75% to 80% of our FAD every year back to shareholders. And that comes via a base dividend, quarterly dividend that we are growing. We grew that 5.9% in Q1 with a commitment to continue growing that in the future, with the remainder of that to get up to the payout ratio, a combination of a variable dividend, which we pay out annually in share repurchase. So we start from a position we know, 75% to 80% of essentially our free cash flow is going back to shareholders through those opportunities. From a CapEx standpoint, investing in our mills, we've got a very long pipeline of high-quality, high-returning capital projects. The limiting governor on that really is just our ability to execute. We only are going to do capital projects that we feel we can execute. And at some level, if you try to do too many projects, our experience has been you sort of lose some of that execution. So we kind of push up to the point where we feel like we can do those. And then the remainder of the cash really is just going to be looking for opportunities to continue to grow the business. We're always looking for opportunities to grow Timberlands. And I'm sure we'll find some good opportunities to put some of that capital to work there. If we found a mill at the right price in the right location, absolutely happy to grow the Wood Products business through kind of bolt-on acquisitions as well.

All right. Well, I think that is about the end of our time here, so want to thank everyone for joining us, and appreciate your participation. And thanks, Devin, for doing this.

All right. Thanks, Buck.

Have a great day, everyone.