Weyerhaeuser Company (WY) Earnings Call Transcript & Summary

All right. Thank you so much for joining us. This is the 8:00 a.m. session. My name is Buck Horne. I'm the analyst from Raymond James. I cover homebuilding, multifamily, residential and also timber and I'm really thrilled to be able to moderate the session for Weyerhaeuser, and I've got Devin Stockfish, the CEO to my left. And so what we're going to do is just open with -- I'm going to turn the floor to Devin for a few just opening comments, kind of state of the world of wood, and then we're going to do some Q&A, and I'll just kind of dive into a list of questions. So with that, I'm going to hand it over to Devin.

All right. Great. Well, thanks, Buck. Good morning, everyone. I appreciate the opportunity to talk to you about Weyerhaeuser and some of the exciting things that we're doing, as Buck mentioned, I'll keep it pretty brief so we have plenty of time for questions. I will note, I'm going to be making some forward-looking statements, and so the typical cautionary language will apply there. So just a really quick overview for those that aren't as familiar with the story. Weyerhaeuser is the largest private owner of timberlands in North America. We have 11 million acres of high-quality timberland all across the United States. We also manage another 14 million acres under long-term licenses in Canada. We're one of the largest producers of wood products in North America. We have 35 facilities across the U.S. and Canada, where we make lumber, oriented strand board, a variety of engineered wood products. We also have 19 distribution facilities as well. And then lastly, we have a business segment that is focused on real estate, energy and natural resources, including our new Natural Climate Solutions business, which we may talk about today. And that's really focused on just maximizing the value of every acre we own. All of our businesses have significant scale and they're managed within a tax-efficient REIT structure. In fact, we are one of the largest REITs in the United States. Just a few quick comments on 2022. As many of you know, we've been hard at work over a number of years, really trying to drive value across the platform. And I think we've had some really significant wins through all of the disruptions of last year, it may seem like a long time ago, of which there were many disruptions, we still managed to achieve quite a lot. We achieved our second highest adjusted EBITDA on record. We grew our Timberlands business. We grew our Natural Climate Solutions business, improved safety. We made progress against our sustainability goals, reducing our greenhouse gas emissions. We reduced our debt, strengthen the balance sheet, continue to build on our ESG foundation and importantly, returned a significant amount of cash back to shareholders. So just incredibly proud of the work that we were able to do last year and notwithstanding some very challenging circumstances. So just let me pivot to our investment thesis. At Weyerhaeuser, we're really focused on 4 key levers to drive value. Our portfolio which is truly world-class, improving constantly our operating performance, really making sure that we have a premier ESG platform and then disciplined capital allocation. And just in the interest of time, I'll touch on just a couple of those. On the ESG front, we really are a leader in the industry and have been for a very long time, going back to the early days of the company. That commitment really starts from a foundation of responsibly managing our forests, which Weyerhaeuser was a pioneer in the space going all the way back to the 1920s and 30s. It's really deeply incorporated into our DNA. Similarly, on the manufacturing side, always trying to reduce the environmental footprint of our operations. And I think importantly, our platform, the carbon platform that we have at Weyerhaeuser really is unique with the forest that we have, the millions of acres that we manage, we take CO2 out of the atmosphere, we store those, store that carbon in the wood products that we make. So just a remarkable carbon story. And frankly, I think you'd be hard-pressed to find a better carbon story than Weyerhaeuser. Just turning quickly to capital allocation. We really do think disciplined capital allocation is key to delivering long-term value for shareholders. And our philosophy is really based on 3 key priorities: returning cash to shareholders, investing in our businesses and maintaining an appropriate capital structure. And by that, we primarily mean just an investment-grade credit rating. Our cash return framework is premised on the idea of returning significant cash back to shareholders, and we do that through our cash return framework. And under that framework, we are committed to returning 75% to 80% of our adjusted funds available from -- for distribution back to shareholders. And that's really via 2 key levers, dividends and share repurchase. On the dividend side, we have a quarterly base dividend, which we did just raise last quarter to $0.19 a share, and that's really intended to be sustainable across all business cycles. We've committed to growing that 5% a year through the end of 2025. We also topped that up through a combination of supplemental dividends and share repurchase to get to that 75% to 80%. Last year, we returned $1.75 billion back to shareholders through the combination of dividends and share repurchase. And over the last 2 years, we've returned $3.8 billion back to shareholders. As we look out over the next few years, we have a number of detailed specific plans to grow the company and deliver value for our shareholders. We laid out some targets at our Investor Day a couple of years back. And just to highlight a few of those. We've targeted $1 billion of timberlands investments. We made good progress against that last year with $300 million of timberland acquisitions. We've targeted 5% per year growth -- organic growth in the lumber business, and we're making progress against that. And then we've targeted through our new Natural Climate Solutions business, turning that business into a $100 million per year business by the end of 2025. I'll just note on that front. That's as much a reflection just on the timing more so than the magnitude of where we think that business can go. So some exciting things in that space. We're continuing to focus on improving our operating performance. If you look back a number of years, the company didn't perform as well as we would have liked fast forward to today, number one, EBITDA margins across all of our manufacturing business. Really, from an operating standpoint across all of our businesses, just industry-leading performance. We're very proud of that, but we know we have to continue to work there. And so we've set a target of $175 million to $250 million of additional operational excellence improvements by the end of 2025. We're going to continue to lead on ESG and sustainability. We've made a net zero commitment. We continue to lead in the space. And I do think that's a significant opportunity for us going forward, not just from a business standpoint through the Natural Climate Solutions business, but also as an investment platform for investors that are interested in ESG space. And then lastly, we do remain committed to returning a significant amount of cash back to shareholders. And that combination, we think will deliver a lot of value back to our shareholders. So -- in summary, we've made some significant progress over the last several years. We've got some detailed plans to continue driving improvement across our platform, and we anticipate with the markets and what we expect to happen in housing, to have some nice tailwinds for the business. And when you overlay that with our platform and operating performance, we should generate a significant amount of cash, and we're going to give the vast majority of that back to our shareholders. So that's at a high level, Buck, a good summary of the company, but I think let's dive into questions. I know you have a good list.

Yes. So I appreciate that. And then just a follow-on to the housing, I'll take a second just to kind of go through what we're seeing from a housing perspective in the market. And certainly, I think it's been to -- certainly to our surprise, how resilient, certainly, the single-family homebuilding market has been this year. I think the general consensus throughout the industry right now is certainly the spring selling season has gone far better than originally anticipated if you go back 6 months to the fall when cancellation rates were jumping 50%, 60% and buyers were completely shell-shocked by the idea of 7% mortgages. And here we are, we're -- now we're looking at 7% mortgage again and yet even through May. It sounds like the builders were pretty pleased with all of their results and the builders are out there communicating and telling their suppliers, we're going to build through this. We're going to keep putting housing starts on the ground and there's not a lot of resale inventory to compete with. We've seen single-family permits up kind of, I think, on a run rate basis, at least 15%, maybe 20% from where we troughed and yet here lumber sits, and that's kind of been one of the drags, I think, probably on your stock and other timber REIT stock performance is just the lack of track or lumber prices year-to-date have just kind of language. So there's a lot to unpack there. So maybe we can just start. What are you seeing in terms of what are the major headwinds? Why do we have this major disconnect between what housing is telling us and this pent-up demand is out there telling us versus kind of where your stock and what the lumber prices are indicating?

Yes. No, I think that's a great question. So a couple of things. First, I would just reiterate that the housing market is certainly better than we had anticipated. If you go back to the end of last year, early part of this year. I think people were pretty negative on what housing was going to look like. And that's certainly been a better story than we had anticipated. But that being said, if you kind of compare this year to the last couple of years, it's definitely better than we thought at 1.4 million housing starts, but it's still down a fair bit from where we were last year at 1.55 million and north of that over the last couple of years. So although better, we do still see housing down year-over-year. I think the other things that are playing in are we have seen a little bit more lumber coming in from Europe. I think that's a reflection of just the very difficult operating environment in Europe. And even as of earlier this year, it's still a better market for some of that European lumber than the domestic market. Now I do think that that's starting to wane a lot of that lumber that's coming into the U.S. at today's price is basically below breakeven. So I think we're going to start seeing some of that lumber from Europe backing off. And then I think the other thing that's at play is we've continued to build capacity, particularly in the U.S. South, around lumber manufacturing, that's generally low cost. For us, that's overall long term, a very good story because we have 7 million acres of timberlands in the South. I think when we're seeing a little bit of a dip in housing though at present, that's just put a little bit more pressure. We've seen, I think, maybe some producers that have continued to operate below cash breakeven. Likely in the hopes that the spring building season would put some upward pressure on lumber prices. Generally speaking, people don't operate at a loss forever. And so you may see some of that come out as we get deeper into the year. All that being said, certainly, whether we're looking at OSB prices, which have certainly been higher than expected, and that's had a nice run. And I'd say even engineered wood products which that's been a very nice business for us. Prices have held up a little better and as the single family has picked up a bit this spring, we've started to see those order files build out a little bit. So on balance, I think this year, we're seeing an okay environment. It's not certainly as good as it's been over the last few years. But going back to the point with housing, at the most fundamental level, we are severely underbuilt in the U.S. We do not have enough houses. And frankly, I think this whole dynamic over the last couple of years where so many people refinanced their mortgage at 3%, sub-3%. That's going to keep a lot of existing inventory off the market. And so if we can get mortgage prices down even into the low 6 and certainly into the 5s, I think that could be the sweet spot for building. And so for us, we're still pretty darn optimistic as we get through whatever this next little period looks like. At some point, mortgage rates will come down, and we're going to get housing back up into 1.5-range, and we've seen a couple of examples over the last few years of what that looks like, and it's very, very positive for our business.

That's great. I kind of want to drill down a little bit on some of the factors you just mentioned because I think it's worth maybe highlighting in more detail. So in terms of this European lumber supply issue and just kind of how much is shown up, I mean it is -- I think it certainly surprised us when we parsed out the numbers and the data, the volume of wood that showed up from Europe really particularly kind of around the December-January time frame. I don't know if you guys are tracking this data, are you seeing anything in real time that suggests, okay, like that flow has really started to dissipate? Is there -- do we still need to work through? What's left at the ports right now? And I guess also kind of curious like how -- did the Ukraine war disrupt that flow of wood? How did the situation with what's going on in Russia, Ukraine, did that influence the flow of it at all?

Yes. In the near term with respect to the Ukraine, Russia situation, it really didn't. Now over time, it will. So 10% of the lumber that is used within Europe has come from -- has come from Ukraine, has come from Russia. And so a significant chunk of the supply has gone away. However, the European economy has really been challenged. And so just the demand level within Europe has gone down pretty significantly. As you look out over time, to the extent that the European economy recovers, which we assume it will at some point, that dynamic with Russia will ultimately impact that volume. And I'd say even over and above that, there have been some issues with beetles and fire, et cetera, in Europe that have impacted the timber supply. They've been working through just that salvage process, particularly in Central Europe, getting through some of that beetle wood, which has really provided low-cost logs to the lumber manufacturers. That's going away. So real time, the numbers are hard to get. They're usually a few months in arrears when you get the actual numbers, but what we're seeing is that lumber from Europe is starting to wane, and I expect that over the back half of the year, it will come down even more.

Okay. Perfect. And in terms of the capacity that's out there in terms of -- that may be producing at unprofitable run rates, is that more of a U.S. South issue? Or is it more of a Canadian, British Columbia type issue? And if it's the Canadians, when -- what are the factors around Canadian costs and what's allowing them to continue to produce unprofitably?

Yes. I mean that's primarily a British Columbia statement with a little bit of Pacific Northwest. The U.S. South, by and large, you can make money at almost any lumber price. It's the low-cost region to manufacture. So it's really a comment on British Columbia. And it's a variety of things. It's beetles, it's fires, it's public policy, but the log costs in British Columbia are high, the labor costs are relatively high. So it is the high-cost place in North America to manufacture lumber. I think the calculation and look, we don't necessarily have insight into what our competitors are thinking, I can speculate that, to some extent, it's a function of labor has been so challenged to get over the last several years. I think many companies may be reluctant to take downtime and risk losing that labor out of the fear that perhaps you can't get people back. So I suspect that's been part of it. And the other thing is, particularly in Canada, because of the weather, you typically will build up relatively large log decks going into the spring. And so if you have a high log inventory, you may be reluctant to take downtime before you run through some of that. So -- we'll see what happens over the course of the summer. But again, in my experience, companies will only operate at a loss for so long before they start to take action.

Hopefully, they start to take action soon. Are there anything -- any other factors that -- how is the repair remodel business holding up in terms of retail demand? It seems like, recently, we've seen some slowdown in big ticket projects for home improvement designs. Is that impactful at all in terms of a factor?

Yes. I think on balance, we've seen repair and remodel hold up reasonably well. I would say it's still a very solid market and you think about where we are today relative to pre-pandemic. These are still pretty strong numbers. Certainly, I'd say down a little bit from the peak of the pandemic where everyone was doing home remodeling, but there's still a fair amount of demand coming out of that space, particularly on the Pro side. When you think about repair and remodel, you have the Pro segment. So those are the folks that know what they're doing and are doing the big kitchen remodels, bathrooms, et cetera. That's holding up fairly well. The do-it-yourself market. We've probably seen a little bit more softness in that space, maybe as people have dialed back some spending. But on balance, it's still a pretty strong market. You've seen from some of the big box retailers, they've announced a little bit softer results lately. I would say that's not necessarily what we're seeing. Our sales into those customers that are fairly big customers for us have actually stayed really solid. In fact, even just the spring up year-over-year for us. And so on balance, I think it's still a pretty strong market, but maybe down low single digits overall, I think, across the industry.

Okay. Let me shift to the timber side of the business, now that we thoroughly dissected lumber. But a very important part of the asset story here is the timberland and the timberland values, and it does seem to be this rare asset class into a rising interest rate environment that -- in the private market, at least in whether you're looking at discount rates or per acre valuations, it doesn't seem to have been impacted much by rising interest rates. Timber value, certainly holding up very strong. We've seen some really almost record-setting transactions, help us understand what's holding up timber values and kind of maybe that follows into we have new groups of buyers, the carbon optionality. What's happening with holding up these valuations?

Yes. I think it's really a function of a couple of things. Number one, first and foremost, there's just a lot of interest in the asset class. Every deal that comes to market, there are a lot of potential buyers that's been pushing value. And I think that's really a reflection of a few things. Perhaps on some level, it's been a good hedge against inflation over time. I don't know that I think that's the big driver. I think more so, it's a reflection of, one, a longer-term view in the benefit of owning timberlands, both from the standpoint of expectations of log prices over time. But also, I think there's an ESG carbon play that's inherent in that, that people are starting to realize. It's -- I think at this point, hard to fully underwrite those carbon values, but people generally know that there's something there. And if you step back and look at all of the conceivable options to mitigate climate change, there's really only one technology in the world right now that works at scale and frankly, is the lowest cost options and that's forest. And I think people are starting to figure that out. And so you have all of the traditional players, the REITs and the TIMOs but you have new players coming in. IKEA has a fund that's been buying timberlands. You're seeing some of the big Wall Street firms that are investing into the space. And all of that interest has really have been driving the values. And like you say, notwithstanding the fact that interest rates have been -- have been higher than they have for quite some time. Just the discount rates continue to push down and the prices continue to push up. So it's been an interesting dynamic. And our view, frankly, is that timberland values will continue to go up over time.

Certainly, that seems to be true. I mean if log prices can follow the demand for housing, I think that would certainly make a lot of sense. And I think the carbon optionality theme is kind of what's -- like you said, it's hard for people to get their arms around how to necessarily underwrite. It's clearly having an impact. But maybe let's kind of dissect exactly what we mean by carbon optionality, whether it's carbon capture and sequestration, whether it's solar and wind-leasing projects. So what are the different aspects of revenue generation that we can drive off of timber?

Yes. I mean I think that's something that really has been underappreciated about a timber portfolio. It is the optionality. Historically, people buy and sell timberlands, they do a discounted cash flow on basically what you're going to generate for managing it to produce logs for mills and that's certainly a big part of the value. But what that doesn't take into consideration is all of the optionality, whether it's real estate, whether it's solar, wind, carbon capture and storage, conservation, mitigation and now, I think, more recently, the forest carbon opportunity. And so for us, and little over 1.5 years ago, we took our CFO and moved him to run what we're calling our Natural Climate Solutions business and really kind of step back to try to better capture the end-to-end value of our portfolio. And I think that's a pretty big opportunity. And so we've got -- we've got a lot of work going on with solar and wind. There's a tremendous amount of energy and excitement about that space. We've got carbon capture and storage, and that's essentially taking CO2 from an emitting source, I think cement manufacturing, oil and gas, you take the CO2 coming out of the smokestack. You pressurize it, you put it through a pipeline, and then you store it deep underground 7,000 to 10,000 feet. That's going to be a really big opportunity. They've increased the tax benefit from $50 a ton to $85 a ton, and that's really made the economics, I think, for those kinds of projects work. We've signed up 2 deals already developing a longer pipeline of additional deals there. And then forest carbon. Again, there's an opportunity to manage forest to take more CO2 out of the atmosphere. We currently manage our forest to maximize the value through the production of timber, but you can change how you manage a forest. You can plant more trees per acre, you can extend rotations, you can do different types of silviculture to take more CO2 out of the atmosphere. And I think that is an option as long as people feel comfortable that what you're doing is additional and permanent for people to pay you for that. And so again, there are just a number of different opportunities to capture value across the land base and we're very focused on that.

What's the time line on the deal? I'm just kind of driving to the carbon capture business and the partnerships you've announced. I think you've got the partnership with Occidental. At this point, you're working on several others that could be announced. And I guess you're also geographically looking at scanning which regions you can do this technology with. But what's the time line to actually starting to inject CO2 underground and driving revenue from that?

Yes. I mean it's a multiyear process. And so -- one of the things that we can bring to the table to shorten that time line is we've been managing these lands for a long time. So we have information on the subsurface geology that we can take to a big company and say, here's an area where we think carbon capture and storage will work. It's not every acre. It has to be the right geology, but we can take that with the data to really shorten that time period. But even with that, they're going to have to do their own data analysis, their own testing, you have to get the permits, you have to build out the pipeline infrastructure. So it's a multiyear process. We're expecting those first 2 deals to come online and probably late 2025 or 2026, and it's usually a multiyear period. We are hopeful, and the administration, I think, understands the opportunity set with carbon capture and storage. And so trying to streamline some of the permitting is some of the work that we're doing back in D.C. So hopefully, that will get expedited over time. But it takes a few years. But the beauty of these projects is once you have them in place, it's just annual recurring revenue. And it's just pure incremental, right? Because we get to continue to manage the timber above ground, and we don't put any of our capital to work. We charge essentially lease payments to allow someone to pump CO2 deep underground below our ownership. So just pure incremental revenue, very similar to wind.

And you're not having to build out any of this major infrastructure?

Correct.

They're bringing the infrastructure.

They're bringing the infrastructure.

That makes some of the big difference. And in terms of the carbon -- kind of the forest carbon opportunity, what's the state of like developing a structured marketplace or something, I guess, international whether it's New Zealanders, there's more of a regulated structure around carbon pricing. How quickly can we start to develop something like that in the U.S.?

Yes, I'd say in the U.S., we're still somewhat in the early innings. So forest carbon markets have been around for a while. Candidly, a lot of the projects that have come to market thus far have been of lower quality. And I think the challenge for this industry, if we want to develop carbon markets is you have to bring real credible projects to market. And as the leader in the industry, that's exactly what we're working on. We have a project going on in Maine. It's our pilot project. And candidly, it's probably taken a little longer than we had expected to get this through the process. I think the infrastructure with third-party auditors and some of the -- the underlying work that you need in order to bring a quality project to market is still in the early stages, and we'll have to build out. But what we do know is there are players, plenty of them that want to buy quality forest carbon credits. They want to use these to offset their emissions, but they want them to be real and credible and so that they withstand scrutiny. Nobody wants to be accused of greenwashing. And so that sort of been the reluctance, I think, for that market to scale. I think when we do bring out this initial project, we will be very pleased with the price that we get for these credits. And I think the more quality credits that we put out into the market, the more likely that whole opportunity set is to scale more quickly.

Got it. A couple of minutes left, but I do want to spend a couple -- a little bit of time on the OpEx initiatives and the investments you guys have made. You've highlighted this earlier. Just your goals towards becoming industry-leading in terms of operational efficiency and margins. Kind of give us some context around the scale of the investments you've made and what you're investing in the future? And kind of how you benchmark yourself in terms of either return on cost or relative to peers? What is this -- what kind of value are we driving with the OpEx?

Yes. I mean, it's really a function of 2 things, right? So there's the capital that we invest. And certainly, that's focused on driving efficiencies, reliability, and we expect a return on that investment typically, those are some of our highest returning projects and you can look just across the Wood Products platform, for example, taking the mill set that we had 5, 10 years ago, you fast forward to today, and it's just night and day in terms of the operating efficiency, the margins, et cetera, where we truly are industry-leading at this point, we're going to continue to go after that. But it's not just capital. I think there's a mindset and a culture that goes along with that. When we first started this journey, it was 100% top-down driven. At this point now when I go out and visit timberlands or mills, it's mill rights, it's electricians, it's loggers, it's foresters that are coming to me with ideas on how to make this company better. Over the last few years, we've really ramped up our innovation mindset. And you'll see that when you come out for the operations tour. We're doing things that nobody else in the industry is doing. And those are going to generate some pretty significant returns over time, whether it's mechanized planting, drones, AI, robotics. We're doing some things that just in this industry, nobody else is doing, and I think you'll see that really yielding some pretty substantial and significant returns over time.

I can't wait. No, it's going to be a fantastic tour if anybody is going to join us. We're planning on joining you guys in making the trip out to Portland that we're playing into. Fantastic operational tour. I highly recommend anyone that gets an opportunity to come join us for that. So I think we're out of time. But thank you all for joining us for the Weyerhaeuser session and look forward to see you soon.

Thank you.