Carbon/ESG Capital Inflows Aid Weyerhaeuser (WY), Costs High
Weyerhaeuser Company WY benefits from more capital inflows for carbon/ESG-related projects as well as improvement in residential construction activity and repair and remodel market.
The company’s focus on operational excellence and efforts to boost financial flexibility enabled it to generate solid cash flow and strengthen the balance sheet. Weyerhaeuser remains optimistic about its performance due to favorable demographics, a decade of underbuilding, and historically low inventory for new and existing homes.
Let’s check out the factors influencing the company’s performance in the future.
Growth Factors
Rising Spending on Carbon/ESG Projects: Governments and businesses across the globe are making efforts on climate change and aim to significantly reduce greenhouse gas emissions to net zero by 2040. Achieving these commitments will require governments and companies to take major steps to modify operations, invest in low-carbon activities and purchase offsets to reduce environmental impacts.
More capital inflows for carbon/ESG-related projects are likely to prove beneficial for Weyerhaeuser. For the Natural Climate Solutions (NCS) business, Weyerhaeuser continues to remain engaged with high-quality developers for renewable energy and carbon capture and storage opportunities across its acreage. The recent passage of the Inflation Reduction Act should drive incremental demand for these markets and further support NCS's growth strategy.
On Sep 20, 2023, the company announced receiving approval for its very first Improved Forest Management carbon credit project in Maine from the American Carbon Registry. The project covers approximately 50,000 acres, with an initial issuance of nearly 32,000 credits, which is expected to generate 475,000 credits over a 20-year crediting period.
For the carbon capture and sequestration business, the company expects solid progress on the projects it had announced with Oxy Low Carbon Ventures and Exxon, both expected to be online in late 2025/2026. It is positioned to determine a goal of growing the Natural Climate Solutions business to $100 million in EBITDA by 2025-end.
Improving Housing, Repair & Remodel Activity to Boost Demand: Residential construction, as well as repair and remodel market activity, is improving gradually. This is supported by steady demand from the professional segment and a normalized do-it-yourself segment to a pre-pandemic level.
In the near term, Weyerhaeuser expects stable demand from the repair and remodel segment, most likely attributed to lower building product prices and customers' demand for remodeling homes instead of purchasing new houses. WY remains bullish for the long term as most of the key drivers supporting healthy repair and remodel demand remain intact, including solid home equity levels and an aging housing stock.
Operational Excellence to Offset Margin-Related Woes: Weyerhaeuser's focus on operational excellence has been advantageous over time. It remains focused on operational excellence that includes merchandising for value, harvest and transportation efficiencies, along with flexing harvest to capture seasonal and short-term opportunities.
In 2023, the company delivered solid operational performance and remained determined in its operational excellence initiative to support customers and drive its margins. In 2022, the company captured approximately $40 million of margin improvements across businesses and made meaningful progress against other OpEx priorities.
In Timberlands, the achievement was primarily attributed to initiatives for increasing mechanized harvesting in the West, implementing machine planting in the South and optimizing Southern fertilization activity. The business also created significant future value through its efforts to reduce reforestation turnaround time, further enhance seedling survival rates and improve data capture as well as analysis capabilities through expanded use of drones and the LIDAR technology. In Wood Products, the company captured improvements, given a persistent focus on controllable costs, mill reliability and enhanced product mix despite fluctuating operating postures in response to the pandemic.
Major Concerns
High Costs: In 2023, the company’s adjusted earnings decreased 24.6% year over year. Net sales also declined 24.6% from a year ago. This was mainly due to lower sales volumes in the Western and Southern markets, and lower average sales realizations as cautious sentiment continued to weigh on the near-term housing and macroeconomic outlook. The company noted that forestry and road costs are expected to be moderately lower due to the seasonal nature of these activities.
Lumber Market Swings: One of the major cost components of goods sold is the cost of lumber products. The company has no control over the costs of imported lumber products, which are dependent on factors like government policies, environmental regulations, weather conditions, economic conditions and natural disasters.
The lumber market is highly volatile, and the market swings have had a negative impact on various operations for WY and other Zacks Building Products - Wood industry players like Boise Cascade Company BCC, JELD-WEN Holding, Inc. JELD and Louisiana-Pacific Corporation LPX.
In addition to lumber, the company uses a significant quantity of various resins in the manufacturing processes. Resin product costs are influenced by changes in the prices or availability of raw materials used to produce resins, primarily petroleum products and the demand for and availability of resin products.
Low Cash Balance: As of Dec 31, 2023, Weyerhaeuser had cash and cash equivalents of $1.16 billion, down from $1.58 billion at 2022-end. Adjusted FAD — a non-GAAP measure to evaluate the company’s liquidity — was $986 million in 2023, significantly down from $2,327 million in 2022. The company’s long-term debt was $5.07 billion in the fourth quarter of 2023-end, up from $4.07 billion at 2022-end. Weyerhaeuser generated $1,433 million for 2023 versus $2,832 million in the year-ago quarter.
A Brief About Above Mentioned Stocks
Based in Boise, ID, Boise Cascade makes wood products and distributes building materials in the United States as well as Canada. Although BCC acknowledged that the industry faced challenges in 2023, it remains well-positioned for 2024 to execute growth initiatives that started in 2022.
Headquartered in Charlotte, NC, JELD-WEN designs, manufactures and sells doors and windows primarily in North America, Europe and Australasia. JELD has taken a two-pronged approach to streamline and strengthen its operations to improve the short-term financial performance as well as position the company well for the long term.
Louisiana-Pacific is a leading manufacturer of sustainable, quality-engineered wood building materials, structural framing products and exterior siding for residential, industrial and light commercial construction.
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Weyerhaeuser Company (WY) : Free Stock Analysis Report
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