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Edited Transcript of WY presentation 8-Mar-17 1:40pm GMT

Weyerhaeuser Co at Raymond James Institutional Investors Conference

Orlando Apr 10, 2018 (Thomson StreetEvents) -- Edited Transcript of Weyerhaeuser Co presentation Wednesday, March 8, 2017 at 1:40:00pm GMT

TEXT version of Transcript


Corporate Participants


* Doyle Simmons

Weyerhaeuser Company - President and CEO


Conference Call Participants


* Collin Mings

Raymond James & Associates, Inc. - Analyst




Collin Mings, Raymond James & Associates, Inc. - Analyst [1]


Good morning. I'm Collin Mings. I'm the timber REIT analyst here at Raymond James. And thank you, everyone, for joining us for the Wednesday session here at the Raymond James Institutional Investors Conference.

Very excited again to have Weyerhaeuser at our conference this year. A lot of exciting things that have happened under Doyle's leadership as far as their merger with Plum Creek. A company that is still relentlessly focused on cutting costs and focused on returning capital to shareholders. So again, very excited both Beth and Doyle are here with us today.

So with that, I'll turn it over to Doyle to take us through the presentation. After that, I have a few questions and then we'll open it up to the audience for Q&A as well. So with that, Doyle?


Doyle Simmons, Weyerhaeuser Company - President and CEO [2]


Thank you, Collin, and thanks, everybody, for being here this morning. And thank you Raymond James for hosting because we always enjoy being at this conference.

So let me start off by just asking everybody to take a moment to review the slide concerning the risk associated with forward-looking statements because we will be making some of those in this presentation.

So over the past three years here at Weyerhaeuser, we've been focused on polling three key levers to drive value for our shareholders: portfolio, performance, and capital allocation. And over the first two years of that three-year period, we made a lot of progress. We made changes to our portfolio. We improved our relative performance, as Collin said, through our relentless focus on operational excellence. And we are returning cash to shareholders through a growing dividend and share repurchase.

Then in 2006 (sic - 2016), we completed two transactions that dramatically transformed our Company and positioned us really well for the future. And those two transactions were, of course, the merger with Plum Creek and the divestiture of our cellulose fiber business.

Along with those transactions came some very specific performance commitments. And I'm really pleased that we delivered on what we said we were going to do in 2016, including we captured $100 million of hard dollar cost synergies. That was ahead of schedule. And we then raised the target by another 25% to be completed by the end of the first quarter of 2017.

We achieved over $105 million of operational excellence and operational synergies. We completed our AVO, asset value optimization process that I'll talk more about here in just a minute for all our southern timberlands and have begun to bring some of those lands to the market. And we repurchased $2 billion of common shares on an accelerated basis at an average price 15% below where we are trading today.

But we still have more work to do. For 2017, we've laid out some very specific goals as we continue to improve our relative performance and fully capture the benefit of the merger with Plum Creek.

Those goals include capturing an additional $95 million to $125 million of operational excellence and operational synergies; achieving $125 million run rate merger costs synergy target, as I said, by the end of the first quarter of 2017; completing our AVO process on our western timberlands by midyear 2017; growing our real estate and ENR EBITDA by over 45% to $250 million; and eliminating $35 million of overhead formally allocated to our cellulose fibers business that, as I mentioned earlier, we closed on in December of last year.

So now let's spend just a minute talking about each one of the components of our investment thesis, starting with portfolio. This slide highlights the significant transformation of our Company over the last few years. The bar on the left-hand side shows the size of our timberland holdings and our mix of businesses back in the 2012, 2013 time frame.

The bar on the right shows where we are today. And timberlands now makes up 90% of our assets, and with 13 million-plus acres, we are 5 times the size of our nearest largest competitor.

Our industry-leading wood products business makes up the remainder of our assets. And very importantly, all of our businesses -- timberlands, real estate, and wood products -- all have the same key economic driver, which is housing. We are also one of the largest REITs in the US.

We have three business segments, as I just mentioned: timberlands, real estate, energy, and natural resources, and wood products. In timberlands, we have an unmatched portfolio, as I said, of 13 million acres of some of the most productive and diverse timberland in the world. This puts us in a league of our own in terms of scale, diversity, ability to service customers, market insight, and operational and financial flexibility.

In our real estate and ENR business, we are focused on two things. Number one, maximizing the value of every acre we own by constantly evaluating the entire portfolio to identify tracks that have a premium over timberland value. And secondly, capturing the full value of surface and subsurface assets on each and every one of our 13 million acres.

In wood products, we are an industry leader with low cost and we produce lumber, OSB, and engineered wood. We also have a distribution business. 50% of our mills are located in the US South, 30% in the US West, and 20% in Canada. So we are well positioned to serve key markets across North America.

But being the best -- or being the biggest and having the best portfolio is not enough. In order to win, we must perform. That is what our operational excellence program is all about: controlling the controllables, to out-execute the competition, and improve our relative performance in each of our businesses.

This slide highlights our operational excellence progress and initiatives in our timberlands group. As you can see, we've captured over $100 million since 2014, but there's more to come, as the merger with Plum Creek opened up a whole new set of opportunities as we benchmarked the best from each company and now are applying those best practices across the entire organization.

As you can see, we have a goal of another $40 million to $50 million in 2017. And these improvements will come from things like operational synergies in areas of wood flow, silviculture, harvesting and transportation, and continuing to roll out our operational excellence initiatives across this larger footprint of 13 million acres.

But as I like to say, none of this operational excellence stuff matters if it doesn't show up on the bottom line. But as you can see here, it is. This is our scorecard, and this chart shows our EBITDA per acre versus the competition. Weyerhaeuser is the green line and the other lines are the competition.

In the west, you can see we have a nice margin versus the competition. We've had that for a number of years and we are focused on widening that gap going forward. In the south, the gap is narrower, but we are confident that we will widen that gap further as we continue to extract the full value out of the Plum Creek merger.

In our real estate business, we are focused on identifying parcels that have a premium to timberland value. So how do we do that? The first thing we do is we determine the timber net present value for every acre that we own. So that's the baseline: what is the timberland timber net present value.

We then apply again what we call our asset valuation process to identify tracts that may have a premium value for real estate. So understand what timber net present value is. Okay, is there a potential real estate value? And if there is, we then bring those tracts to market, use a network of local brokers to go monetize that and capture that incremental value between timber value and real estate value.

In 2016, we completed our AVO analysis on the legacy Weyerhaeuser southern timberlands and identified approximately 500,000 acres out of a total of 4 million acres is having AVO characteristics. We've now started to bring some of the southern timber acres to market.

We won't do that all at once. It will take over the next decade as we meter them out to strategically take advantage of markets and where the markets may be hot. And to make sure that we deliver on the 30% premium that is our target above timberland value.

Our group now, our business now is focused on the west. We are running the AVO process through our 3 million acres of western timberlands and we'll complete that by midyear 2017. This has been a very aggressive timeline. When Plum Creek did this before on their 6 million or 7 million acres, it took them 3 years. We're going to do the 7 million acres of Weyerhaeuser in 15 months.

In wood product, we have achieved almost $65 million of operational excellence improvements in 2016. And you can see here in 2017, we've targeted additional improvements of $55 million to $75 million as we continue to focus on the key initiatives of which are listed on the bottom of the page, which are all about the basic blocking and tackling of running a manufacturing business.

This is our scorecard for wood products. This chart shows our relative performance in each of our businesses. As you can see, in lumber, we've gone to last to a very tight competition for first. In OSB, we've made significant improvement. In our engineered wood products, the bottom left chart, you can see we've gone to second to having a very nice margin versus our nearest closest competitor and we look to widen that margin going forward.

And distribution, frankly, we had a lot of work to do. You can see we've caught the second competitor and we think we have a roadmap to become a leader in our distribution business going forward. So a lot of progress, more work to do.

And let me wrap up the performance discussion with a couple of brief comments on cost reductions. As I noted earlier, we are really pleased with the progress we've made on our hard dollar merger cost synergies. Again, the original target was $100 million by the end of the first quarter of 2017. We actually accomplished the $100 million by the end of 2016 and raised the target by another 25% and highly confident we will meet that target by the end of the first quarter of this year.

In addition, and on top of that, we are on track to eliminate another $35 million in costs that had been previously allocated to our sale of the cellulose fibers business. With the divestiture of that business, we needed to eliminate those cost and we'll do that by the end of 2017.

Our third lever is capital allocation. And as we continue to fully capitalize on the benefits of the merger, capitalize on the benefits from our operational excellence initiatives and the improving markets, we think we are going to generate a lot of cash in this Company. And what we do with that cash will be a critical lever to driving value for our shareholders.

We have three consistent financial priorities. First, returning cash to shareholders; secondly, investing in our businesses; and third, maintaining the appropriate capital structure. So let me spend just a minute on each one of those.

First and foremost, returning cash to shareholders. We'll do that primarily through a dividend, but also share repurchase where appropriate. As you see here, we've more than doubled our dividend since 2011.

And just last year, as I mentioned, we repurchased 2 billion shares (sic - see slide 20, $2 billion) at an average price of $29.49 per share. We have an additional $500 million under our share repurchase program and we'll be executing that on an opportunistic basis as we move forward.

Our second financial priority is investing in our businesses, and we expect CapEx of roughly $435 million in 2017. $135 million of that in our timberlands group and $300 million in wood products. In wood products, we are focused on low return -- high-return, low-risk projects that drive down our overall cost structure. And that has been a big part of our operational excellence improvements and will continue to be for the next couple of years.

The second part of investing in our business is optimizations of our timberland portfolio. We continue to work on a comprehensive review of all 13 million acres. And the recent announced strategic review of our Uruguay operations was an outcome from that process.

I'll tell you that we continue to have a strong level of interest with multiple parties in that potential transaction and we'll report out more as more information becomes available. Our goal through this process is not necessarily to grow the acres in our portfolio, but to make sure that we have the most valuable acres on a go-forward basis.

Our third financial priority is to maintain an appropriate capital structure. We are investment-grade rated by both Moody's and S&P and we are committed to maintaining a solid investment grade rating on a go-forward basis.

So that's it. Portfolio, performance, and capital allocation. When we do all of these things right and better than our competition, we fundamentally believe it will show up in providing a superior relative total return for our shareholders. And that's what we are focused on every day.

Now before I open it up for questions, Collin, let me give you a brief update on some of our key markets, including a brief update on the SLA. Let me start, though, with housing, which is, as I mentioned earlier, the key driver for all of our businesses.

Housing markets continue to steadily improve, and 2017 is off to a strong start. We are projecting somewhere total housing starts in the 1.25 million to 1.3 million range in 2017 and are encouraged by what we've seen so far in 2017.

Solid growth in housing is driving steadily improving demand for lumber. This improving demand combined with a potential reduction in the supply of Canadian lumber into the US due to the softwood lumber dispute and reduced log availability has provided a catalyst for a run-up in lumber prices over the past four or five weeks. But more importantly, the foundation for favorable lumber prices as we move forward.

We have significant leverage to lumber prices in our Company. You can see on the bottom right-hand side, every $10 is $45 million to our bottom line on an annual basis.

With respect to the softwood lumber dispute, we expect a preliminary determination regarding countervailing duties in late April, specifically April 24, followed by preliminary anti-dumping determination in late June, June 23, again on anti-dumping duties. Our preference remains for a negotiated agreement. However, currently, negotiations are on hold while appointees are confirmed and take office, but we look forward to resuming those negotiations over the next few months.

As housing markets have grown and lumber demand has increased, a significant amount of that additional demand has been filled by imports of Canadian lumber. As Canadian lumber, as I mentioned, is constrained and additional southern lumber production comes online, this has the potential to create a path to start to gain traction for southern saw-log pricing in 2018, as southern saw-log pricing remains 25% to 30% below where it was prior to the recession. Again, a lot of leverage to this business. A $5 improvement in southern saw-log prices is $75 million of EBITDA to our bottom line.

In the west, we anticipate improving demand and pricing in export markets, as export markets remain solid and domestic log markets continue to improve. Japanese wood housing starts were up by approximately 8% in 2016 and we anticipate continued steady demand from Japan in 2017. The China market feels good, as Chinese imports of logs increased by 30% in 2016 versus 2015, despite headwinds from a strong dollar.

And California is the key driver from a domestic viewpoint for western logs. And although construction activity in January and February in California were hampered due to severe weather, California is starting to show some signs of a very strong 2017. And that will serve as a significant driver of demand and pricing going forward for western logs.

So let me wrap up the discussion on our products with OSB. The demand in operating rates are strong, which is putting upside pressure on pricing. Given the strong outlook for demand, we expect the market will absorb coming capacity -- and there is some capacity coming online -- while maintaining or exceeding the current operating rate and prices. And again, a lot of exposure to this business. Every $10 improvement in pricing adds $30 million to our bottom line.

So let me conclude, going back to where I started. I'm excited about 2017 and beyond as we have a focused portfolio of outstanding assets. We have a proven track record of improving performance through OpEx, with more to come. And we have a very disciplined capital allocation process. And all of that is against a backdrop of what feels like a true improvement in industry fundamentals.

So with that, I'll open it up for questions.


Questions and Answers


Collin Mings, Raymond James & Associates, Inc. - Analyst [1]


Thanks Doyle. I think maybe just to start off the -- maybe expand upon the comments as far as the momentum in lumber pricing here year to date. Clearly a lot of conversation around more protectionist trade policies.

We have, again, a pending kind of outcome on the trade case as well as some improvement in housing. But what do you think has really driven this most recent uplift here over the last six weeks or so?


Doyle Simmons, Weyerhaeuser Company - President and CEO [2]


Good question. I think there's really 3 factors that have driven the ramp-up of $50 to $60 that we've seen in lumber prices over the past, as Collin said, 5 to 6 weeks.

Number one, I think inventories were very lean as we came into the year. So that was a starting point. Number two, as I said, housing has been better than anticipated in the first couple of months of the year. That's partially due to some favorable weather, but overall, housing feels like it's really starting to gain traction.

And then the third component is what's happening with the SLA. People are speculating as to what the duties may be. Speculating as to what that could mean from a amount of shipments that come in from Canada. Speculating as to what that could mean from pricing, depending on what the Department of Commerce determines both on the countervailing and the anti-dumping duties.

So I think those three things combined have resulted in the run-up. The ones I'm most encouraged about are, of course -- or the one I'm most encouraged about is just the overall demand improvement as we move through 2017.


Collin Mings, Raymond James & Associates, Inc. - Analyst [3]


Okay. And then another topic that you guys highlighted as far as -- and have been pretty consistent on this -- is looking at kind of a balanced approach to capital allocation. Acquiring assets where it makes sense, returning capital to shareholders when it makes sense.

Just curious your thoughts on kind of where you are right now between share repurchases, dividend increase, or potentially looking at opportunities to continue to grow your portfolio.


Doyle Simmons, Weyerhaeuser Company - President and CEO [4]


Yes. And from a growth perspective, as I say internally and as I'll say to everybody here, our number one, two, and three priorities are making sure we fully deliver on the benefits from the merger with Plum Creek. We've made a lot of progress. We still have more work to do.

I'm a big believer that you earn the right to grow, and the way you earn the right to grow is through performing on prior acquisitions. So we are fully focused on making sure we drive every penny of benefit from the merger with Plum Creek to the bottom line. And that will continue to be our focus for the near term.

In terms of capital allocation specifically or overall, as I said, first and foremost is returning cash to shareholders. That will be primarily through a growing dividend, but we'll also look to share repurchase where appropriate.

As I said, we still have $500 million on our share repurchase. We will do that opportunistically, and we'll be working very closely with our Board to determine the appropriate timing for a potential dividend increase.


Collin Mings, Raymond James & Associates, Inc. - Analyst [5]


Okay. Going to open up to the audience. I don't know if there's any questions at this point. Yes, sir.


Unidentified Audience Member [6]


We had some operational hiccups late last year, whether it be the mill fire or some other related stuff. Can you just give us a sense of how extraordinary those were? You mentioned it's tracking well according to the synergies. Just on a core operations basis how we track it.


Doyle Simmons, Weyerhaeuser Company - President and CEO [7]


We did have a little bit of a hiccup in the fourth quarter of last year in our wood products business, specifically in our OSB business. We had a fire at our Sutton mill. As we reported in the fourth quarter, that was an insured event, so net-net, when all is said and done, that cost us $5 million.

But the mill is back up. The mill is running extremely well. And in fact, all of our operations are running extremely well in the first quarter.

In terms of weather, that was a fourth-quarter event. That affected most companies in our industry. As I mentioned earlier in my comments, the weather -- other than on the West Coast and Seattle and in California and Seattle where we live and in California, the weather has actually been favorable. So mills have been running good. And demand for, as I said, housing feels good and demand for our product has been very good. So all in all, things are running well in the first quarter.


Collin Mings, Raymond James & Associates, Inc. - Analyst [8]


Maybe sticking a little with the wood products there, Doyle. Just as far as a lot of the momentum on product pricing, both lumber and OSB really here quarter to date, how sustainable do you think that is? Or do you see that as kind of continuing to be volatile throughout the year?


Doyle Simmons, Weyerhaeuser Company - President and CEO [9]


That's a good question, Collin. And what I would say is I think there's always going to be some volatility, both in lumber and OSB. But if you look at the fundamentals, again the demand side, the constraints on Canada from a lumber perspective, I think we are set up for favorable pricing in 2017 versus 2016. So to answer your question specifically, I think the pricing improvement is sustainable.

In OSB, again, it comes down to demand and supply. Demand continues to improve for OSB, at least in the near term. Not a lot of supply coming online. And as housing continues to improve, we are going to need some additional supply in OSB.

So I think that's going to be absorbed, again, assuming a decent rate of housing improvement going forward. So we are optimistic, as I said, about OSB prices as we move through 2017 and into 2018.


Unidentified Audience Member [10]


Can you talk about your dividend policy and the contrast of the business that you're in in terms of [validy] and other things you can't control. (inaudible)


Doyle Simmons, Weyerhaeuser Company - President and CEO [11]


Yes, and as I mentioned a moment ago, we'll be working very closely with our Board to determine the potential timeline for an increase in our dividend as we move forward.

As you've indicated, we have restructured our Company. And the 90% of our assets being in timberland is a positive because that's much a less volatile, more steady stream of earnings. The improvements that we made in our wood products business on the cost side will allow us to fully capitalize on the upside.

But just as importantly, when that thing rolls over, and as we all know, it ultimately will, our goal is to be back at the bottom. We said at our investor day that we are 70% of the way there as of the end of 2016. By the end of 2017, we'll be 85% of the way there.

And when I say 85% of the way there, what we've done is we've gone back and assumed we had the same pricing and volume that we had and conditions that we had back in 2008, 2009, run those through our cost structure. And by the end of 2017, we'll be 85% of the way where we wouldn't burn cash. And by the end of 2019 type time frame, I think we be close to 100% of the way there.

So what that does, it takes some of the volatility out of it. So we'll be working with our Board based on the new structure of our Company with the portfolio changes that we've made -- 90% in timberlands, the lower cost structure that we have in wood products -- to figure out what the right dividend payout ratio is on a go-forward basis. Historically, it's been roughly 75% over a cycle and we'll be looking at that as we move forward.


Collin Mings, Raymond James & Associates, Inc. - Analyst [12]


Maybe along those lines, as far as you think about potential drivers of kind of that cash flow and obviously a more stable base now relative to maybe what Weyerhaeuser looked like several years ago, just curious if you can update us a little bit more on the US South as far as saw-log pricing there.

You referenced there is still meaningfully lower prices than trend line there. Expectations for this year. And how important do you think kind of what's happening with the trade dispute is going to be as it relates to saw-log pricing.


Doyle Simmons, Weyerhaeuser Company - President and CEO [13]


Yes. So I think we could start to see small incremental improvements in saw-log prices as soon as the second half of this year. But I think really where we will start to gain traction is in 2018.

And I think the key drivers are threefold. Number one, continued improvement in housing. Number two is housing is continuing to improve. We've seen a lot of investment being made in converting opacity in the US South, whether it be our Canadian friends who understand that there are not as many trees in Canada, so the place to invest is the US South.

They bought up a bunch of older, inefficient mills and are putting a lot of capital in those mills. There are new mills being built. And in fact, we think there's probably 12 million to 13 million tons of additional wood that's going to be needed in the US South going forward. So those are those are both positive from the demand side.

And then on the supply side, as I said, there's going to be less lumber coming in from Canada. When there's less lumber coming in from Canada, it's going to have to be met -- that demand is going to have to be met in the US South.

So I think all of those things are going to converge. And our best guess is starting again in 2018, we could start to see some real traction in terms of Southern saw-log prices. And as I said, those are currently 25% to 30% lower than where they are today and we could start to see those -- 25% to 30% lower than they were prior to the recession. And we think we could start to see those move back to pre-recession levels as we enter 2018.


Collin Mings, Raymond James & Associates, Inc. - Analyst [14]


Great. I think we have time for one or two more questions from the audience.


Unidentified Audience Member [15]


Yes. So Doyle, you mentioned assessing or getting the most out of Plum Creek merger. I just would like to hear your comments on what you think you got with the real estate business, what you are getting out of the US South right now, and what you think you might get (inaudible).


Doyle Simmons, Weyerhaeuser Company - President and CEO [16]


Yes. So we've been really pleased with the talent and the process that we got from Plum Creek as part of the merger. Plum Creek had a lot of very dedicated real estate professionals, a skill set that we needed at Weyerhaeuser. So we've now brought that team in as part of Weyerhaeuser.

They also had a process, a proven process, again, called, as I mentioned earlier, AVO, asset value optimization, to really identify where you had opportunities from a real estate perspective. That group has really hit the ground running.

As I said, we completed our assessment is in the US South in 2016; identified 500,000 of the 4 million legacy Weyerhaeuser lands as having potential real estate value. And we've already started to bring, as recently as the first quarter of this year, started to bring some of those properties to market.

And what that is causing, that's a big driver of our EBITDA from our real estate operation improving by 45% in 2017 versus 2016. And we think there may be some upside to that. So that's how we see it.


Collin Mings, Raymond James & Associates, Inc. - Analyst [17]


Maybe just a follow-up to that, just putting in context, how much of the kind of the overall Company do think as far as EBITDA will be generated off of this real estate platform on kind of a normalized basis?


Doyle Simmons, Weyerhaeuser Company - President and CEO [18]


Yes. And normalized is always hard in our business, but we've consistently said we think roughly 15% to maybe even 20% of the EBITDA from our Company for our Company will be generated from the real estate and ENR business on a go-forward basis. And we see that as a consistent generator of cash flow as we move forward.


Collin Mings, Raymond James & Associates, Inc. - Analyst [19]


Great. Well, thank you, again, Doyle. Back from making the trip to Orlando. We do have a breakout session downstairs, but thank you, everyone, for attending this morning.


Doyle Simmons, Weyerhaeuser Company - President and CEO [20]


Thank you.