Weyerhaeuser Company

Greetings and welcome to the Weyerhaeuser third quarter 2020 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance during the conference, please press star 0. As a reminder, this conference is being recorded. It is now my pleasure to introduce Beth Baum, Vice President of Investor Relations and Enterprise Planning. Thank you, Ms. Baum. You may begin.

Thank you, Rob. Good morning, everyone. Thank you for joining us today to discuss Weyerhaeuser's third quarter 2020 earnings. This call is being webcast at www.weyerhaeuser.com. Our earnings release and presentation materials can also be found on our website. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. We will discuss non-GAAP financial measures, and a reconciliation of GAAP can be found in the earnings materials on our website. On the call this morning are Devin Stockfish, Chief Executive Officer, and Russell Hagan, Chief Financial Officer. I will now turn the call over to Devin Stockfish.

Thanks, Beth. Good morning, everyone, and thank you for joining us today. I hope everyone is well and staying healthy. This morning, Weyerhaeuser reported third quarter results, reinitiated a quarterly cash dividend, and announced a new dividend framework consisting of a base dividend plus a variable supplemental dividend. I will begin by highlighting our third quarter results and then turn my focus to the dividend reinitiation. Weyerhaeuser reported third quarter gap earnings of $283 million, or 38 cents per diluted share, on net sales of $2.1 billion. Excluding net charges of $103 million for special items, we generated earnings of $386 million, or 52 cents per diluted share. Adjusted EBITDA totaled $745 million in the third quarter. This is 93% higher than the second quarter and over 140% higher than a year ago. Each of our businesses delivered outstanding operational and financial results despite disruptions caused by severe storms in the U.S. South, extreme fires in the Pacific Northwest, and the ongoing COVID-19 pandemic. This strong operational and financial performance enabled us to deliver the highest operational cash flow since 2006 and take additional steps to meaningfully strengthen our financial position. I'll begin the discussion of our results with a few brief comments on the continued improvement in the housing market. U.S. housing activity rebounded sharply in the third quarter, supported by a growing preference for larger single-family homes in less urban areas. Total housing starts averaged over 1.4 million for the third quarter, an improvement of 33% over the second quarter. Single family housing starts accelerated even more sharply, averaging over 1 million units for the quarter and reaching the highest levels since 2007. On a seasonally adjusted basis, third quarter single family starts improved by over 35% compared with the second quarter and over 15% compared with the third quarter of 2019. We are seeing similar levels of improvement in key leading indicators. Single family permits and new home sales increased nearly 40% compared with the second quarter, and we're up approximately 20 and 40% year over year respectively. Single family permits in September reached the highest rate since 2007, and builder confidence has reached all-time highs for two consecutive months. Repair and remodel activity has also remained robust, supported by do-it-yourself and professional activity, and the remodeling industry's confidence has continued to increase. Several other fundamental factors also support a continued strong outlook for residential construction, including historically low mortgage rates, demographic tailwinds, and an aging housing stock. Clearly, there remains room for caution, especially as it pertains to US unemployment, the outlook for additional government stimulus, and the risk of further COVID-19 related disruptions as we approach the winter months. However, we are increasingly confident that the recent strength in U.S. housing and the repair and remodel segment will continue, notwithstanding ongoing macroeconomic headwinds. Turning now to our third quarter business results, starting with Timberlands on pages six through eight of our earnings slide. Timberlands EBITDA decreased by $10 million compared with the second quarter, and earnings decreased by $86 million due to an $80 million non-cash timber casualty loss for Oregon fire damage. The 2020 fire season in the Pacific Northwest was one of the most extreme that we have experienced in many years. In early September, highly unusual weather conditions transformed fire activity in the state of Oregon from minimal to highly destructive in a few short days. Our thoughts are with everyone affected by this disaster, and I want to acknowledge all of the firefighters, first responders, government and industry partners, as well as our Weyerhaeuser employees, for their extraordinary work to save lives, protect property, and contain the fires. As we previously disclosed, these wildfires spread onto our Oregon Timberlands, affecting approximately 125,000 acres to some extent. The magnitude of the damage to timber varies based on topography, age of the timber, and many other factors. We've commenced salvage operations to maximize the value of the damaged timber, and Russell will discuss that more in a few minutes. The non-cash charge we recorded in the quarter represents the estimated book value of the timber and related assets that cannot be salvaged based on information available at this time. Moving on to our third quarter operating performance. Western Timberlands EBITDA decreased by a million dollars compared with the second quarter. In the western domestic market, demand was strong and pricing improved throughout the quarter as mills sought to take full advantage of record lumber prices. Log supply tightened abruptly in the second half of the quarter, particularly in Oregon where wildfires shut down harvest operations in most of the state for several weeks. Our fee harvest volume decreased 15% compared with the second quarter as we lost 10 harvest days in Oregon and four days in Washington due to fire restrictions. As harvest operations resumed, our teams did a phenomenal job of managing the operational complexity of coordinating multiple firefighting efforts while at the same time rescheduling harvest operations and safely optimizing the deployment of dozens of logging and trucking crews to continue serving our customers. This includes our own mills. where we were able to leverage our integrated model and operational agility to ensure our western mills did not lose a single shift due to out-of-log downtime. Turning to our export markets. In Japan, demand for our logs was soft early in the quarter due to continued slow housing activity and incremental effects of the COVID-19 pandemic. Demand improved as the quarter progressed as Japan housing activity improved modestly and U.S. log availability was reduced by strong domestic lumber markets and western fire activity. In China, average realizations were flat with the second quarter and demand was solid. However, our sales volumes to China decreased significantly as we flexed volume to more profitable domestic opportunities. Moving to the south, Southern Timberlands adjusted EBITDA decreased $8 million compared with the second quarter. Fee harvest volumes declined by 5% compared with the second quarter as we continue to implement the previously announced 10% reduction in full year southern harvest volumes. Although the US South experienced multiple hurricanes and tropical storms during the quarter, we incurred very minimal damage and lost almost no production days as we redeployed harvest crews to alternative parcels. Average log sales realizations were comparable to the second quarter. The southern saw log market experienced downward pressure in the quarter as favorable summertime logging conditions resulted in abundant wood supply. However, our average saw log realizations improved slightly due to marketing and merchandising efforts associated with our operational excellence initiatives. This improvement, however, was offset by lower fiber log realizations in the quarter. In northern Timberlands, adjusted EBITDA improved by $1 million compared with the second quarter due to seasonally higher harvest volumes as we exited spring breakup. Real estate, energy, and natural resources, pages 9 and 10. Real estate and DNR adjusted EBITDA increased by $3 million compared with the second quarter, but earnings decreased slightly due to a higher average land basis on the mix of properties sold. Real estate sales increased slightly from the second quarter as an increase in the number of acres sold was largely offset by lower average price per acre due to mix. Third quarter again included some sale of low productivity acreage in southern Oregon that we acquired with the Plum Creek merger. Results from energy and natural resources were slightly higher than the second quarter due to seasonally higher production of construction materials. Wood products, pages 11 and 12. Wood products delivered its strongest quarterly performance ever, contributing $566 million to third quarter earnings and $615 million to adjusted EBITDA. This exceeds the previous record EBITDA attained in 2018 by almost 60%. Our lumber, OSB, and distribution businesses all delivered the highest quarterly results on record, and engineered wood products achieved record third quarter results. Although these results were enabled by historic increases in commodity prices, they would not have happened without continued strong operational performance across the business. Through hurricanes and tropical storms in the south, extreme fire activity in the west, and the ongoing impacts of the global pandemic, our teams have continued to deliver outstanding operating results and maintain record low controllable costs across multiple product lines. In the third quarter, demand vastly outstripped supply in virtually all of our product lines, driven by strong new residential construction and repair and remodel activity. With inventories lean across the channel, benchmark pricing for lumber and oriented strandboard escalated rapidly until mid-September. Customers began to purchase more deliberately late in the quarter, particularly for lumber, as repair and remodel activity began to show some signs of a seasonal slowdown. However, order files remained extended for most products as the quarter closed, especially OSB and engineered wood products. In lumber, adjusted EBITDA was $260 million higher than the second quarter, as a 54% increase in average sales realizations was slightly offset by higher Western log costs. We incurred a small amount of weather-related downtime in the quarter due to wildfire smoke in the west and hurricanes in the south. In OSB, adjusted EBITDA increased by $119 million due to a 65% increase in average sales realizations and slightly lower manufacturing costs. Adjusted EBITDA for engineered wood products increased by $16 million. Sales volumes for solid section and I-joist products increased by 21%, and unit manufacturing costs improved slightly. These improvements were partially offset by higher raw material costs for oriented strand board web stock. In distribution, adjusted EBITDA was $24 million higher than the second quarter. This is attributable to improved sales volumes and higher margins, including operational excellence initiatives. Turning briefly to operational excellence. Through three quarters, we've made excellent progress against our 50 to $70 million full year OpEx goal. And I'm confident we will achieve this target by year end. I'm extremely proud of our teams for their continued focus and dedication to achieving our OpEx goal, despite the disruptions caused by the pandemic and recent natural disasters. Let me now turn to capital allocation and the reinitiation of our quarterly dividend, pages 14 to 16. We remain firmly committed to returning cash to shareholders as part of our balanced capital allocation philosophy. Early in the pandemic, we made the difficult decision to suspend our quarterly dividend to preserve financial flexibility. Since May, the Board has regularly reviewed opportunities to reinitiate an appropriate quarterly dividend. This review has taken into account a number of considerations, including our market conditions, the broader macroeconomic environment, the desire for dividend framework that will drive long-term shareholder value across market cycles. Over the past several months, demand for housing and wood products has proven resilient, even as macroeconomic headwinds continue. Our businesses have delivered strong operating and financial results through an unprecedented range of market conditions, and our outlook on the near-term business climate has improved markedly since late spring. Additionally, as Russell will discuss in more detail, we have taken a number of actions to significantly reduce leverage and strengthen our balance sheet. Accordingly, we are reinitiating a quarterly cash dividend. We are also adjusting our dividend framework to ensure that the dividend and our overall approach for returning cash to shareholders are both sustainable and appropriate for the company's portfolio and the cash flow that we generate from our businesses across market cycles. In this framework, we are targeting an annual payout of 75% to 80% of adjusted funds available for distribution. This is comparable to the targets communicated as part of our prior dividend framework and underscores our commitment to returning a significant portion of our free cash flow back to shareholders. Going forward, however, our new dividend framework will include two components. We will pay a sustainable quarterly base cash dividend and each year we will supplement that base dividend with an additional return of cash as needed to achieve the targeted 75 to 80% of adjusted FAD. We believe this new dividend framework will enhance our ability to return meaningful and appropriate amounts of cash to our shareholders across a variety of market conditions while positioning Weyerhaeuser to deliver superior long-term value creation. The sustainable base dividend remains our core mechanism for returning cash. We are reinitiating this quarterly cash dividend at 17 cents per share. This base dividend payment, which totals approximately $127 million per quarter, is supported by the cash flow from our Timberlands, real estate, and E&R segments. We intend to grow this payment sustainably over time as segment cash flows increase. The second component of our dividend framework is a variable supplemental dividend. This will generally be an annual payment declared and paid in the first quarter based on cash flow generated during the prior fiscal year. We will apply this new supplemental dividend framework to our 2021 results and accordingly we currently expect the first supplemental dividend will be paid in the first quarter of 2022 based on full year 2021 adjusted FAD. We expect the supplemental dividend will be our primary tool for returning cash above and beyond the base dividend to achieve our targeted annual payout. However, we may also utilize opportunistic share repurchase to return cash under certain circumstances. Page 16 shows our adjusted FAD and adjusted EBITDA back to 2017, when our current portfolio was established. Timberland's real estate and E&R results have been relatively stable over time. while earnings for our wood products business have fluctuated with lumber and oriented strandboard pricing. The two-part base plus variable supplemental dividend framework will enable our shareholders to more fully benefit from the mix of cash flow profiles generated by our businesses. Shareholders will receive a stable income stream that is fully supported, even in adverse market conditions, and they will also benefit from significant upside in strong commodity markets through the variable dividend component. The remainder of our cash generation, that is the cash in excess of our base and supplemental dividends, will be deployed consistent with our stated priorities for opportunistic allocation. These priorities include value-enhancing growth opportunities, liability management, and opportunistic share repurchase. We are committed to allocating this excess cash in a disciplined manner to grow our base dividend and drive superior long-term shareholder value. I will now turn it over to Russell to discuss financial items and our fourth quarter outlook.