All right, thank you so much for joining us. This is the 8 A.M. session. My name is Buck Horne. I'm the analyst from Raymond James. I cover home building, multifamily, residential, and also timber. I'm really thrilled to be able to moderate the session for Weyerhaeuser. I've got Devin Stockfish, the CEO, to my left. I'm going to turn the floor to Devin for a few just opening comments, kind of state of the world of wood. We're going to do some Q&A, and I'll just kind of dive into a list of questions. 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 gonna be making some forward-looking statements. The typical cautionary language will apply there. 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. 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. 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.
You know, 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, strengthened the balance sheet, continued to build on our ESG foundation, and importantly, returned a significant amount of cash back to shareholders.
Just incredibly proud of the work that we were able to do last year and, you know, notwithstanding some very challenging circumstances. Just let me pivot to our investment thesis. At Weyerhaeuser, we're really focused on four 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. Just in the interest of time, I'll touch on just a couple of those. On the ESG front, you know, 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, you know, 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, you know, our platform, the carbon platform that we have at Weyerhaeuser really is unique. With the forests that we have, the millions of acres that we manage, we take CO2 out of the atmosphere. We store that carbon in the wood products that we make. Just a remarkable carbon story. Frankly, I think you'd be hard-pressed to find a better carbon story than Weyerhaeuser. Just turning quickly to capital allocation.
You know, we really do think disciplined capital allocation is key to delivering long-term value for shareholders. Our philosophy is based on two principles: investing in our businesses and maintaining an appropriate capital structure. 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. We do that through our cash return framework. Under that framework, we are committed to returning 75%-80% of our Adjusted Funds Available for Distribution back to shareholders, and that's really via two 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. 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 top that up through a combination of supplemental dividends and share repurchase to get to that 75%-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 years back. 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. 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. Some exciting things in that space. We're continued to focus on improving our operating performance. You know, 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, you know, 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. We've set a target of $175 million-$250 million of additional operational excellence improvements by the end of 2025. We're gonna continue to lead on ESG and sustainability. We've made a net zero commitment. We continue to lead in the space. 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.
Then lastly, you know, we do remain committed to returning a significant amount of cash back to shareholders. That combination, we think will deliver a lot of value back to our shareholders. You know, 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. We anticipate with the markets and what we expect to happen in housing to have some nice tailwinds for the business. When you overlay that with our platform and operating performance, we should generate a significant amount of cash, and we're gonna give the vast majority of that back to our shareholders. 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.
Good. Yeah. Appreciate that. Just follow on to the housing, I'll take a second just to kind of, you know, go through, you know, what we're seeing from a housing perspective in the market. Certainly I think it's been. Certainly to our surprise, how resilient, certainly the single-family home building 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 six months to the fall when cancellation rates were jumping 50%, 60% and buyers were completely shell-shocked by the idea of 7% mortgages. Here we are, we're, you know, now we're looking at 7% mortgages again.
Even through May, it sounds like the builders were pretty pleased with all of their results. The builders are out there communicating and telling their suppliers, "We're gonna build through this. We're gonna 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. Here lumber sits, and that's kind of been one of the drags, I think, probably on your stock and other timber REIT stock performances, just the lack of traction or, you know. Lumber prices year to date have just kind of languished. There's a lot to unpack there.
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?
Yeah, no, I think that's a great question. A couple things. You know, first, I would just reiterate 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 gonna look like. That's certainly been a better story than we had anticipated. You know, that being said, you know, if you kind of compare this year to the last couple of years, you know, 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, you know, 1.55 and north of that over the last couple of years.
You know, although better, we do still see housing down year-over-year. I think the other things that are playing in are, you know, 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. Even as of, you know, 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 break even. I think we're gonna start seeing some of that lumber from Europe backing off. I think the other thing that's at play is, you know, 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, you know, I think maybe some producers that have continued to operate below cash break even, likely, you know, 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, you know, 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, you know, that's been a very nice business for us. Prices have held up a little better. As the single family has picked up a bit this spring, we've started to see those order files build out a little bit. On balance, you know, 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. Going back to the point with housing, at a most fundamental level, we are severely underbuilt in the U.S. We do not have enough houses.
I think this whole dynamic over the last couple of years where so many people refinanced their mortgage at 3%, sub 3%, that's gonna keep a lot of existing inventory off the market. If we can get mortgage prices down even into the low 6 and certainly into the 5s, you know, I think that could be the sweet spot for building. 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 gonna get housing back up into the 1.5 range. 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 wanna drill down a little bit on some of the factors you just mentioned 'cause I, you know, think it's worth maybe highlighting in more detail. In terms of this European lumber supply issue and just kind of how much has shown up, I mean, I think it's, 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 that December, January timeframe. I don't know if you guys are tracking this data or, you know. Are you seeing anything in real time that suggests, okay, like that flow has really started to dissipate? Is there or do we still need to work through what's left at the ports right now?
I guess also kind of curious, like, you know, did the Ukraine war disrupt that flow of wood? Or how did the situation with what's going on in Russia, Ukraine, did that influence the flow of it at all?
In the near term, with respect to the Ukraine-Russia situation, it really didn't. Over time, it will. 10% of the lumber that is used within Europe has come from Ukraine, has come from Russia, a significant chunk of the supply has gone away. However, the European economy has really been challenged, 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. I'd say even over and above that, there have been some, you know, 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. You know, real time, the numbers are hard to get. They're usually a few months in arrears when you get the actual numbers. 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. In terms of, you know, the capacity that's out there 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? If it's the Canadians, you know, what are the factors around Canadian costs and what's allowing them to continue to produce unprofitably?
Yeah, I mean, that's primarily a British Columbia statement with a little bit of Pacific Northwest. The US South, by and large, you can make money at almost any lumber price. It's the low cost region to manufacture. 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. The log costs in British Columbia are high. The labor costs are relatively high. It is the high cost place in North America to manufacture lumber. You know, I think the calculation and, you know, look, we don't, we don't necessarily have insight into what our competitor are thinking. I can speculate that, you know, 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. I suspect that's been part of it. The other thing is, you know, particularly in Canada, because of the weather, you typically will build up relatively large log decks going into the spring. If you have a high log inventory, you may be reluctant to take downtime before you run through some of that. You know, we'll see what happens over the course of the summer. 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, you know? 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 and designs. Is that impactful at all? Seems a, you know, a factor.
Yeah, you know, 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, you know, the peak of the pandemic where everyone was doing home remodeling. 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, you know, 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.
On balance, it's still a pretty strong market. You've seen, you know, from some of the big box retailers, you know, 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 this spring, up year-over-year for us. On balance, I think it's still a pretty strong market, but maybe down, you know, low single digits-
Mm-hmm.
Overall, I think, across the industry.
Okay. Let me shift to the timber side of the business now that we've thoroughly dissected lumber. The, yeah, you know, very important part of the asset story here is the timberland and the timberland values. It does seem to be this rare asset class into a rising interest rate environment that, you know, 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 is certainly holding up very strongly. We've seen some really almost record-setting transactions. You know, help us understand, you know, what's holding up timber values and kind of, you know, maybe that follows into, you know, do we have new groups of buyers, carbon optionality? What, what's happening with holding up these valuations?
I think it's really a function of a couple of things. You know, 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. I think that's really a reflection of a few things. Perhaps on some level, you know, 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. Also I think there's an ESG carbon play that's inherent in 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. You know, 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 forests. I think people are starting to figure that out. You know, 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 been driving the values.
Like you say, notwithstanding the fact that interest rates 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. It's been an interesting dynamic. Our view, frankly, is that timberland values will continue to go up over time.
Certainly, that seems to be the true. I mean, if log prices can follow, the demand for housing, I think that would certainly make a lot of sense. 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, you know, exactly what we mean by carbon optionality, whether it's, you know, carbon capture and sequestration, whether it's, you know, solar and wind leasing projects. What are the different aspects of?
Yeah.
revenue generation that we can drive off of timber?
Yeah. I mean, I think that's something that's really has been underappreciated about a timber portfolio is the optionality. Historically, when people buy and sell timberlands, they do a discounted cash flow on basically what you're gonna generate for managing it to produce logs for mills. That's certainly a big part of the value. 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.
You know, for us a little over a year and a half ago, we took our CFO and moved him to run what we're calling our natural climate solutions business and really kinda step back to try to better capture the end-to-end value of our portfolio. I think that's a pretty big opportunity. We've got, you know, 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. Think, you know, 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, you know, deep underground, 7,000 to 10,000 feet. That's gonna 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 two deals already, developing a longer pipeline of additional deals there. Forest carbon. You know, again, there's an opportunity to manage forests to take more CO2 out of the atmosphere. We currently manage our forests to maximize the value through the production of timber. 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. 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. 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 timeline on the? 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. I guess you're also geographically looking at, you know.
Right.
scanning which regions you can, you can do this technology with. What's the timeline to actually starting to inject CO2 underground and driving revenue from that?
Yeah, I mean, it's a multi-year process. You know, one of the things that we can bring to the table to shorten that timeline is we've been managing these lands for a long time, and 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. We can take that with the data to really shorten that time period. Even with that, they're gonna have to do their own data analysis, their own testing. You have to get the permits. You have to build out the pipeline infrastructure. It's a multi-year process.
We're expecting those first two deals to come online in probably late 2025 or 2026. It's usually a multi-year period. We are hopeful and, you know, the administration, I think understands the opportunity set with carbon capture and storage. Trying to streamline some of the permitting is some of the work that we're doing back in D.C
Hopefully that will get expedited over time. It takes a few years. The beauty of these projects is once you have them in place, it's just annual recurring revenue and, you know, 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, you know, lease payments to allow someone to pump CO2 deep underground below our ownership.
Just pure incremental revenue, very similar to, wind.
Mm-hmm. you're not having to build out any of this major infrastructure.
Correct.
yourselves. They're bringing the infrastructure.
They're bringing the infrastructure.
That makes some big difference. In terms of the carbon, kind of the forest carbon opportunity, what's the state of like developing a, you know, structured marketplace or something, I guess, international, you know, whether it's New Zealand or? There's more of a regulated structure around carbon pricing. How quickly can we start to develop something like that in the U.S.?
Yeah. I'd say in the U.S. we're still somewhat in the early innings. 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. I think the challenge for this industry if we wanna develop carbon markets is you have to bring real credible projects to market. 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. You know, 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 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. 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. That's 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.
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. We have 2 minutes left, but I do wanna spend a little bit of time on the OpEx initiatives and the investments you guys have made. You highlighted this earlier, just, you know, your goals towards becoming, you know, industry leading in terms of operational efficiency and margins. Kind of give some context around the scale of the investments you made and, you know, what you're investing in the future, and kinda how you benchmark yourself in terms of, you know, either return on cost or, you know, relative to peers. What is this, you know, what kind of value-
Yeah.
Are we driving with the OpEx?
Yeah. I mean, it's really a function of two things, right? There's, you know, the capital that we invest, and certainly that's focused on driving efficiencies, reliability, and we expect a return on that investment. Typically, you know, those are some of our highest returning projects. You can look just across the, you know, the wood products platform, for example, taking the mill set that we had, you know, 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, and we're gonna continue to go after that. 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 millwrights, 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 know, 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 gonna 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. I think you'll see that really yielding some pretty substantial and significant returns over time.
I can't wait. It's gonna be a fantastic tour. If anybody is gonna join us, we're planning on joining you guys and making the trip out to, was it Portland that we're flying into?
Yeah. Yeah.
Fantastic operational tour. I would highly recommend anyone who gets an opportunity to come join us for that. I think we're out of time. Thank you all for joining us for the Weyerhaeuser session, and look forward to seeing you soon. Thank you.