All right. Thank you, everybody, for joining us. Appreciate you stepping in for the 9:15 session. This is our 44th annual presentation. I think I'm officially now have been here for a majority of these, that definitely puts me in a different category of Raymond James analyst. My name is Buck Horne. I'm the Raymond James housing analyst covering residential real estate and timber REITs, really thankful and appreciative of Weyerhaeuser being able to join us today to talk about a lot of different topics in the, certainly the building materials supply chain, wood products, timberland valuations, lots of things going on, certainly related to what's happening in the housing market to a degree. Devin Stockfish made the long trip over from Seattle to sunny Orlando, Florida for us.
We'll let you guys get settled in here. With that, I'm gonna turn it over to Devin. We'll do a presentation, and we'll have plenty of time for Q&A.
All right. Well, thanks, Buck. Appreciate the introduction. Happy to be here to talk to you about Weyerhaeuser Company. I will note I'm gonna go through some slides here, but we do have a recently updated, more expansive deck on our website at weyerhaeuser.com. I will be making some forward-looking statements this morning, the typical forward-looking statements cautionary language applies there. We'll go ahead and get started. I'm gonna start off with our investment thesis. At Weyerhaeuser, we're really focused on four key levers to drive value for shareholders: an unmatched portfolio of assets, industry-leading performance, a strong ESG foundation, and disciplined capital allocation. I'll speak to each of these in a little bit more detail here. First, just a few brief comments on 2022.
We have, as many of you know, been hard at work for a number of years, really driving improvement across each of the value levers in our investment thesis. Through all of the disruptions of 2022, of which there were many, we managed to deliver our second strongest adjusted EBITDA on record. We also grew our timberlands portfolio, grew our Natural Climate Solutions business. We advanced our efforts on operational excellence and innovation. We improved our year-over-year safety performance, continued to support our customers and our employees, and we returned a fairly significant amount of cash. Overall, just really pleased with the work that our people did in 2022 to help us continue to become a better company and a more valuable company. Just a quick overview of Weyerhaeuser for those that aren't as familiar with the story.
We are the largest private owner of timberlands in North America. We have just under 11 million acres of high quality, highly productive timberlands across the United States. We're also one of North America's largest producers of wood products. We have 35 manufacturing facilities where we produce lumber, Oriented Strand Board, a variety of other engineered wood products. We have 19 distribution facilities in key markets across the United States. Finally, our real estate and ENR segment is really focused on maximizing the value of every acre we own, including through our new Natural Climate Solutions business. I will just note, and we'll speak to this a bit more in a few minutes, Weyerhaeuser has a very unique carbon platform.
When you think about the millions of acres of timberlands that we have sequestering CO2 out of the atmosphere and the wood products that we manufacture that store carbon for the lifetime of those products, it's a very unique opportunity to invest in the carbon space. All of these businesses have significant scale, industry-leading performance, and we manage them within a tax-efficient REIT structure. In fact, we are one of the largest REITs in the United States. You know, over the many, many decades that we've been in business, we have developed unrivaled expertise in creating and capturing value across each instance of our supply chain. We've been focused on this for many, many years from the proprietary seedlings that we plant in the forest, the way that we manage our forests, the low-cost manufacturing, all the way through to the end customer.
That includes the work that we do to capture HBU premiums on the land base and some of the exciting things that we're doing in the Natural Climate Solutions business. It's really all about creating value for our stakeholders over time. At the foundation of the company is our timberlands business. As I said, we have 11 million acres of timberlands in North America. Of that, about 3 million are in the Pacific Northwest. These are some of the premier timber growing regions really in the world. A high-value Douglas-fir sawlog. We have strong domestic and export markets, so just a really important part of our business. We have 7 million acres across the U.S. South, high-value southern yellow pine plantations that really allow us to capture all of the key markets across the Southern United States.
We have 1 million acres in the Northeast with a wide variety of hardwood sawlogs, including some very high-value sawlogs that we grow in that region. Our export business out of the Pacific Northwest has really been focused on Japan for a very long time. We have a unique business supplying high-value premium logs to the Japanese building market, primarily in the post and beam space. This is a relationship that we've had for many decades and creates a lot of value for our portfolio in the Pacific Northwest. We also have relationships with key customers across Asia, including in China, in Korea, and developing a business out of the export markets in the U.S. South.
We think we're really well-positioned to capture this growing market over time, both out of our existing scaled program in the Pacific Northwest as well as our emerging program out of the U.S. South. We continue to be focused on growing our timberlands portfolio. As you can see from this slide, we've continued to grow and to optimize the portfolio. As we announced a couple years ago at our Investor Day, we have a $1 billion target of timberland acquisitions over the next several years. We made some good progress last year with a really nice acquisition in the Carolinas of over 80,000 acres, really high-quality timberlands. We'll continue to look to grow this portfolio. We'll do it in a disciplined way, obviously looking for opportunities to create value for our shareholders.
I think we have some really interesting things that we bring to the table in the acquisition space to leverage our scale, our supply chain, the integrated nature of our business, as well as some of the emerging opportunities around carbon and Natural Climate Solutions. Now, managing a portfolio of this size creates a lot of additional opportunities to create value. As you can see from this slide, we're really focused on leveraging all of the expertise that we've developed internally to create additional incremental value back to the acre. When you think about it, a portfolio of 11 million acres, there are a lot of options to create value, and that's really what we're going after with the end-to-end portfolio management approach that we're taking at the company.
Part of that is the real estate program, and this is really about just maximizing the value of every acre. We have a program we call Asset Value Optimization that looks across our acreage for attributes on the land base that can support a higher, better use valuation. This is something we've been doing for a number of years. We've identified around 1.2 million acres across our portfolio that could potentially support a higher, better use valuation. We refresh this annually. Generally speaking, we sell less than 1% of our portfolio every year through this program, and we replenish that over time as we do additional timberland acquisitions. One of the really exciting pieces of the business that we put together back in 2021 is our new Natural Climate Solutions business.
It falls under the real estate and ENR business. It's really about creating value through the new focus on Natural Climate Solutions, of which our business has, I think, a lot of opportunity. There are really four key pieces of that. Two of these we've been doing for a while, the renewable energy, and think solar, think wind, mitigation, conservation. I think these are opportunities that will continue to grow in the near term. The two newer pieces of the business are the carbon capture and storage, as well as forest carbon. We'll probably talk about that a little bit in the Q&A. All of these programs, I think, are making really good progress. I think we have some potential to create a lot of value through this Natural Climate Solutions business.
We've targeted $100 million of EBITDA from this business by the end of 2025. What I'd say there is that's not a reflection of the magnitude of where we think this business will ultimately go. The world needs a lot of Natural Climate Solutions to deal with the climate change issue and we have, I think, a lot of opportunities to serve that market over time. Finally, our wood products business. We are one of the largest producers of wood products in North America. As I said, we have 35 manufacturing facilities, most of which are proximate to our timberland ownership. Really been focused in this business over the last several years on improving our operating performance. As you'll see here in a minute, some really good progress there.
We have 19 distribution facilities that help support that business as well. This mix of assets and geographic coverage really allows us to serve all the key markets across the United States and North America. A key aspect of our overall operating strategy for the last several years has been really focusing on operational improvement, and a key part of that has been our effort around operational excellence. It's been one of the true success stories at Weyerhaeuser really over the last 10, 20 years. We've made significant improvements in how we run these businesses. In 2022, we again captured additional value, $40 million of OpEx improvements. We've got a multiyear target of $175 million-$250 million from 2022 through 2025.
This will continue to be a core part of how we run the business, combined with innovation, I think will continue to really serve us well and be a competitive advantage for Weyerhaeuser in years to come. As you can see, it's translating into bottom-line performance. We have number one EBITDA margins across all of our manufacturing business, number one EBITDA per acre out of the West. As I said, it continues to be a core part of what we do, and I think we have an opportunity to create significant value in the future by staying focused on this. Just briefly on the ESG front, you know, we have been focused on integrity and running our business sustainably really for over 100 years. This is a core part of how Weyerhaeuser has always operated.
Our focus on environmental stewardship really goes back to managing our forests sustainably, which goes back to the early days of the company. We're also focused on minimizing our environmental footprint in our manufacturing business. Social responsibility, corporate governance, just a lot of things that we're doing. As you can see, a lot going on on this front. This has been and will continue to be a core part of how we do business. We just think that's the right way to, you know, manage these assets over the long term. I think there's a growing appreciation for the ESG investment opportunity in Weyerhaeuser and something that we continue to highlight. You know, I think one of the things that's probably underappreciated about our company is that carbon platform that I referenced earlier.
The millions of acres that we have capture millions and millions of tons of CO2 from the atmosphere every year. We store that carbon in the wood products that we manufacture. We are significantly carbon negative. What I mean by that is we sequester more than 4 times the amount of CO2 every year that we emit. We're making additional improvements in the company by reducing our CO2 emissions. We've joined The Climate Pledge. We've committed to net zero by 2040. I would say you would be very hard-pressed to find a better carbon story anywhere than Weyerhaeuser Company. Just turning to disciplined capital allocation, which we think is a key lever for driving value for shareholders.
We have three key priorities around capital allocation, returning cash to shareholders. That comes through a combination of dividends and share repurchase, investing in our businesses, all while maintaining an appropriate capital structure. We'll go through each of these here. Our cash return framework is really focused on returning 75%-80% of our Adjusted Funds Available for Distribution back to shareholders. There are really two pieces of this. The first of which is a sustainable quarterly-based dividend, which we've committed to grow 5% per year through 2025. In fact, we just raised the dividend 5% back in February. That's really supported by the more stable businesses, the timberlands, the real estate and ENR, and it's really meant to be sustainable across all parts of the business cycle.
Then we target the 75% to 80% with additional cash through a supplemental dividend and/or share repurchase. There's a lot of power in this cap-cash return framework. Last year, we returned $1.75 billion of cash back to shareholders through a combination of dividends and share repurchase. If you go back to when we first put this new cash return policy in place, we returned over $3.8 billion. As you can see, there's a lot of flexibility for us in returning that through the combination of dividends and share repurchase. We also continue to invest back in our business.
I mean, these investments that we've been making back into the business, the organic investments to improve our operating performance, have been a key piece of what has driven our cost structure down and improved our profitability. We continue to look for these opportunities. We've targeted about $440 million of CapEx for 2023. That's down just a little bit from last year, but within that range of $420 million-$440 million that we target on a yearly basis over the next several years. We've also continued to focus on strengthening our balance sheet. If you go back a couple of years, we've really made a significant improvement in the strength of our balance sheet. We've paid down $1.2 billion of debt.
We refinanced $900 million of higher cost debt last year, that came with annual interest savings of about $38 million. We've reduced our pension liability significantly, and we closed out the year at a fairly low leverage ratio. Just touching briefly on current market conditions. You know, I'll start with housing, which is a big driver for demand for most of our products. Obviously, housing is softer this year than we've seen over the last couple of years. You've all, I'm sure, been watching what's been going on with mortgage rates, et cetera, and that certainly had an impact. You know, our view is we're gonna see a choppier year this year from a housing standpoint. Not catastrophic by any means, just not quite as strong as we've seen over the last couple of years.
We have a pretty bullish medium-term view on what's gonna happen with housing. There is a significant shortage of housing across the United States. I think everyone appreciates that. We'll get to a place where you see a little bit more stability in the housing market, and I think you're gonna see that demand pick back up, which will be a very nice tailwind for us. On lumber and OSB, again, you know, that is to some extent driven by housing. We're in a softer pricing environment than we've been over the last couple of years. That's certainly the case. It's been trading in a relatively narrow band here for the last month or so. I think as we head into the building season, we'll see how that progresses.
You know, the inventories across the channel are pretty lean, so if the housing activity picks up as we get deeper into spring, I think you could see a nice tailwind for lumber and OSB demand and pricing. On Western logs, I'll start with the export market. The export market out of the Pacific Northwest has stayed solid. In fact, we're ramping up our exports to China. I think that market, as they've come out of COVID, you're seeing the demand for logs pick up, so that should be pretty strong as we head into the spring. On the domestic side, the log market is really going to be very highly correlated to what's going on in the lumber market. As we've seen the lumber prices come down on the West Coast, you're seeing log prices follow that.
It remains a very tight wood basket, so to the extent lumber prices go back up, you're gonna see log prices follow. Those two should trade pretty much in line here in the near term. On the southern side, the demand has been pretty solid. The South remains a very good place to manufacture lumber and wood products. Those mills, for the most part, will remain profitable even in a softer pricing dynamic. We're not expecting any material swings in pricing or demand for southern logs here in the near term. We have set out a number of specific targets. We laid these out at our Investor Day in 2021. We are going to continue to grow our timberlands business. As I said, we've got a billion-dollar target. We're gonna grow our Natural Climate Solutions business.
We've got some organic growth that we've targeted for our lumber business. We're gonna continue driving operational excellence and leveraging innovation to really separate ourselves from our competition and really drive that competitive advantage. A lot of work that we're gonna continue to do on the ESG side with our greenhouse gas emission reduction targets. Really just leveraging that story around carbon and what we bring to the table to really help people understand that story better. I think, you know, with our portfolio, the operating performance that we have, we're gonna generate a fair amount of cash over the next several years. We're gonna be very focused on returning the vast majority of that back to our shareholders. In closing, you know, I think we've done a lot of work across each of these levers of our investment thesis.
I am really optimistic about what's gonna be happening over the next two, three, five years in housing, carbon, wood products demand, and I think we've really positioned ourselves well together with our growth targets to deliver a lot of value for shareholders in the years to come. I think with that, maybe we'll pause there and, jump into questions.
Yeah. Thank you. That's fantastic. I'm gonna fire a couple of questions to start. Please feel free if you've got anything top of mind, we'll get to your questions as well. Let me start with this, and maybe you can either corroborate or you can dispute this. It seems to me there's, you know, a very or maybe a growing disconnect between private valuations of timberland versus what the public markets are reflecting. I think you highlighted to a great degree, the increasing carbon optionality or ancillary revenue sources, whether it's wind, solar, you know, HBU real estate, other alternatives that seem to be attracting a greater or a wider set of non-traditional investors into timberland investing. I don't know. How, how do you think-
Yeah.
about that, and how, you know, how is that affecting what you're seeing in the private market?
Yeah. I mean, there's no question the demand for timberlands has continued to go up. We've really seen over the last couple of years, the prices that buyers are paying for timberland packages has just continued to go up. You've seen some really high value deals going on in the South. I think that's a reflection of a few things. You know, to some extent, we have seen southern log prices coming up a little bit. To some extent, maybe that's supporting the thesis around growing sawlog prices to support a higher valuation. I think the bigger issue is a growing appreciation for the option value across the land base.
When you look at timberlands historically, the way they've been valued is you have a view on what the long-term harvest profile is, you have some expectation around price, you discount the cash flow, and that's more or less the value of timberlands. What that doesn't reflect is all of the other things that you can do with land, whether you're talking about real estate development, HBU, wind, solar, conservation, mitigation banking. Now with this new focus on carbon, you know, forest carbon capture and storage, those values have not been reflected historically in the price that people are paying for timberland. I think there's a growing appreciation for that. There are more parties coming into the space.
You can just look around at the big financial institutions, private equity, Europeans, non-traditional players that are coming into the timber space, and they're starting to recognize some of that value. I don't think people have fully baked that in now-
Mm-hmm.
In terms of the private markets, directionally, that is the sense that we're getting. My expectation is the price of timberland will continue to go up, which it has really, if you look back over the last 40, 50 years, it generally speaking, goes up. I think there's a real opportunity. To the extent that the carbon markets develop, and I can't tell you when that's gonna happen, but directionally, I think we feel pretty good about where that's gonna go over time. If you have carbon markets that are paying $30 a ton or $35 a ton for carbon offsets, you can't have $25 stumpage prices. All that means is the value of the land, the value of the logs, the whole portfolio, you know, that value goes up over time.
I think we're in the early stages of seeing that, but you are seeing it reflected in the price.
Do you have any sense of, you know, if you can quantify, maybe it's different by region by region or wood basket by wood basket, what, you know, what you could potentially sell acreage for into the private market versus buying back your own stock, you know, and that's obviously complicated by the?
Yeah.
REIT structure itself, is that something you guys consider given where things are at?
Well, you know, we look at both of those things, right? When you looked at last year, we bought back $550 million of stock, and we also bought $300 million of timberland. You know, we don't necessarily look at it, you know, you hear people talking about the arbitrage opportunity. To some extent that's true, but I think for us, you know, you also have to balance that against, you know, if you sell timberlands now with the expectation that it's gonna be worth more in a couple of years, you have to bake in that return that you're foregoing on the land that you sold. We look at it holistically. I think from our standpoint, you're probably gonna see us both buying back stock and, you know, obviously buying timberlands.
Right. Right. Makes sense. Any questions? Okay. Yeah, Rick, go ahead.
Yeah.
Where are you seeing the greatest reduction in capacity growing in areas of growth?
Well, for lumber, that's the easiest one to answer, I mean, clearly what you're seeing is in British Columbia, you're seeing capacity come out. It's the high cost region to manufacture. We've seen as lumber prices have come down, you know, over the last six months, a pretty significant amount of capacity coming out of British Columbia. I wouldn't be surprised if you see more of that, you know, in the next little bit. It's just a very difficult place to operate wood products manufacturing these days. The Pacific Northwest, I think you're gonna see some small reductions over time, it's just a very tight wood basket, so log costs are high. If you're not a really high-quality operator with low cost in the Pacific Northwest. You know, it can be a challenging place.
I wouldn't be surprised to see some capacity come out of the Pacific Northwest. All of the investment is going into the U.S. South. I mean, you've seen that over the last several years. I think 10 billion board feet of new capacity has come in since 2017. It's the best place, certainly in North America, perhaps the world, to manufacture lumber. You've got plentiful fiber, you've got accommodative regulatory, and you've got a labor force that understands the industry. I think that's the trend you're gonna continue to see is more capacity coming into the South, coming out of British Columbia and to some extent, the Pacific Northwest.
How are you guys modeling the growth in the U.S. South? Put a number on it.
Yeah, I mean, obviously, we can only model what we've seen announced. You know, there's still several billion board feet of new lumber capacity that has been announced into the South. I would expect that you're gonna continue to see 1 billion-2 billion board feet, you know, over the next several years coming into the U.S. South, just again, to take advantage of the markets that you have down there and the plentiful fiber.
Kind of a follow-up to that. When you look at where you obviously made some significant investments in your operating structure, you reduced your operations and streamlining a lot of efficiency there. Do you have a sense for where you think your operating cost structure and a marginal cost to produce, you know, whether it's lumber or OSB relative to the competition?
Yeah. Well, I mean, I think we're number one, and I think that's reflected in the EBITDA margins that we track. You know, that's for those that have followed the company for a long time, it's been a journey. If you go back into the 2011, 2012 time frame, we were pretty much fourth quartile in a lot of these businesses. This has just been a reflection of the focus that we've had year after year after year to drive costs out of the business, improve efficiencies, improve reliability. What you've seen is that's translated into a cost structure and an operating platform that's best in class at this point.
One thing we've noticed through this early part of the year, certainly from a home building perspective, is that certainly January was off to a much better than expected start. February, certainly the front part of February was really good as well for most of the builders we've heard from. There's a lot more optimism now that maybe, you know, there is a level of pent-up demand out there, we need to put some more houses in the ground. Builders are increasingly looking to put some spec starts in the ground. Obviously, a lot depends on mortgage rates, but you mentioned how lean inventories are in the supply chain currently.
You know, if we do get some meaningful re-acceleration of demand for, you know, wood relative to that, you know, October, November time frame, how sensitive do you think the pricing could be?
Yeah, I mean, obviously it depends on the magnitude.
Right
of how much incremental building. We've seen, you know, over the last few years, I'm not suggesting that you're gonna get back to $1,000 lumber prices, what I would say is when you have lean inventories and the building activity picks up, you can see that pricing move fairly quickly. The one thing that is always true, if a builder has a customer, a lot, and the labor, they're going to build, and they will pay, you know, whatever price needs to be paid to make sure that you have the building materials. You know, we'll see what happens with the spring building season. As you said, you know, I think there was maybe a little bit more optimism in January and early February as you saw the rates come down. I think it's a little hard to say.
They've bumped back up just a little bit, how that's gonna translate. My personal view is, you know, it's not gonna be certainly the same level of housing we've seen over the last few years. I don't think it's gonna be catastrophic. Most of the builders, both production and custom, have said they're gonna build homes this year. I think you're gonna see maybe a slightly different type of home, maybe a smaller home, fewer amenities, you know, maybe looking to offer some incentives to get people in the door. We're gonna build some homes this year. I do think if you look past whatever period this turns out to be, whether it's three months, six months, nine months, at some point, mortgage rates are gonna start going back down. We saw what happened.
As soon as they got close to six, people started rushing for, you know, the, you know, that inventory. With what you've got going on there, I think you're gonna see a lot less existing home inventory come into market just because everyone refinanced at 3%. I think there are just a lot of tailwinds over the next several years for residential construction. We just have to kinda get through the 7% mortgage period and get things stabilized to a little bit lower level.
Quick question on just international trends. You mentioned that you know, Japan has pretty steady demand for imported wood from the Pacific Northwest. Is there any impact from European wood that's entering the domestic markets recently?
Yeah.
Is that a factor to be aware of?
Yeah. You know, around the margins, I do think you've seen the European flow of wood into the U.S., and I'm speaking primarily of lumber here, has certainly ticked up a bit over the last, you know, probably 12, 18 months. I think that's really a reflection of the European market is struggling, and so they're looking for a home for that wood. Now, as the pricing has come down, I think you started to see that slow just a little bit. Over time, our expectation is that European lumber is going to become much less plentiful in the U.S. because of the beetle issue that they've had, and they also have to make up for lost Russian volume into the European market.
As soon as Europe stabilizes, I think you're gonna see a lot more of that European lumber stay domestic as opposed to coming to the U.S.
All right. Sounds good. With that, I think we're right at up at our time limit. I wanna thank Devin and the team for