Weyerhaeuser Co Earnings Call Insights: Wood Products Business Rates and Cellulose Guidance

Weyerhaeuser Co (NYSE:WY) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Wood Products Business Rates

Mark Wilde – Deutsche Bank: I want to thank you for your improved disclosure, I know that a lot of us really appreciate that. I wondered first of all on the Wood Products business can you give us a sense of kind of where your estimated operating rates are in those different businesses?

Daniel S. Fulton – President and CEO: Sure. For the first quarter Mark, our lumber and OSB business were operating at about 90% rate, and in our Engineered Wood Products business we saw a significant increase in operating rate, so that we’re now operating in the mid 40% range for our I-joists facilities and mid 50% range for our solids.

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Mark Wilde – Deutsche Bank: Dan, can you also talk about anything that you might be doing to kind of add more capacity, whether it’s just picking up another shift or perhaps restarting capacity or maybe even thinking about a little incremental capital?

Daniel S. Fulton – President and CEO: Yeah. Couple comments Mark. We do have the ability in our lumber mills to add hours and to some extent add shifts, all of our lumber facilities are operating today and our Oriented Strand Board business, all of our mills are operating and we are increasing shifts in some cases, so there’s some additional flex capacity in our solid or engineered wood business. We still have two curtailed facilities, and as the market continues to recover, we have the ability to bring them back. As anyone in the industry restarts capacity, there’s a long lead time and so we are positioning our facilities so that at the right time we can bring them back to meet demand. One of the surprises I think in the industry has been how long it takes to bring back mills that have been shut down, both because of the availability of labor that’s qualified, the ability to fill a log yard and to operate smoothly. So, we have flex capacity to respond and as the market continues to improve, we’re well positioned.

Patricia M. Bedient – EVP and CFO: Mark, I’d just like to add that the Engineered Wood operating rate, that Dan gave you, did include those two closed facilities. So, if we were to back those out and just use our existing facilities, they would be closer to the mid-to high 60% ratio. So, those operating rates, as Dan said, are continuing to move up. I think also as you think about our capital spending, which I referenced was, could be up to $300 million for this year, which is similar to what we spent last year. But the mix of where we spend that will be very different from last year given that in last year we were finishing our converting facility in Poland, so we were spending more in Cellulose Fibers last year than we will this year, and we will also be putting more money to work in Wood Products especially in our lumber business to look at low capital, but still capital solutions where we can bring on additional capacity as we need it adding dry kiln here and there so that we can process more of the green lumber that we can produce at some of our facilities. So, you will see a little shift in mix that it’s not huge increment, but across our 18 mills that does add up as we put those dollars to work…

Mark Wilde – Deutsche Bank: And if I could, just a follow-up on your Timberland business, you highlighted that dichotomy between kind of the western situation and the Southern situation, what are your expectations about kind of price and volume in the south as we kind of move through the year and when you think this pick-up in housing and Wood Products prices is going to start to flow through to southern log and timber prices?

Daniel S. Fulton – President and CEO: Well, we think it will come, but we can’t call the timing. As I mentioned, there was more deferral in the South and so as markets pick up, clearly the Wood Products production is increasing. So the deferral wood in the south is benefitting the margins of wood products producers or as in the west it’s a much stronger log market. So it will just be one that we have to watch over time. Very difficult to call the timing of when that market (tension), because there are so many land owners that have the ability to bring logs to market.

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Mark Wilde – Deutsche Bank: But fair to say you think it maybe a little longer than normal lag in south this time around, before this starts to flow back to the stump?

Daniel S. Fulton – President and CEO: Not sure what a normal lag is. I think we’ve been through an extraordinary period in this housing session. So we don’t have experience with this amount of deferral. But I would expect with the pace of recovery in housing, that there’ll be opportunity.

Patricia M. Bedient – EVP and CFO: Mark, I think we’ve already experienced a little longer than a normal lag.

Mark Wilde – Deutsche Bank: I agree Patty its not been a normal downturn.

Patricia M. Bedient – EVP and CFO: I think those prices will start to move probably sometime more in the latter half of this year than what we’ve seen at this point. So I don’t think it’s a long ways away. But we’ll be ready for it when it comes.

Cellulose Guidance

Chip Dillon – Vertical Research Partners: By the way not to join bandwagon, but I noticed this was the third quarter in a row where you didn’t have any adjustments to between GAAP and reported earnings and the first time you’ve had three in a row since 1998. So congratulations.

Patricia M. Bedient – EVP and CFO: Thanks Chip I’m glad that you noticed.

Chip Dillon – Vertical Research Partners: The first question – this has been long time coming. The first question is on the Cellulose business. I know you sort of give us the view that there will be substantial improvement, and as you know that number can jump around considerably excluding any price impact. So, if we made – I don’t know what you are assuming whether this current round of price announcements go through or not, but could you just give us a little better guidance in terms of what the movement might be if we exclude any pricing impact from first to second quarter?

Patricia M. Bedient – EVP and CFO: Well, maybe the way to think about it, Chip, would be, if you think about where we would expect that business to be in the second quarter given the assumptions that I had in my outlook, that I would say that it will be much closer to the $60 million that we earned in the fourth quarter than in the $31 million that we moved in this quarter.

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Chip Dillon – Vertical Research Partners: Then, second follow-up is on the Wood Products business. I know your guidance is for flat and it’s really tough with pricing moving around the way it is. It just seems like in the past that often when there is a sudden movement about the time of the call, and it’s is not fair because your people couldn’t have looked at randomly last night for example and then reacted to it, but it would seem to me that if we see a continuation of softer lumber prices in the next three or four weeks that maybe that would prove high, but – maybe you could comment on that sensitivity and maybe if I turned it around and said if we do see a bottom by the end of – let’s say by mid-to-late May, and a turnaround, could that number actually be up?

Daniel S. Fulton – President and CEO: I guess the best way to answer your question is to think about conditions in the channels, Chip, because this is merely a behavioral issue as much as anything. Channels are very tight and with prices as high as they have been, you know most in the channel have been reluctant to take significant inventory positions. But the orders continue to come in, because new home construction is picking up, and so the real question is to the extent that there is softness, how long, how deep and since inventory levels are relatively low, I think what we may find is something similar to what happened in the first quarter where the orders were coming in and so the distributors and the builders put their orders and reentered the market. So, it’s really going to be a behavioral issue I think as much as anything and it’s all – really does flow back to demand levels and construction, so I think you have to look at construction levels versus guidance there. I would want to speculate about price movement.

Chip Dillon – Vertical Research Partners: And you are not concerned about inventories being elevated at the very end, at the builder level because we’ve seen so many strong months?

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Daniel S. Fulton – President and CEO: Help me a little bit with your question. Inventory levels at the builder level…

Chip Dillon – Vertical Research Partners: Your end customer, yeah exactly, the guys that are actually using the stuff now?

Daniel S. Fulton – President and CEO: Channel seem to be relatively thin, and finished inventory for builders is very low as I commented, and so as those new orders come in, construction will pick up and it starts with a lumber drop and panels and so, we would expect building activity based upon all of the statistics starts, permits to be continuing to increase through the year.

A Closer Look: Weyerhaeuser Co Earnings Cheat Sheet>>