Weyerhaeuser Co Earnings Call Nuggets: WRECO and Incremental Margins

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


Gail Glazerman – UBS: I guess starting off within WRECO, can you talk a little bit about what sort of mix changes may come with the increasing community counts. It seem like 2012 mix was a little bit weak, would you expect to see that shift a little bit or remain where it was in 2012?

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

Daniel S. Fulton – President and CEO: The mix is dynamic. Talking about the fourth quarter mix, Gail, we had in the fourth quarter an increased percentage of homes that are reported dwellings, we had talked about that on our last call, but these affordable units come with an overall master plan approval process, that was in the Washington D.C. market. Then we had a shift between third and fourth quarter away from a higher percentage of sales in closings in San Diego to other markets. So we would expect, as we look at the first quarter, as Patty commented, we expect the mix to be about the same. We have adjusted our product in every single market in response to evolving market conditions, and we’ve had significant response in the Inland Empire area of California in developing a new more affordable product, but in other markets we’ve actually moved up market because that’s where the demand has been in the last year to 18 months. As the overall market conditions improve, we will continue to find the opportunities where we have greatest margin potential. With all of these new community openings, we have opportunities to adjust our product mix and so what we will do throughout the year is try to give you some guidance on how we would expect that mix to be changing from quarter to quarter. But as we look from 2012 to 2013, we should not expect a significant mix shift other than this resurgent demand from California can have a positive impact on us as we move throughout the year. It takes some time for those sales to convert to closings, but we have good visibility as we look out in the houses that are in our backlog. We know what those margins should be and I think we’ll just continue to update you on a quarterly basis.

Gail Glazerman – UBS: Log price developments, can you help us understand kind of the developments that you saw in the fourth quarter and currently how much might have been due to weather and how much you think is due to underlying kind supply/demand tightness, because it does seem like in both the west and the south there were weather impacts?

Daniel S. Fulton – President and CEO: There was a little bit more weather impact in the fourth quarter in the west than there was in the south. In the first quarter it’s likely that we’ll have more weather conditions that will impact us because of wet weather. What we are seeing in the log market is the impact of some recovery in U.S. housing both in the west and in the south and in the west continued increase in demand for exports. So we expect some upward pressure on log prices. We have weather events every quarter that may impact us a bit, but I think generally we would expect that the impact is coming from the demand side.

Incremental Margins

George Staphos – Bank of America: Two general areas of question, one in Wood and one in Real Estate to give acting on Gail. I guess in Wood Products Dan. Inflation offset a lot of the pickup in revenue that you saw in segment I guess that’s to be expected this time in the cycle. If we look out to next year or so would you anticipate that your realizations should be at least able to keep up with inflation? Then taking a different take on it if we hold raw materials and pricing constant, what kind of incremental margin do you expect you should be able to see at Wood Products over the next one to two years?

Daniel S. Fulton – President and CEO: What we would expect is that as the market recovers we certainly have different products. We have our lumber business. We have our OSB business and we have Engineered Wood Products. As market demand picks up there is pressure on log prices and so the relative margins between logs and lumber shifts over time for logs and oriented strand board, but more related to logs. The impact in our Engineered business comes through as you noted OSB input costs. So, I can’t answer your question specifically because it’s a function of what supply is available on the market throughout and what production capacity comes back online in the Wood Products business. It is that dynamic of supply and demand and it’s a function of production capability across the system. So quite frankly, I can’t give you a specific number as I look out a couple of years. What we believe is that with a recovering market, in the U.S., we should see increased demand for Wood Products, which will then translate to demand and ultimately pricing on logs, plus in our case we have significant export market off of the West Coast and that plays into the pricing dynamic also.

Patricia M. Bedient – EVP and CFO: George, the other thing that you saw in those margins in Wood Products in the fourth quarter was we had some down time for the holidays, some downtime from maintenance and implementing some capital projects. So as we see utilization rates improve, that will significantly impact that margin going forward as well.

George Staphos – Bank of America: I’ll leave that general area to the side for now. If we switch to RICO, it was nice to see the increase in pricing in the backlog. Can you speak to what’s been driving that? Is that, what you’re seeing in California or Las Vegas? I guess again, just back to Gail’s question, you had called out the mix issue in the fourth quarter and you were more or less where we had expected you, but also it seemed like Las Vegas, Nevada, we’re stronger than we would have expected in the fourth quarter, regionally broadly, not just Weyerhaeuser specific. I’m curious why you didn’t see more of a mix effect in the quarter?

Daniel S. Fulton – President and CEO: We are talking about sales prices which don’t translate into the quarterly closing numbers and so there is a lag George when you write those sales and when they are delivered. We were encouraged and have been encouraged not just by the fourth quarter but as Patty noted sales early this year had been very strong, which is atypical .We joke a bit about the Super Bowl being a turning point in the early year selling season. So this year is a bit of an anomaly. We are seeing prices moving up in every single market, for similar type products. So that is not even addressing the mix issue as to whether or not it’s a first time product or a move up product where there may be some additional pricing power. So we think that what’s happening is certainly the existing inventory has diminished significantly, home buyers are going back into model complexes and making the commitment to buy new homes in part because they have more confidence in the economy, in their jobs and they can obviously see that the market is up and there is more likelihood of upward pricing movement as well as perhaps some uncertainty about where mortgage rates are.

George Staphos – Bank of America: So the backlog price increase was brought and not region specific is that what you are saying?

Daniel S. Fulton – President and CEO: Yes.

A Closer Look: Weyerhaeuser CoEarnings Cheat Sheet>>