Weyerhaeuser Co. Earnings Call Nuggets: WRECO, West Coast Export Markets

On Friday, Weyerhaeuser Co. (NYSE:WY) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s the key executive takeaways.


George Staphos – Merrill Lynch: I appreciate all the additional details. My first questions around Chart 10 and WRECO and it’s encouraging to – obviously the lower cancellation rates and the buyer traffic picking up. The one interesting – one of the interesting data points here is the pricing your backlog which has been trending lower and I guess my question here is how much of this is cyclical from what you see Dan? Or is there any secular implication that we should take away from the declining price in the backlog that could impede the recovery ultimately and WRECO and profitability when we finally see more and more closings and starts?

Daniel S. Fulton – President and CEO: The primary reason for the decline in the pricing backlog, George is answered by mix. So as I mentioned in my remarks. We have mix issues across our various markets. We have higher priced product, for instance in San Diego and the Washington DC area lower priced product in places like Phoenix and what we’ve seen over the last three to six month that is reflected in our backlog is a recovery in sales in some of those lower price markets ahead of what we were longer term expecting to see coming from let’s say Southern California. So we had a very significant increase in activity for instance in Arizona, not just in the last quarter but really go back probably six months. And Arizona generally is a lower priced market, those are lower margins, so that’s also impacting our margins. So it is more of a mix issue, we also had for instance in Washington DC which is a higher priced market a period of time where we had heavier shift to more like family. So we are in some larger master plan communities and for example in some of those master plans. We have a requirement to build affordable housing as part of the entitlement process those are lower priced units and so that would affect both the margins that you see falling as well as deal price. So it is more a function where the homes are and for instance in some markets we are beginning to be able to pass through price increases. So I think that most of the price decline due to the softness of the market is behind us and there’ll be some choppiness as mix shifts as we come out of this and we’ll try to keep you informed so that there is no surprise.

George Staphos – Merrill Lynch: Related question and I have one last follow-on. Would it be fair to say then given the ultimate lag in trend and how that will materialize in your performance, the recent improvement in pricing that you could see single-family margins more or less close to where they were at last year in the back half? Should we ultimately get to better than breakeven, better than marginal loss in WRECO in the second half in single-family? Then, the second question I had, totally different topic. In terms of Cellulose Fibers, relative to the rest of your portfolio, what you are trying to build it in Weyerhaeuser, it’s obviously you have done a great job of improving your returns, but it still remains a very cyclical and capital intensive business. From where you sit right now, why you think that Cellulose Fibers is still a good business to be maintained the portfolio for Weyerhaeuser, for your shareholders? Thanks and good luck in the quarter.

Daniel S. Fulton – President and CEO: Thanks George. Your question of WRECO and the balance of the year, yes, we will return to profitability. What happens in the first quarter is that, it is our lowest quarter for closings, and so we end up in a loss position fundamentally because of G&A, and as the volume picks up through the year, then you’ll see those break into profitability. As Patty mentioned, we expect to be profitable in the second quarter, and then through the balance of the year, we’ll be delivering the homes that we have sold earlier in the year. So we’ll have the margins from those sales come through the P&L. So, we would certainly expect that to recover. In terms of what the margins maybe in the balance of the year, we have good visibility today from second quarter margins. It gets a little bit fuzzier as we look at third and fourth quarter, because some of the closings that will occur in third and fourth quarter will be from sales that we haven’t even entered into yet. With respect to the Cellulose Fibers in your portfolio question we believe that the Cellulose Fibers business is a good fit for our portfolio. We are a strong competitor in the fluff business in particular, where we have very strong relationships with growing global customers. What the Cellulose Fibers business does for us is, it gives us really terrific global exposure, because it’s about roughly two-thirds of our sales are for customers outside of the U.S. And so, we believe long-term trends or demand for fluff are very positive and the relationships that we are building with our customers that are growing, give us confidence that we will be able to maintain profitability and grow with them. Patty mentioned, when she was talking about projects that we are spending money on this year, in our CapEx for the Poland facility. So that’s a conversion facility that will give us increased product to sell to key global customer as they expand into Europe and North Africa and we believe that we are a strong competitor in that business and it’s a good fit for us.

West Coast Export Markets

Gail Glazerman – UBS: I guess just to start, can you talk a little bit more about the West Coast export markets and I guess just the level of trend, was it getting worse as you moved through the first quarter or was it picking up in terms of I guess the Chinese market particularly? And are any sort of numbers you can put to in terms of the change in your export volumes to China?

Daniel S. Fulton – President and CEO: You were breaking up at the very end of your question Gail. Could I just ask you to?

Gail Glazerman – UBS: Are there any numbers that you can – the last part was, are there any numbers you can put to in terms of the change in your volume to China either year-over-year or sequentially? And just generally give a context on what the trends were like moving through the quarter into the second quarter?

Daniel S. Fulton – President and CEO: So our overall export volumes were slightly off in the first quarter as compared to the fourth quarter. That’s fundamentally a China statement. As I mentioned we had a significant slowdown in exports to China starting in the fourth quarter continuing into the first quarter and that caused the shift in mix. So (indiscernible) numbers about 80% of our export volume went to Japan, 10% Korea, slightly more than 10% going to China. While we go back to fourth quarter those numbers were sort of mid-60s for Japan, China had actually grown to be 25% of our export volumes. So we are returning to more typical mix. Our long-term market continues to be Japan. Those are higher quality logs. That’s our most valuable resource that we are exporting off of the West Coast and we see that demand continuing to be steady and it has been growing. We are well-positioned to sell into the China market as we did last year because of the location of our lands and (adjust) advantaged facilities that we have to ship off the West Coast. So longer term we continue to expect the export to be a significant part of our activity off the West Coast. Japan will continue to be our major market but we will take advantage of opportunities to serve longer term customers in Korea, to build market share in China. And also to take advantage of opportunities that are beginning to emerge in some other export markets. Beyond those big three.

Patricia M. Bedient – EVP and CFO: Gail, to your specific question about, in the first quarter we saw coming out of the fourth quarter a lot of inventory in China and in to the first quarter and some of that was also due to, some of the Chinese government policy which we are starting to see some signs of monetary easing by the Chinese Government. So that’s encouraging. In terms of the impact going into the second quarter we don’t see a lot of pick up but we see some of the inventory being worked off. So that’s why in my comments I focused primarily on the second half of the year in terms of the resurgence of Chinese demand. We don’t see a lot of that impact of this happening in the second quarter, but rather that inventories continue to be worked down.

Gail Glazerman – UBS: Will these comments hold generally for the lumber exports I think if some exposure to that out of Canada going into China, and if so is there any risk or you are seeing signs of some of that being repatriated?

Daniel S. Fulton – President and CEO: I am sorry I am going to have to ask you, to ask that question one more time.

Gail Glazerman – UBS: Sure, did this comment hold for lumber as well, and if so are you seeing any signs of volumes that might have gone to China previously kind of being repatriated in North America.

Daniel S. Fulton – President and CEO: We have been shipping some lumber to China out of Canada. And actually on a year-over-year basis our export volume to China out of Canada roughly doubled. They have, as you know the wood that goes to China is used for industrial purposes concrete forms and packing and crating at least as it relates to softwood. So the Chinese Government did enforce credit controls to try to slow down growth, to try to slow down some real estate development. We would expect that activity to start to recover. We’ll continue to take advantage of that opportunity as it exists. In our lumber business, out of Canada, once again, our primary customer has been Japan and that’s a higher quality wood than it’s going to China. But we’ll take advantage of the opportunities as they present themselves. We are – in Wood Products business, we are exporting lumber. We are also starting to export some amount of OSB and engineered products into Asia also.

Patricia M. Bedient – EVP and CFO: Yeah. Gail, I really think as it relates to our lumber export as Dan said similar to logs. Japan is a much more important market for us, because most of our lumber production comes out of Alberta. It’s not as affected by the beetle damaged wood as some of the other producers. So we produce and export more to Japan of a higher grade than probably other producers that you might be hearing from.

Gail Glazerman – UBS: Just two quick ones, the guidance for Timberlands in the second quarter, does that include land sales or would land sales be additive or attractive to that?

Patricia M. Bedient – EVP and CFO: We don’t forecast land sales, because they are lumpy, but I can tell you based upon what we see right now that we wouldn’t see a big difference in the second quarter compared to the first, but as we’ve talked about in the past, that can move around, but as we sit here today, it doesn’t make a big difference quarter-over-quarter.

Gail Glazerman – UBS: And Patty, is there any guidance for the unallocated items, I think in the past you had talked about maybe $80 million for the year, you are well below that in the first quarter. Would you expect that to normalize or if there is any change structurally there?

Patricia M. Bedient – EVP and CFO: Well, what we tried to do on the Chart 13 was really give you what makes up that. So as you think about walking down that chart, the unallocated corporate functional expenses, I wouldn’t see that changing significantly throughout the year in terms of the quarter impact. The unallocated share based comp does move around because that’s tied to for the most part the volatility in our stock price. Pension and post retirement costs, probably pretty stable, foreign exchange gains that’s a result of changes in primarily the Canadian dollar on our intercompany borrowings. So those would be the primary items as you think about. So as the foreign exchange Canadian dollar that moves around, that will impact that number, just roughly I would say probably a $0.01 change makes about a $3 million-ish give or take and it’s also a function of the currency fluctuation as well as the level of borrowings intercompany, how that goes through year-to-year or quarter-to-quarter. And then on share based comp, probably about a $1 movement in the stock price is roughly $1.5 million to $2 million. So maybe that will help you calibrate throughout the quarter.

Gail Glazerman – UBS: Just that other segment because that was pretty big swing quarter-on-quarter.

Patricia M. Bedient – EVP and CFO: That’s really made up of a bunch of little things, there is a whole list of – that’s why we didn’t call out anything separately there. Other is a bunch of 1 million or 2 million kind of unique items quarter-over-quarter.

Gail Glazerman – UBS: But is the fourth quarter kind of the more normal number or is just completely random.

Patricia M. Bedient – EVP and CFO: It’s kind of random. I would say it’s probably somewhere between that $2 million and $7 million number.