DBRS Confirms Weyerhaeuser Company at BBB with Stable Trend

DBRS has today confirmed the ratings of Weyerhaeuser Company (WY or the Company) at BBB and the trends are Stable. The Company performed as expected with operating performance on a steady recovery path, albeit at a slow pace in line with industry conditions. The Company’s financial profile has strengthened modestly in 2011 but is still aggressive for the current rating. DBRS expects the Company’s financial profile to substantially strengthen once the forest-product industry breaks out of the current prolonged depressed condition. The current ratings continue to be supported by WY’s above-average business profile with a solid market position in each of its businesses. Additional support comes from the strong liquidity provided by the Company’s sizeable timberland holding, which can be easily monetized.

Three of WY’s businesses (timberland, wood products and real estate) are heavily exposed to the U.S. housing industry. The recent increase in demand for logs and, to a lesser extent, lumber from Asia, especially China, has helped add a modest degree of geographic diversity. Activities in the U.S. housing sector bottomed in 2009, but the pace of recovery has been tepid. Housing starts have increased modestly since the trough but are still well below the historic average, especially for single family units, the main factor for the weak results at WY. The Company reported modestly better operating earnings than a year ago, with gains in three of the four businesses (real estate was essentially flat) partly offset by higher corporate expenses. The strong export demand for logs and the associated increase in log prices led the timberland segment to be the best performer amongst WY’s businesses on a year-over-year basis in 2011.

Near term, WY expects the momentum in the U.S. housing market to pick up with housing starts at about 720,000 units in 2012 (606,000 units in 2011). Increasing construction activities will be positive for the timberland, wood products and real estate businesses. In addition, log export to Japan is expected to remain favourable. However, conditions for cellulose fibre are expected to be challenging with softer markets and lower production due to ongoing planned maintenance. Overall, DBRS expects WY to continue to report modest improvement in operating earnings in 2012.

Long-term potential for the Company remains very positive. The eventual recovery of the U.S. housing market to trend levels and the ongoing urbanization of emerging markets will support a sustained strong demand for logs and lumber. The Company is well-situated geographically to supply growing demand in Asia. Anticipated harvest curtailments as a result of the mountain pine beetle epidemic in the B.C. interior will tighten supply. This would significantly boost prices for sawlog and lumber during the upturn of the next building cycle. Moreover, WY’s expertise in silviculture would help boost growth and quality of sawlogs and the value of the timberland holding. The Company is well positioned to take advantage of the rising demand. Furthermore, cellulose fibre would benefit from the strategy of focusing on value-added products and efforts to increase cost competitiveness by raising uptime and efficiency. WY has the potential to significantly increase earnings and cash flows in the next forest product industry upturn.

The Company continued to deleverage, retiring $583 million in 2011, mostly with cash on hand. Cash flow from operations and proceeds from asset sales (mostly non-strategic timberland) have more than covered capital expenditures and higher dividend payments (as a result of the real estate investment trust (REIT) structure). The modest improvement in earnings and debt reduction has strengthened WY’s financial profile. Despite the improvement, the Company’s financial profile is still aggressive for a cyclical company. Nevertheless, the Company has a large timberland holding valued (DBRS estimate) at about three times the Company’s gross debt. These timberland assets can be easily monetized to raise funds, even in depressed markets, adding to the Company’s financial flexibility and providing security to debt holders. With cash and unused credit facilities totalling $1.7 billion at the end of March 2012, the Company has ample liquidity to weather the current downturn. DBRS expects the Company ratings to remain Stable in the next few years based on our outlook of the industry.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Forest Products Industry (June 2011), which can be found on our website under Methodologies.