DBRS Confirms Weyerhaeuser Company at BBB with Stable Trend

DBRS has today confirmed the Issuer Rating of Weyerhaeuser Company (WY or the Company) at BBB with a Stable trend. The confirmation reflects that WY performed in line with expectations, with significant performance improvement in 2013. The Stable trend reflects DBRS’s expectation that credit metrics will remain acceptable for the current rating in 2014, driven by modestly stronger operating results. More importantly, WY’s rating continues to be supported by its solid investment-grade business profile and strong financial flexibility due to its large timberland holdings.

DBRS views the split-off of the Weyerhaeuser Real Estate Company (WRECO) as positive for WY’s business profile, which would allow the Company to focus within its core forest products business. Moreover, the purchase of Longview Timber LLC (Longview) in 2013 was also positive, as the additional high-value timberlands (645,000 acres) further strengthened WY’s financial flexibility and solidified its position as a leading North American timberland holder.

Following the acquisition of Longview, WY’s leverage level improved modestly, as additional equity from issuances more than offset the impact of higher gross debt. In terms of operations, WY generated significantly stronger results in 2013, in line with DBRS expectations, which were mainly driven by favourable market conditions in Timberlands and Wood Products as the recovery of the U.S. housing market continued. In H1 2014, operating results were mixed, but overall results were stronger than H1 2013, reflecting ongoing recovery in the forest products industry. Stronger Timberlands and Cellulose Fibres results were partly offset by weaker Wood Products performance, mainly due to temporary weather-related transportation issues from Q1.

In H2 2014, DBRS expects comparable earnings to H1, as negative seasonal factors in Timberlands are offset by stronger market conditions in Wood Products, which are expected to be driven by the continuing recovery of the U.S. housing market, based on the ongoing improvements of the overall U.S. economy. As a result, DBRS expects H2 2014 performance to be comparable to H2 2013 and 2014 full-year results to be stronger than 2013. In terms of cash flow, H1 2014 free cash flow before financing was positive and the debt level stayed unchanged. Together with stronger cash flow from operations, credit metrics improved modestly from the end of 2013 and remained in line with the current rating. In H2 2014, DBRS expects comparable cash flow from operations to H1 2014, in line with earning expectations. In turn, DBRS expects WY will generate a modest amount of positive free cash flow before financing, as cash generation from operations and inventory reduction more than covers capex, the growing dividends and other cash items. However, DBRS does not expect any material debt reductions from the current level due to the share repurchase program ($700 million announced on August 13, 2014). Combining the expectations of comparable cash flow from operations and stable debt level, DBRS expects credit metrics to remain comparable to the H1 2014 period.

In the medium to long term, WY’s Timberland and Wood Products business are well-positioned to benefit from the upcycle in the U.S. housing market. Additionally, the Company’s operating performance is likely to benefit from the following factors: (1) a lack of Canadian log supply due to the mountain pine beetle infestation would have a positive impact on log prices. (2) WY is also well-situated geographically to supply growing demand in Asia. (3) WY’s expertise in silviculture helps boost growth and quality of sawlogs and the value of the timberland holding. (4) Cellulose Fibres benefits from the strategy of focusing on value-added products and efforts to increase cost competitiveness by increasing uptime and efficiency.

With cash and unused credit facilities totalling $1.845 billion at the end of June 2014, WY has more than sufficient liquidity to meet any short-term cash requirements. In addition, WY has a large timberland holding, which DBRS estimates to be valued at about three times the Company’s gross debt. These timberland assets can be easily monetized to raise cash, even in depressed markets, adding to WY’s financial flexibility and providing security to debtholders.

In conclusion, DBRS expects the credit rating of WY to remain stable for the foreseeable future, supported by a solid investment-grade business profile, strong financial flexibility due to its large timberland holding and the expectation of acceptable credit metrics going forward.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

MacMillan Bloedel Limited All Series Sinking Fund Debentures are assumed by Weyerhaeuser from the acquisition of MacMillan Bloedel.

The applicable methodologies are Rating Companies in the Forest Products Industry (June 2013) and DBRS Criteria: Financial Ratios and Accounting Treatments – Non Financial Companies (January 2014), which can be found on our website under Methodologies.