International Paper Co (IP) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. We thank you for your patience. And welcome to the Temple-Inland fourth quarter and full year fiscal results 2006 conference call. [OPERATOR INSTRUCTIONS] I would now like the turn the call over to your host for today's presentation, Mr. Chris Nines, Director of Investor Relations. Please proceed, sir.

Good morning. This is Chris Nines, Director of Investor Relations for Temple-Inland. And I would like to welcome each much you who have joined us by conference call or webcast this morning to discuss the results for fourth quarter and full year 2006.

Joining me this morning are Kenny Jastrow, Chairman and CEO of Temple-Inland, and Doyle Simons, Executive Vice President. Please read the warning statements in our press release and slides concerning forward-looking statements as we will make forward-looking statements during this presentation. In addition, this presentation will include non-GAAP financial measures.

The required reconciliation to GAAP financial measures can be found on our website at www.templeinland.com.

This morning Kenny Jastrow will give a presentation on the results for fourth quarter and full year 2006. After the completion of his presentation, we will be happy to take your questions. Thanks for your interest in Temple-Inland, and I would now like the turn the call over to Kenny Jastrow. Kenny.

Chris, thank you very much, and let me extend a welcome to all of you who have joined us this morning. Net income for the fourth quarter 2006 was $104 million compared to $24 million fourth quarter 2005, and $96 million third quarter 2006. Diluted earnings per share fourth quarter 2006 were $0.97, compared to $0.21 fourth quarter 2005 and $0.87 third quarter 2006.

Average diluted shares in the fourth quarter 2006 were $107.8 million compared to $113 million fourth quarter 2005. During fourth quarter 2006 we repurchased 2.2 million shares and at year end the diluted shares outstanding totaled 106.7 million.

Now, net income excluding special items on a earnings per share diluted basis was $0.73 in the fourth quarter 2006 versus $0.30 fourth quarter 2005 and $0.93 third quarter 2006. The fourth quarter 2006 net after-tax special gain of $26 million or $0.24 per share principally related to settlement of the Softwood lumber agreement.

Segment results. Starting with corrugated packaging. For the fourth quarter 2006 we earned $74 million on our Corrugated Packaging operation compared to a loss of $3 million in the fourth quarter of 2005 and $74 million third quarter 2006. Forest Products fourth quarter 2006 operating income was $46 million dollars compared to $52 million in the fourth quarter of 2005 and $83 million third quarter 2006.

Real estate operations, operating income in the fourth quarter 2006 was $12 million compared to $16 million in fourth quarter 2005 and $15 million third quarter 2006.

Financial Services earned $53 million in the fourth quarter 2006 compared to $51 million in the fourth quarter 2005 and $58 million third quarter 2006. For the quarter, then, total segment earnings were $185 million fourth quarter 2006 compared to $116 million fourth quarter 2005 and $230 million third quarter 2006.

Now let me turn to each of our operating areas beginning with Corrugated Packaging. Once again, operating income in the fourth quarter 2006 was $74 million versus the loss of $3 million in the fourth quarter 2005 and $74 million third quarter 2006. On the price front, fourth quarter 2006 averaged box price was up $96 a ton versus fourth quarter 2005 average. Fourth quarter 2006 average box price was up $13 a ton versus third quarter 2006 average.

Volumes. Our volumes in the fourth quarter 2006 versus fourth quarter 2005 on a volume per workday basis were down 6%, and when you compare fourth quarter 2006 versus third quarter 2006 they were flat.

However, let me remind you that we sold performance sheets August 25, 2006, which was a [inaudible] plant out in California. This impacted quarterly shipments negatively by 30,000 tons.

Excluding performance sheets, fourth quarter 2006 box shipments on a volume per workday basis were down 3% with fourth quarter 2005, but up 2% compared with third quarter 2006.

Freight. Freight costs were up $2 million versus fourth quarter 2005 and third quarter 2006. Energy costs were down $16 million versus fourth quarter 2005, but up $3 million versus third quarter 2006.

I might say that gas pricing currently is up about $1 from fourth quarter 2006, roughly $7.50 per MMBtu. Recycled fiber principally OCC, costs were up $9 a ton versus fourth quarter 2005, but down $18 a ton versus third quarter 2006. Currently OCC prices are up $30 from fourth quarter average to over $125 a ton.

In the first quarter 2007 the Rome, Georgia, linerboard mill scheduled maintenance outage was accomplished in January 2007. Mill production was negatively impacted 27,000 tons in first quarter 2007 compared with fourth quarter 2006 because of this scheduled maintenance outage. Might also say relative to weather issues that our California box plant and is Mexico box plants did have some negative impact from weather relative to shipments, and during the first quarter that amounted to a negative of 7,000 tons to 10,000 tons.

Forest Products. Operating income in the fourth quarter 2006 was $46 million compared to $52 million fourth quarter 2005 and $83 million third quarter 2006. Looking at our various product groups starting with lumber. Average price was down $98 versus fourth quarter 2005 and down $18 versus third quarter 2006. Volume was down 3% versus fourth quarter 2005 and down 9% versus third quarter 2006. Current prices are up $6 versus fourth quarter 2006 average price.

Gypsum. Average price was up $23 versus fourth quarter 2005, but down $20 versus third quarter 2006. Roughly gypsum prices are in the $170 range currently, down $13 versus the fourth quarter 2006 average price. On a volume basis, volume was down 12% versus fourth quarter 2005. These numbers have been adjusted for the acquisition of our partners interest in Standard Gypsum in January 2006 and down 4% versus third quarter 2006.

Particle board. Average price was up $86 versus fourth quarter 2005, but down $6 versus third quarter 2006. Volume was down 23% versus fourth quarter 2005 and down 27% versus third quarter 2006. Might also note that similar to our paper group's AG business in the box system, winter weather, especially in Texas and the southeast part of the U.S., did have effect on shipment voluming for our Forest Products group.

Now turning to real estate. Operating income was $12 million in the fourth quarter 2006 versus $16 million fourth quarter 2005 and $15 million third quarter 2006.

Entitlement activity. During the fourth quarter 2006, zoning was approved for 2001 acres of high-value land around Atlanta, Georgia. The specific projects were Town West, 971 acres, Fox Hall, 224 acres, Legion Lake, 215 acres, and High Grove, 591 acres.

Let me remind you that detailed information regarding project descriptions, land use, etc., for all these projects are on or website www fourstargroup.com and I would refer you to that website to gather more detailed information.

During the quarter high-value land sales totaled 1,150 acres. The average price was $9,500 per acre and $10 million was a result of this high-value land. Residential we sold 715 lots. The average revenue per lot was $49,300, and the average growth profit per lot was $16,500.

Commercial acres sold totaled 57 acres during the quarter. The average selling price was $123,400 per acre, which resulted in a $3 million gain on sale from commercial land.

Regarding our pipeline, totals for undeveloped land have 195,833 acres. Land in the entitlement process is 25,850 acres, entitled 12,222 acres, and under development 2,839 acres for a total pipeline in a real estate group of 236,744. I might make note that we expect the first quarter of 2007 to be similar to the fourth quarter 2006 in the range of $10 million regarding operating income.

Once again, please check our website for detailed information as it relates to not only the pipeline but all the projects listed earlier where entitlement activity had taken place.

Now let me turn to Financial Services. Operating income in the fourth quarter 2006 was $53 million compared to $51 million fourth quarter 2005 and $58 million third quarter 2006. Fourth quarter 2006 earnings were up compared with fourth quarter 2005 due to stronger credit conditions and lower costs. Fourth quarter 2006 earnings were down compared with third quarter 2006 due to lower non-interest income.

In Financial Services in the first quarter of 2007 we expect earnings for this group to be in the range of $45 million, slightly lower than the first quarter of 2006.

Now full year results. Net income per diluted share, excluding special items was $3.32 compared to $1.90 for 2005 for an increase of 75%.

Full year segment results, Corrugated Packaging in 2006 earned $255 million compared to $120 million in 2005. Forest Products had a record year of $312 million in 2006 compared to $219 million in 2005.

I might say that '06 is now the third year in a row of record performance from our Forest Products Group. Real Estate earned $62 million in 2006 compared to $44 million in 2005. And, finally in our Financial Services Group, earnings in 2006 were $222 million compared to $201 million in 2005.

Similar to our Forest Products Group, Financial Services earnings of $222 million were a record, and this now makes three years in a row this group has achieved record earnings. For the year total operating income was $851 million compared to $584 million in 2005.

Looking forward now, pension expense in 2007 is estimated to be for the year $36 million compared to $47 million pension expense for 2006. And on the Capex front, capital expenditures in 2007 are estimated to be in the range of $225 million up slightly from the $208 million in 2006.

Let me review fully the results of our company for 2006. First on the ROI front, ROI was 15.9%, and we continue to be an industry leader. Earnings per share before special items of $3.32 was an all-time record, and the 75% year-over-year increase compared with last year.

During 2006 we returned roughly 10% of the average market capitalization of our company to shareholders through dividend and is share repurchases. During 2006 dividends were increased 11% to $1 per share, and during the year we repurchased 7.9 million shares. Our Corrugated Packaging Group we had record mill production and record box plant asset utilization. In Forest Products we had record operating income of $312 million our third consecutive year.

Our Real Estate Group, which 2006 was our first year of segmentation, we got off to a good start with $62 million in operating income, 2,181 acres became entitled out of our high-value land portfolio, and we transferred 4,890 acres of high-value land into the entitlement process.

Financial Services operating income of $222 million was a record, and once again the third consecutive year for record performance for this group.

In February 2007 our Board of Directors approved a dividend increase of 12% to $1.12 per share. This makes the fifth consecutive annual increase in our dividend. In addition to that, the Board authorized an additional 5 million shares for our repurchase program.

We currently have 1.6 million shares left from a previous authorization in August of 2006, when combined with this new authorization of 5 million shares gives us a total now of 6.6 million shares in our repurchase program.

Relative to shareholder returns on a long-term basis looking five years, three years, two years, and one years, you can see the comparison of our company to the Peer Group Median and also the S&P 500. Particularly as you look long-term, Temple-Inland is up 107% in the five-year category versus the Peer Group Median of down 5% and the S&P up 500. Temple-Inland's strategy, our execution, and our focus on ROI continued to drive shareholder value. Now, with that let me stop and answer your questions. And once again we appreciate you being with us today and your interest in our company.

And our first question comes from the line of Eric Pipa of Morgan Stanley.

That's a new variation. Thanks very much and good morning, gentlemen.

Good morning.

It's a new one every time. Kenny, I was hoping you could talk to us about whether or not there has been some calls for a break-up of the company, and I was hoping you could perhaps address some of those calls directly here as kind of the first answer.

To answer your question, I assume relates to the 13D filing we received from Icahn, and I will refer you to the 13D filing.

Got it. Okay. And then I will jump into the meat. Can you talk to us about -- you've obviously made some progress on the real estate business this year.

You've said in the past that you would think about spending that business off and just sort of you needed to get some momentum going in that business if you will. How would you rate the Company's momentum and where would you put us in terms of your thought process and whether or not this could be a stand alone company?

Yes. Several years ago when we really began to identify this opportunity in real estate, we said two things.

One, that we would begin to segment this operation, and that we did beginning in 2006. The segmentation is an effort to provide transparency and an opportunity for investors, analysts and customers, whoever, to really take a look at what's going on in this business, and this of course has been augmented by a very broad-based website that contains a lot of information relative to our projects.

So in the process of looking at this operation as we go forward, I think we felt like 2006 was a good year, and a good start for us as I said in my comments. In addition to that, we've had a lot of hits on our website, so we believe that the content of the website and the transparency provided has been beneficial.

Secondly, we have discussed publicly the issue of considering spinning out this group as we move forward, and we've talked about issues relating to not only transparency, but also operations where people can in fact begin to see what's in this portfolio, begin to develop some scale in this business, and certainly as we go forward, we will consider taking a look at the spin-out of the real estate business to the extent we believe it would add value to our shareholders.

But your view is you're not there yet, or you don't want to discuss whether or not you're there yet?

We clearly have made a great deal of progress, but we have not made any announcement to spin it out yet, and so until we do, we're not there yet

Got it. Thanks very much

Thank you.

Thank you very much, sir. Ladies and gentlemen, the next call is from the line of George Staphos of Banc of America Securities. Please proceed

Thanks. Hi, Kenny. Congratulations on the year. Good morning. I guess the first question I had on the box business. Can you update us at all in terms of what's new on the business improvement program, in changes in what you might be able to get through that program relative to the corrugated business and improvement over the last few years?

And separate related question, can you update us as to whether there might be any tail on pricing in the box business from 2006 activity, and what your status is on any pricing initiatives in the box business for '07? Thanks. I have a follow-on as well.

As you know, with we typically do not make forward comments relative to price. But I will say to you on sort of a seasonal issue, I think clearly we have experienced a normal seasonal slowdown in the December-January period.

However, we're heading into the spring season, and we would expect this year for those seasonal patterns to develop as they have in prior years. Secondly, as it relates to the issue of business improvement, and I will remind our listeners this is an improvement in our operations not related to price. Over the last three years we've accomplished $225 million in annual business improvement.

We still have set for ourselves a target of $300 million. We are confident that we will get there. Also, I would say to you that we have begun to develop additional thoughts of driving particularly our box business in terms of asset utilization even higher. And a term we use throughout our company now is manufacturing excellence.

And this is a step change in our box plants to not only continue to drive asset utilization, but really look at design, capacity, and driving box plants to achieve even higher levels than we thought possible in the past. And this new issue of manufacturing excellence we believe will be very successful, and internally we are excited about the direction we're headed. So, as an overall answer to your question, George, we made good progress, but we still feel there is good progress in front of us.

Kenny, one related and on a separate question on business improvement or manufacturing excellence. When would you expect to have additional details that you could share about the targets there or more the details in terms of how you get -- intend to get there.

And separately in terms of credit conditions in the bank business, I know we have to wait for the 10K to get a lot of the detail, but can you give us a little bit of color on what you're seeing in credit conditions and the outlook for the first half of '07? thanks

Alright, let me take your first question first, and that has to do with timing and amounts. We have been public that $300 million is our target, roughly $225 million throughout has been accomplished so far.

Throughout 2007 we will continue to update on our progress, and as I said even further from there, we think this issue of driving manufacturing excellence can provide even additional business improvement as we go forward. So, we have not set a specific time, George. I will say to you, though, so far we have exceeded our internal thoughts relative to the timing of accomplishing these improvements.

Credit conditions, interestingly enough, credit conditions still remain to be very positive. As we enter 2007, credit conditions are in good shape similar to the way they have been over the past year.

Thanks, Kenny

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mark Connelly of Credit Suisse. Please proceed.

Thanks. Just two things. I wonder, Kenny, if you can give us an update on what's happening in wallboard and your other panel businesses. And second, to follow up about your comments on driving the box business further, you guys were out front the first time, and a number of companies are more or less following your lead in restructuring. Are you seeing their activities start to eat into the lead you have?

Well, let me answer that question this way, Mark

I mean, obviously you're going ahead anyway.

Yes, right. I think -- I don't want to comment about other companies. I will say to you that we fundamentally believe that given the fundamentals -- the improvement in fundamentals in the corrugated packaging business, that to continue to drive asset utilization in our box plants will continue to lower costs and improve performance. So, we really believe that. And this whole issue of taking a step change now from where we've been to really drive manufacturing excellence, and as I said earlier, this is really a move to have box plants moved to rated capacities, not just comfortable capacities but rated capacities, and in doing that, there is no question in our mind that it will make our corrugated packaging business an even better business.

So, relative to others, I say you just have to ask them. All right?

Yes, sir

We continue to make progress, and I would remind everybody, and I appreciate the question, Mark. I would remind everybody that when you look at voluming for us we made the adjustments for performance sheets and these numbers and a comparable so you could get a sense of that. But, don't forget we have closed down 11 box plants since '03, and that's over a million tons, and yet our volume is up significantly over that time period.

And as we all know, to the extent that we can run more through less, then in fact we're lowering costs, and that's what happened. So, thank you for the question, and we will continue to develop with you and with the others this whole concept of manufacturing excellence. And I have talked so long I forgot your first -- second question.

Just looking for an update on wallboard and your panel businesses.

Clearly I gave you a little color on the wallboard business with my comments. We see pricing roughly in the $170 range.

I would say to you that this business and including our other panel businesses will really be impacted by where housing is headed as well as repair and remodeling markets. Some weather has had an impact obviously, but that's more short-term than long-term.

Long-term as you know, we really view housing, homebuilding, repair and remodeling markets to be very strong give demographic factors. Clearly in certain markets, housing markets have been challenged, but there seems to be a growing body of evidence that perhaps we have hit the bottom and may be bouncing off the bottom. So, I think the direction of this business for the rest of the year will really be reflective of what kind of progress is made in the housing market. Fundamentally, though, we believe that housing, particularly in the markets where we're located, is going to be very strong

Thank you, Kenny

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Rick Schneider of UBS. Please proceed.

Good morning.

Good morning.

Could you talk a little bit about your tax rate in the quarter? It was -- looked like something around 29%, and you've been consistently up around 37%. Could you give under the circumstances an idea what happened there and what's potentially the outlook going into '07?

Right. Yes. Thanks, Rich, for the question.

In the fourth quarter 2006, two things affected our tax rate, and I would say normally our tax rate is a statutory rate plus state in the 35%, 37% range, and that typically going forward would be our tax rate. However, during the fourth quarter two interesting things happened. One, we were able to settle some returns and in doing so it allowed us to release some tax reserves and that went through the rate. Secondly, here in Texas there was a new change tax relative to corporations, and it is called the Texas Margin Tax.

And when that became implemented some valuations allowances set up relative to those issues were able to be released. So, that happened this quarter. Long-term though, and as we head into the year I would say to you the normal tax rate would be the best guess of exactly where taxes ought to be

Looking at Financial Services, could you give us some views on what your trend has been in loan volume?

I think I have said consistently throughout this year and even in years past that clearly the level of profitability not the bank's return, but the level of profitability is affected by asset generation and growth in the portfolio.

Clearly since we are a real estate lender in many ways, the housing markets do have an impact and given the fact that housing is down and the competitiveness of the market, we've seen more competitive conditions and therefore a tougher time to generate assets for the bank. But I would remind our listeners also that we do have a national geography of loan and loan products, so that we don't have a single product that we are tied to, and even though housing, particularly in certain markets has been challenged we've had nice off-set from other lines of business. So, even though it is competitive out there, and it has been competitive all year, our bank had a record earnings in 2006, and as I've said in the past, the challenge will continue to be in '07, the issue of loan growth.

Looking at OCC going into the first quarter you said it is up $30. Could -- I think a lot of that is the strong demand coming from overseas, particularly China. Could you give us some view -- do you think this is a spike and it's going to start on lever out, or any of your insights into it?

Without being specific as to its level, we have been consistent for a long period of time, particularly going back to our acquisition of Gaylord where we actually closed down a significant amount of capacity that was principally OCC related. That dropped our OCC content from roughly 44% down to 34% rough numbers. Fundamentally, we believe that as capacity, particularly in China, continues to put stress, or continues to demand OCC U.S., that there can be pressure in the OCC markets.

That's principally the reason that we lowered our OCC percentage, and on the second part of that I will remind the contra to that is we have 66% virgin. So, we that believe that the fundamental position of being more heavily on the virgin fiber side long term will pay dividends particularly as it relates to pressure on CCC.

Finally, just last question. Looking at real estate, you gave us a view as to the first quarter outlook.

Could you give us in general terms, because it is hard other than looking at the website and trying to interpret things, some general idea on your outlook for '07? Is it -- do you think it could be a better year in '07 than '06?

We gave the guidance that we did so that we could get started in the first quarter. We're not prepared, Rich, to give guidance for the year. I would say to you to keep in mind that this business is lumpy, and earnings are not just sequentially the same.

But, I would remind you that in the fourth quarter we had some significant events happening for our company with the entitlement of the projects that is I listed. Those are some of the initial projects out of our high-value land around Atlanta that now move into the entitled product category, which as you know begins to create and move up the value chain for us

Great. Thank you

That will take time obviously for those developments to begin the process of being developed, but it is important we move them into the entitled category, and that's over 2,000 acres, which was I said important relative to the fourth quarter

Great. Thanks.

Thanks, Rich

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Mark Wilde of Deutsche Bank. Please proceed.

Good morning, Kenny and congratulations on a very good '06

Thank you, Mark

One question I had, the drop just sequentially in Forest Products earnings was a little larger than I would have come to putting through the price that you mentioned as well as sort of the incremental contribution that I would assume from volume. Can you help us there?

Well, I made comment, Mark, that certainly we've had some issues relative to weather and its impact on shipments, which is obviously volume. So, I think that gives color to that, and then throughout my comments I've given you price and shipment levels for various products, which create the earnings for the quarter.

Okay. Was there any significant quarter-to-quarter change in specifically the timberlands component?

We don't separately segment timberlands as you know. However, on a quarter-to-quarter basis things are fairly steady.

Okay. Second question. Can you give us on the real estate side just a little bit of an update on where you're at with Wolf Creek? That's the largest of the properties around Atlanta?

Yes. We continue to make progress with governmental authorities on Wolf Creek. It is a very large project, and I can say to you in sort of a general perspective we've been -- made good progress, and we continue to make progress on that project, when we don't see any major roadblocks to ultimately getting that project entitled.

Do you have any sense, Kenny, of when you may actually be able to starting to sell lots in that area?

No. It is hard, Mark, and I -- it is hard to know when that will exactly be, and therefore it is hard to say. So, I don't have a specific time period. I will say to you, though, we are making good progress, and we don't see major roadblocks

The last question I had, you've been very excellent in terms of returning cash to shareholders in the last few years. I wonder on the other side if you can talk about acquisitions, acquisition environment, and where if you're going to grow Temple-Inland, what types of things you might be looking at?

Well, I think we've been consistent in saying that, first of all, we do look for opportunities to grow all of our businesses. We believe that our balance sheet gives us the flexibility and the financial strength to take a look at acquisition opportunities. We're very focused on [inaudible] as you know, and I would say fundamentally we're going to have opportunities throughout our businesses to look at growth opportunities. And as I said, we believe we are financially came to take advantage of those opportunities

Would you say like the opportunities might be a little better in Forest Products now because of the slow down in the housing market, or wouldn't you even want to generalize like that?

Well, I don't want to generalize. I would say to you that fundamentally we believe that we're going to have opportunities throughout our business lines and let me leave it at that

Okay. Fair enough. Thanks, Kenny

Thank you very much, sir. Ladies and gentlemen, your next question comes from the line of Chip Dillon of Citigroup

Yes. Good morning, Kenny

Good morning, Chip

I wanted to ask about when you think about the eventual possible I guess spin-off of the real estate development business. When we look at the map of your ownership, it seems like as you look at the continuum, and certainly your experience since you started talking about the HBU land is that more and more land starts to become attractive as development land, and yet I guess if you did a spin-off, how would you mechanically be able to continue to move land from the Company as it becomes potential HBU land into the new company, or would you not be able to do that?

Well, first of all, let me say that in terms of looking at spinning out our Real Estate Group, assuming we do that and at that time we would want to make sure that whatever land that was in our total portfolio that would be available for real estate would be part of that.

Secondly, once things -- assuming you did spin out, then no, you cannot get land across without essentially making a sale. But, I think, Chip, it is incumbent upon our team to make sure that at the time if we do spin it out that we do get the appropriate land organized to be part of that.

Got you. And can you a little bit about how you view the -- switching gears to the wallboard business. I understand there is a bit of capacity I think coming on in the next couple of years both in the liner area and in the wallboard itself, and how do you view the marketplace in light of that? Do you think it is something that will take awhile to get absorbed, or do you think it will be -- the impact will be relatively light?

I think long term, if you look at the growth prospects for the wallboard business, they look positive to us. Secondly, when capacity comes on, it comes on in step changes, not graduate changes so that there is clearly an absorption process that goes on. Long-term we fundamentally believe the gypsum business from a demand perspective looks good.

Having said all of that, though, one of the key things that we think is favorable to our company, first of all is our location. Our gypsum facilities are located near major growth markets and, in particular Texas and the southeast. And also as you know, we are very heavy in synthetic gypsum as a raw material source. Synthetic gypsum is a low-cost source for the making of gypsum wallboard, so that long term looking back and looking forward this has been a good business for us, and we continue to expect it to be so.

Okay. And then lastly, you point out earlier in the call that in the wake of the Gaylord transaction you had reduced your dependency on OCC, which certainly seems to be a wise move as time goes on. How would you view your exposure to that and what I mean is you might use a certain percentage in your mills, but obviously some of that is coming from your box plants. If you kind of looked at the all your fiber, how much is actually predicated on the use of purchased OCC?

Well, we will use roughly, Chip, about roughly 34% OCC in our system. The other side as I said that's 66% virgin. Certainly there are cut-ups and clippings that get shoved over from box plants to mills, but the preponderance is acquired on the outside

Got you. Thank you very much, sir.

Ladies and gentlemen, your next question comes from the line of Mark Weintraub of Buckingham Research Group. Please proceed.

Congratulations, Kenny, on getting those 2000 acres entitled in the quarter. And wanted to, if possible, have you walk through for us in a little more detail what does happen at those four projects, for instance, and the type of timing one might realistically expect to see passed before revenues might start open up?

Thanks, Mark. First of all, the largest of those projects is Town West, and that's a project that is north and west of Atlanta and we've been working with that area, the various governmental authorities to get Town West essentially entitled. I also would remind you out in this area a new [inaudible] was built, which gives some real estate activity and focus to the area.

Let me refer to you the website because it does show for Town West what the master plan looks like, and as we now have it entitled, we will begin the process of developing that project and the exact development schedule I don't know what it is and can't just say on this phone call because I don't have that specific information available. But I would say to you that typically development will start from major arteries, from major arteries to the development of single-family lots, created as part of that are commercial sites. So, that development should take a normal pattern compared to other real estate developments, and we'll move through it just as fast as the market will allow us to do so

And recognizing there is obviously great variability, when you say a normal pattern, would that be a 5 to 10 year process? 3-to 5-year process? Is there way to help guide us on -- normal again recognizing that there can be variability on that?

It is hard to say. I would say one thing we do in projects is typically have various price points so we don't develop a single product for just one segment of the market, and Town West does have multiple price points and multiple market opportunities. So, it is very difficult to say how long it will take. All I can say to you is, once it becomes entitled its value begins to accelerate, particularly as we move now to the development process.

And are you going to take of these projects through to the final stages of land development, or do you entertain possibly JVs or selling properties to other land developers? What's the mindset?

Yes. All of the above. I would say to you and I think -- we've been public on this. To the extent projects meet hurdle rate returns, when we would move on to develop them. If you don't the we would look to exiting through the sale or whatever.

I think a good deal of the projects that become entitled will in fact meet hurdle rate returns, which gives us the opportunity to create additional value through the development process.

Okay. Then lastly, on Wolf Creek, is that a situation where it will be piecemeal approved or are we going to get one announcement that all 11,000 acres are now entitled? How does that likely play out?

Well, there are various levels of authorization of projects like that. There will be sort of impact statements that are global in nature, but relative in zoning and road arterial systems get defined, but ultimately specific subdivisions, specific sites become a more targeted approval performance. But as we get global authorizations approved, we will communicate those to you, and those will be more in terms of impact statements, arterial issues, major sewer and water availability, that kipe of stuff, and then you drill down further from there. leals and video are intieghts the already various levels of authorization for projects like Well, there are various levels of authorization of projects like that. There will be sort of impact statements that are global in nature, but relative in zoning and road arterial systems get defined, but ultimately specific subdivisions, specific sites become a more targeted approval performance. But as we get global authorizations approved, we will communicate those to you, and those will be more in terms of impact statements, arterial issues, major sewer and water availability, that type of stuff, and then you drill down further from there. We'll keep you posted.

Thank you very much, sir. And ladies and gentlemen, your next question comes from the line of Richard Skidmore of Goldman Sachs

Thank you. Good morning, Kenny. Just to follow up a bit on the real estate, just in the pipeline, as we look at slide 14, certainly on the entitled and development totals went up. How should we think about the undeveloped to the entitlement process pipeline changing over time?

Well, over time ultimately we want to move all of it from undeveloped into the entitlement process. As you know it takes time. We are working on several projects all of which are identified on our website, but we have put into this pipeline in the undeveloped category those acres that over time we believe will have real estate value. So, over time we would hope to move all of them from undeveloped into entitlement and through the system.

Secondly, moving to container board, looking from your past presentations where you targeted an ROI of 14% to 20% over the cycle, and in '06 you were sort of at 12.5% roughly. If you build on that $75 million of improvements you're discussing, it would sort of be around 16%, if you just add that $75 million on the '06 number. How do you get container board to be solidly in that 14% to 20% over the cycle, even just building that in you're toward the lower end and one could argue we're more towards the upper end of the price cycle than we are at the lower end?

Well, first of all, you're correct to the extent we have further business improvement that drives ROI. In addition to that, I might make a note that when you look at the return this year and you are accurate about its level, don't forget that's the average for year and not the end of the year return. So, and as I said in my comments, one of the things certainly that happened this year is movement in price, and yet the return is for the average for the year, not the fourth quarter returns

So, in talking about your business improvement, sounds like this could be more additional upside on the $75 million. Is that a fair interpretation?

I think its incumbent on us to get to the $75 million, but I am saying to you that doesn't set a top level. We think there is opportunities through manufacturing excellence to continue to drive asset utilization and therefore business improvement.

Thank you, Kenny

Thank you.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Peter Ruschmeier of Lehman Brothers. Please proceed.

Thanks. Good morning, Kenny

Good morning, Pete.

I know you don't have a full balance sheet, or cash flow statements at this point, but I was just curious, Kenny, if you could share the cash flow from operations and the net debt balance at the end of the year?

Pete, I don't have those here with me and so I can't comment on that.

We're just looking for the -- Okay. You did comment, Kenny on the outlook for some of your building product businesses. I was curious though if you could compare and contrast the retail housing side of the business from commercial. Commercial seems to have been very strong, much stronger than retail. I am curious if you're still seeing that and what your outlook is, specifically for commercial activity.

Pete. That's a good point. Particularly in panel products and especially in gypsum, the markets not only include the traditional home building and repair and remodeling markets, but certainly commercial activity and there has been a significant amount of, which particularly for gypsum has been beneficial.

And it appears that going forward that those markets still have strength in them and I think we'll be positive for those particular products. So, I would say on you that have been good and we expect them at least in the near term to remain good

Is it fair to say you haven't seen any meaningful fall off in the demand in the commercial side? No, I think the commercial side has been good and like I said there doesn't seem to be impediments to it to continue to be okay for us. Last question, if I could. Financial Services, you mention that the one part of the portfolio that might be challenged, the housing-related, but you mentioned you're balanced, and I am curious if you can help us remind us the other areas that are perhaps contributing the most and actually helping to offset the housing portfolio?

Yes. One of course is just what we talked about, and that's the commercial area, and we do finance that, our bank commercial projects from a construction perspective. So, that's been important. Secondly, several years ago we developed an oil and gas department, and that department has done very well. We have senior living lending opportunities that for several years have been very strong for us. We've entered into the healthcare business where we have projects in the construction areas that have built up nicely. So, it is just a factor of different geography and different products that allows us not to have all of our eggs in one basket

Kenny, I know in the past you shared some of the percentages. If you added up all those areas, nonhousing related areas, can you remind us roughly what percentages we'd be talking about in the portfolio?

Yes, housing including all housing related issues whether it is construction or securities or house loans, whatever, would be in the 60%, 65%, and the rest would be in the other related areas.

Great. That's very helpful. Thanks, Kenny.

Thank you very much, sir. [OPERATOR INSTRUCTIONS] Your next call comes from the line of Ted Izatt of Bear Stearns. Please proceed

Yes. Hi. Good morning and congratulations on your quarter. My questions were already answered. So, I don't have any. Thanks

Good. I think if we have one more question we'll take it. If not, I think we're just about finished

We do not have anymore questions in queue, sir

Alright. Let me sign off by saying thank you to everybody for joining us this morning. We very much appreciate your interest in Temple-Inland. Thanks a lot.

Thank you very much, sir, and thank you, ladies and gentlemen for your participation in today's conference call. That concludes your presentation for today. You may now disconnect. Have a good day.