威爾豪瑟 (WY) 2001 Q1 法說會逐字稿

Good morning and welcome to the Weyerhaeuser quarterly earnings conference call per April 17, 2001. Your host for today's call will be Kathryn F. McAuley. Ms. McAuley you may begin.

Thank you Joanne. Welcome to the Weyerhaeuser first quarter earnings conference call. I am Kathy McAuley your moderator for today's call. Joining me are William C. Stivers, Executive Vice President and Chief Financial Officer, Richard J. Taggart Vice President and Treasurer, and Kenneth J. Stancato Vice President and Controller. This call has been web cast at www.weyerhaeuser.com. If you have not received a copy of our earnings release, please contact Epril Myer at 253-924-2937 and she will fax or e-mail a copy to you. Our time for today's call is limited due to our Annual Meeting. However, Dick and I will be available throughout the day to take your questions. I would like to ask you to read carefully the warning statement in our earnings release concerning the risks associated with forward-looking statements, as we will be making comments regarding next quarter on this call. I will lead you through the business trends in this first quarter. We will start with usual comments on financial items and strategies, and Dick Taggart will discuss the outlook for the second quarter. Net revenues in the first quarter were $3.6 billion versus $3.9 billion in Q1 2000. Earnings include non-recurring items, $133 million or $0.61 per share compared to the first quarter last year when operating earnings was $244 million a $1.4 per share. The company earns $194 million or $0.88 per share in the fourth quarter of 2000. Net earnings were $107 million or $0.49 cents per share after non-recurring after-tax charge of $26 million or $0.12 per share were costs associated with outsourcing certain support services. Bill will discuss this charge in more detail. The pension credit increased $0.4 per share in this quarter, and we expect it to be at this level for the remainder of the year. The quarter includes a loss of $2.3 million after tax loss related to foreign exchange translation. Our share of this cost expressed linear cost was #3 million. We would also expect it to be $3 million next quarter. The tax rate in the quarter was 37%; for the full year we expect the tax rate to be 37%. Energy costs growth during this quarter about $11 million inline with our expectations. The company benefitted from hedging putting plates for natural gas, which expired at the end of February, as well as from contracts for electrical requirements, which expired in fall. Co-generation at Springfield, Oregon, Longview, and cosmopolitan Washington helps offset higher costs. Last week, we announced that we plan to build a co-generation facility with TransCanada Energy Limited at Grande Prairie, Alberta. Dick will discus the outlook for energy in more detail. I will review the trends during the quarter by business line. The changes will be averaged Q1 volume and price changes versus Q4, and we are appropriate we will compare March prices versus the average of the quarter. I will also comment on downtime. We constantly monitor our order books and take market-related downtime as needed. Consequently, our downtime may be greater than estimated.

Volumes declined 15% in the first quarter versus the fourth quarter. Prices were down $26 or 4%. A favorable business mix with our large production of more stable pulp grade moderated to decline. The pulp price at the end of the quarter was $8 first time, lower than the first quarter average. During the first quarter, our pulp mills took 39,000 tons of downtime, out which 26,000 was market-related. In the second quarter, we expect to take 178,000 tons of downtime, of which 66,000 will be market-related.

Remember the containerboard numbers are open market sales. Containerboard volumes declined 20% in Q1 verus Q4. Prices fell a 11% on average $44 per ton. At the end of March, prices were $39 per tonne below the first quarter average. Export prices slid much more than domestic prices. During the first quarter, containerboard mills took 73,400 tons of downtime, of which 26,000 was market-related. In the second quarter, we plan to take 119,000 tons of downtime, of which 72,000 tons will be market-related. Box shipment fell 7% in the quarter. Prices were flat for most of the quarter; however, at the end of the quarter box prices were $10 per ton below the first quarter average reflecting containerboard mixed priced reduction in February. Fine paper volumes declined 6%. Prices rose early in the quarter, but by the end of the quarter most prices had fallen back to the pre-price increase level. However, at the end of March, prices were $40 per ton below the first quarter average price. Downtime in the first quarter in fine paper was 3500 tons, all of which was scheduled downtime. During the second quarter, white paper mills will take 40,000 tons of downtime of which 35,000 is maintenance-related. Domestic log volumes were flat to up slightly in the quarter. Prices were down 9%. Export log volumes, however dropped to 19% as Japanese market were oversupplied. Prices declined by 5%. Lumber volumes declined 3% in Q1 versus Q4. Lumber prices fell to a ten-year low and were flat to down slightly in the quarter. At the end of March, lumber prices had begun to improve and were up about $8 per 1000 square feet, over the first quarter average price. Lumber mills continue to operate at 92% operating rate. Plywood shipment fell 14% in the quarter. However, prices were flat. At the end of the quarter, prices were $7 for 1000 square feet above the first quarter average. Overseas volume declined 6% while prices plummeted $17 per 1000 square feet or 11% to a new record low. At the end of the quarter, prices began to improve and the March price was $5 for 1000 square feet above the first quarter average. We took significant downtime in our final panel plant running at 85% operating rate in the quarter. Engineered wood product sales were down at 8% in the quarter where prices were stable. I will now turn the call over to William C. Stivers who will discuss the synergies and financial items sales.

Thank you very much Kathy. During the quarter, as Kathy mentioned, we incurred a $26 million after tax transition charge, associated with outsourcing our IT activities through EDS in March, and this was part of our program to streamline our support services. This was a onetime charge, approximately half of this was a non-cash write down of computer equipment transferred the EVS and the other half was for retention bonuses and other related transfer costs associated with those employees who moved the EDS. Non-IT related support alignment cost during the quarter were $4 million, which were offset by approximately benefits of $10 billion. You will recall our goal is to save a $150-250 million through support alignment, which is in the process of delivering support services more efficiently across the company. Beginning this quarter, we have changed the way we treat SG&A in our businesses. In the past, many of these expenses were charged to the businesses through an elaborate charge-back system with a large portion retained at the corporate level. With this quarter, more of these expenses are being allocated back to the individual businesses, to be a franchise fee. As a result, expenses within the business segments have increased by about $1 million in timberlands, $20 million in wood products, and $18 million in pulp, paper and packaging, and correspondingly we have reduced what we see as corporate expense and corporate overhead by a commensurate amount. In the future, we expect corporate and other charges to run an estimated $50-55 million level per quarter. It might just stay at current statically this simplifies the charge-back system that we have had from many years and eliminates a lot of non-value added work. The synergies from the MacMillan Bloedel and Trus Joist mergers were $33 million in the quarter bringing total merger synergies today of a $173 million of the $200 million projected at the time of the acquisition. That was $7 million in onetime transition costs associated with the mergers in the quarter. We expect those costs to continue to decrease throughout the year. Dick Taggart will now comment on the outlook for our business.

Thank you William. I will just make a few comments on pricing trends in our major product lines and then a couple of items on cost-related on energy cost and cost associated with the expensive downtime Kathy mentioned will likely get us in the upcoming quarter and we will then will take a few questions. Kathy noted we are in a tight timetable today because of our Annual Meeting, which will begin before too long. In timberlands, our volumes are expected to increase seasonally in the export market. They will approximate the volumes we had in the second quarter a year ago and will be slightly better than the first quarter. Pricing as Kathy mentioned, has been eroding on the export market, but we expect it to stabilize as the second quarter demand is improving and inventories are being worked down in Japan. In the second quarter, our timber harvest is expected to be very similar to the first. As a result of the lower export log prices and lower selling timber prices; we expect the modest decline in our second quarter earnings. Though lower prices for logs that we have been purchasing will be offsetting these lower product prices somewhat, so we do not expect a significant decline. In our wood product business, we will be getting the same some seasonal price improvements, particularly in lumber as extensive low closures and curtails of reduced supply and the healthy single family housing market is beginning to improve seasonally. These markets are coming into somewhat better balance. In the near term, concerns about market disruptions caused by the exploration of the softwood lumber payment have not materialized. Even though the longer-term effects of this are still uncertain, in the short term it is causing buyers to purchase only for immediate needs and is not having material, I mean a negative effect that some were concerned about. Given current market conditions, we expect wood products earnings in the second quarter compared to the first quarter will improve but will still be below second quarter of last year. As you know, effective April 2nd we lowered our price of beach craft pulp by $50 a tonne and of our prices for flap have remained unchanged. There is still some downward pressure on pulp prices. With customer inventories remaining normal to below normal level, and new inventories beginning to decline, supplies moving in the right direction. But, it is this new inventory reductions will be required to bring the market back into some balance. As Kathy noted, extensive amount of downtime, which we are taking in our market pulp mills in the second quarter. Box prices had began to roll modestly as Kathy indicated at the end of the quarter as lighter prices turned as lower. But the supply-demand balance in this business remains fairly good, in spite of this weaker demand, and so any price erosion that may occur in the quarter, we expect to be modest. Uncoated free sheet prices were generally stable in the quarter, but our order rate declined significantly by the end of that quarter and we began to see some erosion in some grades. We have seen some improvement in order flow in the last week or two, but we expect that the downtime that we are taking in our bigger business will keep that system imbalance and it remains to be seen what real price weakness may occur as a result of the weaker orders. Kathy noted the amount of downtime that we have taken and plan to take during the next quarter and a significant amount of this is maintenance-related. As you know, in the past our practice has been to accrue the cost of our normal maintenance downtime and to spread those costs evenly through the year. This year, we have scheduled an extended period of downtime at our major complex in North Carolina to do a major boiler rebuild. That major paper complex will be down for 48 days. The cost of this maintenance is far above our normal maintenance and it has not been accrued during and spread across the year and it will add approximately $10 million to the quarter over and above the normal maintenance cost. In addition, our energy cost increases that I will talk about in a minute will primarily hit the pulp, paper, and packaging businesses because they are the most energy intensive. As a result of weaker pricing, higher downtime, and energy costs we expect earnings to be considerably lower in the second quarter in our pulp, paper, and packaging businesses than in the first, even though we do see positive signs, particularly the pulp markets beginning to come into better balance that will lead to recovery later in the year. On the bright side, our real estate business continue to perform very, very well with the order backlogs that Kathy mentioned, and only modest pressure on material prices, we expect to realize earnings in the second quarter very similar to the first. In energy, as we indicated last quarter, we expect our costs this year to be increased about $85 million with 15% for the full-year. As Kathy mentioned, our natural gas hedges expired at the end of February, and so in March we saw our natural gas costs increase as well as electricity costs outside of the Pacific Northwest where we are hedged until October 1st. In the second quarter, we expect to experience the full quarter of higher natural gas prices, which will add about $10 million in the quarter to our energy costs. We have been working to place long-term contracts for natural gas through the remainder of the year, however, and so we do not expect much change in our energy costs in the third quarter, relative to the second. In the fourth quarter, when our Northwest electric contracts expire, we expect to see about $15 million increase due to a higher Northwest electrical rates. We are able to mitigate these somewhat, we do have some surplus power that we sell back into the grid; we are yet to quantify the exact benefits of that we will experience in the fourth quarter. We are marking to mitigate these increases in a number of areas. As Kathy mentioned we announced two weeks ago that we are building a co-generation project on our Grande Prairie Alberta hope mill sites of TransCanada energy; this will generate sufficient supply of power to all of our Alberta facilities not only our pulp mill, but our oriented strand board facilities. We are exploring additional co-generation possibilities at our Kenwood pulp mill facility and are looking at reviving some retired generating capacity at our Longview, Washington and Springfield, Oregon sites. We are also reducing our energy consumption at our North Pacific Newsprint joint venture in Longview, Washington by reducing our pulp production there and shipping in pulp from our Kenwood pulp mill. Overall, we expect our second quarter earnings to be lower than the first as seasonal improvement in our wood products businesses is not expected to help to offset the lower pulp, paper, and packaging prices as well as higher energy and downtime costs in the second quarter. With that we have time for a few questions.

Yes, I would like to open now for questions now Joanne

If there are any questions on the phone line, please press the *1 on your touchtone phone. If you are using a speakerphone, I suggest you to pickup your handset and press the *1 at that time. Please, go ahead with your questions. Our first question comes Chip Dillon from Salomon Smith Barney.

Good morning and I just need one clarification. Did you say the downtime in linerboard was 73,000 tons?

In the first quarter Chip, we took 73,400 tons in downtime of which 26,000 was market-related.

Okay and then you also said that uncoated free sheet prices in one, I think Dick was saying that, or maybe Kathy, you said you saw some great solid weakness towards the end of the quarter and yet I think you said across the spectrum, the prices were down $40 per ton versus the first quarter average. Could you revise in detail where that occurred?

Chip, that was our average realization that Kathy was referring to, and a good deal of that was mixed as a combination of off set rolls, cut size and lightweight coated. And in the cut size our average realization was down about $3 a ton, rolls were actually a little better, but lightweight coated was lower.

Okay you said off stock, cut size was down at $3 a ton. Then off stock has down how much?

Off stock was actually up, modestly.

Just another question on the downtime, seems like you are taking quite a bit of market, in for market related downtime in both container board and pulp. We have not seen the similar kind of magnitude in uncoated free sheet. Any reason why you would not be taking downtime in that business as well, given the pretty soft volumes you have seen out there in the industry?

Actually Chip, in the early part of the quarter, the uncoated free sheet market was a market that really looked pretty good and we are scheduling for the second quarter downtime of 40,000 tons, of which 35,000 is maintenance and the remainder is market-related, but remember in the beginning of my comment on downtime as we are constantly monitoring our order books and we took in the first quarter more downtime than initially projected because of the order books, and if we see we need to take further downtime due to what our order books are telling us in what we will do that.

Last question. You mentioned the domestic log prices were down 9% that again is versus the fourth quarter. Have you seen some stabilization in the domestic log prices in addition to what you have seen in, I guess you are saying in Japan you expect them to be flat as well.

Yes that is correct. We have seen some stabilization to up slightly on domestic logs.

The next question from Mark Donnelley from Credit Suisse First Boston.

Two things. I wonder if you can just give us a sense of where you feel your inventories are now in containerboard and uncoated free sheet. We are hearing from most producers so far that inventories where were they wanted them. In fact Packaging Corp told us their inventories were low. It sounds like Weyerhaeuser is not finding itself in that position and can you also talk a little bit more about what is happening with box prices, you said you are seeing some erosion and the prices were down $10 in the quarter. Are prices eroding now or what is the status as we start April?

Mark, this is Dick. Because of the expensive maintenance downtime that we had planned, we did bill some inventory beyond normal in the first quarter, and I would expect that we would plan to reduce our inventories approximately 30,000 tons in each of our major product lines during the second quarter. This was planned, of course the market was not anticipated but this is just a normal seasonal pattern for us. Your second question regarding box prices, we are quoting average realization; some of this is a mixed effect. There has been modest box price adjustments as liner prices are plummeting lower, but nothing more than that, and a tentative that we mention to come late in the quarter following the lower printing of liner prices.

On that same point as the quarter was ending can you comment about what sort of seasonal improvement you were seeing relative to normal, in containerboard.

In containerboard, I do not have specific numbers. In March in our box shipments, our box shipments were down only modestly from the year ago down about 1% of the industry, we were still down around 6%. So we are beginning to see some seasonal improvement, but it is still not indicating that the economy is getting stronger.

Okay fair enough. Thank you.

Next Question, Richard Snyder from UBS Warburg, please go ahead.

Just going back on some of the pricing numbers you gave. You said that pulp at the end of the quarter was $8 lower than the average for the first quarter. Obviously, that does not incorporate the $50 decline in MDF-K on April 01. So, if you incorporate that and soft pulp is flat and you are probably down about $30; half mix is MDF-K and half is there for a little more in that kind of proportion?

That is correct Richard. Prices are moving lower, obviously.

Could you, I am not sure if I got that, the prices you gave on containerboards for the quarter did you say that you were down $44?

Containerboard, remember this is our open market sales of containerboard, and this is heavily affected by the export market. The price was down $44 to a tiny in the quarter, first quarter versus fourth quarter, and at the end of March down $39.

Could you give us an idea roughly what your open market sales are for containerboard now and what portion is going to the export market?

It is mostly of our domestic linear board transactions, which are trades and not really open market sales. But about 10% of our containerboard is sold in the open market and most of that that is effectively a third party sale in the export market.

So those two prices you gave are pretty much a reflection of export pricing?

That is correct.

The energy head that you are taking, you know, would you be able to give us a little idea where the $11 million hit occurred in the segment and the additional $10 million that you are expecting for the second quarter, which segments are going to be more affected by that?

I do not have a broken down by segments, Rich. Many of our complexes are highly integrated and do not have that data, but they will be having for pulp, paper, and packaging and primarily from natural gas.

Just lastly you talked about the boiler project with a hit of $10 million. Do you see any other big projects like this in the remainder of the year that could have an effect on the either third or fourth quarter?

Not that is maintenance-related at this time. We have one plan for the next year and another major boiler rebuilt, but not this year.

May be just a last one. This times the cost of downtime through the second quarter. Do you have any quantification on, what you think that incremental cost will be in the pulp and paper area versus the first quarter?

We do not, but it will be higher and there is much more market-related downtime in the second quarter than in the first.

Next question, Peter Vas Meyer from Lehman Brothers. Please go ahead.

Thank you and Good Morning. I had a couple of questions. Just curious on a support alignment, where are you cumulatively on your cost saving on the support alignment. I think your imaginary goal was 150-200 million?

That is correct. As Bill indicated, we have about $10 million in benefits in the first quarter those would add to about $33 million in benefits realized last year, it would be roughly in that $40-$50 million range in the benefits. As we have indicated last year, this point must be the cost of offset; the onetime cost, which will offset the benefits to this point.

And I might add, Pete, _29:52_____ fundamentally if you look at this year and we sort of cut through at even though I mentioned that there was an approximately $4 million of cost versus $10 of benefits in the quarter. As I look at it for the full year because of the heavy fund and loading, we had a one time cost to implement a lot of, yes, I would say basically we break even for the year.

Okay. As far as going forward, you will still have an incremental goal of a $150 million?

That has not changed at all and that looks very releasable. That has not changed.

What is the timing on that?

Basically over the next couple or three years.

I guess on the synergy front TJ and MacMillian, you mentioned $173 to over a $200 series realize. It seems like he is potentially go over that. Is that reasonable? You have exceeded the $200 million target?

We have not increased that number as a target, Pete, specifically, obviously the numbers speak for itself. We have been quite successful in getting the integration benefits, and there is continued effort there. I would say very honestly that as this time goes on, it gets much more difficult to isolate it specifically as an affected integration of benefits. But I feel very comfortable and will certainly meet the goal of $200 million if not exceed over it.

Okay good. Then coming back on the co-generation, I was curious if you could quantify the economics in terms of contribution, your outlay, and what your kind of expected return is, and then secondly perhaps, what is the timing as you look at some of the other facilities that are possible co-generation in terms of making a decision.

The co-generation project that has been approved has relatively low capital cost, as the TransCanada is going to be the owner of the facility on our side. You will have about a one-year pay back for us. There is a very, very vast and we will spend about a $11 million and we will save that within about one year. The facility, I do not believe we expect that it will start off sometime towards the end of next year.

Okay. But is there a facility on your side and then you have some type of long term agreement with supply?

That is correct. We provide them surplus feeding from our pulp mill and they will operate that facility.

Okay. In terms of the timing on the other projects; when you may make a decision whether to go forward on co-generation?

We would be making a decision over the next three to six months gap. Actual timing will be determined in that in our normal capital planing process.

And if the returns are so high there, can you help us to understand a consideration as to why you might not proceed with those types of high return projects. Is it really case by case?

Just as a case-by-case basis on how long do you think the energy situation is going to be the way it is.

Some of these I would say honestly, Pete, we would have done anyway, they would have penciled out very, very well even under a prior cost-energy-cost structure. They just happen to be extremely attractive at the moment.

Okay and one last question. I think you mentioned pension expanse increase $0.4 in the quarter is that right?

Yeah that is correct.

There was an expense, Pete, with income.

It was $0.4 less income, is that.

No. Greater.

$0.4 more, okay. But that is going to stay flat going forward.

Correct.

That is all I had. Thanks guys.

Next Question, Mathew Barlow from Morgan Stanley.

Hi. Good Morning. Just a couple of quickies. Corporate expense, if I take the $90 million reported and subtract the 41, I get 49. If you sort of net out the other plusses and minuses, is that a good number to use going forward and that seems to be roughly, way almost $30 million; lower than what I was looking for on a ongoing basis. The second question I had however relates to the shipments in the second quarter. Dick, I think you sort of answered the question but just a review to make sure I got it. You expect to lower your inventories by that 30,000 tons in most of your paper businesses in the second quarter because of the downtime, but what do you think that means in terms of shipments or Weyerhaeuser to 2Q versus 1Q?

I will take the first part of it, Matt. Yes, going forward you can expect corporate guidance to be running around that $48-$50 million level as a result of the change in the charge out system. That is a good number to use.

Correspondingly Matt as I mentioned, obviously there is a huge franchise fee, there is a greater expense in each one of the business segments by the numbers I mentioned. I think I mentioned approximately $1 million of timberlands, roughly $20 million of wood products, and $18 million in pulp. So we need to change your models now.

Matt, we would expect, regarding shipments, pulp shipments as we noted, dropped significantly in the first quarter relative to the fourth, but at this point relatively stable and committed at current levels and so we do not expect them to decline significantly. Our paper orders, as we indicated had fallen off, and so our shipments may be modestly lower there, but certainly not down as much as the downtime. The same thing can be said for containerboard, they will be up just modestly higher seasonally, probably a couple of percent, but that the inventories will still come down.

As far as the pulp price situation, there are some smaller competitors of yours that are basically shipping pulp to their customers and basically saying that we will worry about price later, which is kind of unbelievable, with the uncertainty in the market place. How often in are you that the price levels that you set on April 2nd is basically going to be in place for some period of time, may be just a month. Or is there possibility you will asking up to repay it all the way back at April 2nd based on future price change?

Matt, as you recall there were some customers, some competitors who initially lowered NBSK to $30 to $620. We went to the $600 because that was the positive price we were confident we would sell the pulp and would not repay.

Operator, I think we have time for one more question.

Next Question, Mark Welding from Deutsche Bank

I wondered if you could just enlighten the top market for pricing record and talk about whether you are reining in your capital plans for the year any further and then may be you could just gives us a sense about the export in stranded board down so sharply. Whether you are actually backing away from some of those sales?

We could not hear you very well. Repeat the question. Your question was two-fold. One was in light about our weaker markets, are we changing our capital spending plans, and the second was relative to export containerboard market given the declining prices, are we backing away from that market?

Yeah exactly.

Mark in terms of capital plans basically as the plans were set for this year they were with an eye towards, I mean, we were seeing obviously, the curating conditions back in December, and also in keeping with our commitment relative to spending on depreciation. So fundamentally, I would say we feel that we are up sized right for where we are and you may remember our number is $765 million, which would include capitalized interest. Regarding the export market, we have been in the market in Asia for a long time, we try not to push paper into that market, so we do tend to back away when the market declines with the acquisition of ___________00:39:52 we entered the export market in Europe and we will operate on the same philosophy there.

That being you will probably will be backing out on some of these exports sales?

We will be backing away from the market. I would not say that we would be backing out permanently, but we certainly do not push paper into those markets simply to run the mills.

I like to thank you everyone for joining us today. Dick and I would be available throughout the day to take your questions and this call will be rebroadcast if you have missed any parts of it at 888-509-0081 and will be available for 48 hours. Thank you very much for joining us this morning.