威爾豪瑟 (WY) 2002 Q2 法說會逐字稿

Please stand by, your meeting is about to begin, and please be advised that this conference call is being recorded. Good morning, and welcome to the Weyerhaeuser second quarter earnings conference call for July 23rd, 2002. Your host for today's conference call is Kathryn McAuley. Miss McAuley, please go ahead.

Thank you . Welcome to Weyerhaeuser's second quarter earnings conference call. I'm Kathy McAuley, your moderator for today's call, and joining me in Federal Way are Bill Stivers, Executive Vice President and Chief Financial Officer, Rich Hanson, Executive Vice President, Timberlands, and leader of Willamette integration, Dick Taggart, Vice President, Finance, and Steve Hillyard, Vice President and Chief Accounting Officer. This call is being Webcast at www.weyerhaeuser.com.

If you have not received a copy of the earnings release, please contact my associate at 253-924-2937, and she will get a copy to you. After today's call, I will be available to answer any questions you may have. I would like to draw your attention to the warning statement in our earnings release concerning the risks associated with forward-looking statements. Please read this statement carefully, as we will be making comments regarding the next quarter on this call.

I will review second quarter business trends, Dick Taggart will discuss the outlook for the third quarter, then Rich Hanson will comment on Timberland, but bring you up today on the progress of the Willamette integration. For the second quarter 2002, net earnings for Weyerhaeuser were 32 cents per share, and 39 per cent per share before non-recurring items. These items included a charge of eight cents per share for Willamette integration costs, a charge of eight cents per share for the closure, or pending closure of facilities, and a gain of nine cents per share for the reversal of the CDD accrual. This compares with second quarter 2001 net earnings of 78 cents per share.

The quarter was also impacted by higher employee and retiree health care costs, totaling $13.5 million per quarter, and a reduction in the pension credit of eight million per quarter, to reflect benefit improvements in recently negotiated union pension plans. With this earnings release we have changed our segment reporting. The Weyerhaeuser pulp, paper and packaging segments have been restructured into two new segments, pulp and paper, which includes all white paper production, market pulp, fine paper, as well as newsprint, coated ground wood and bleached board. The other segment is containerboard packaging and recycled.

In addition to the non-recurring items noted in our earnings release, there were several other one-time items affecting the quarter. The recovery boiler explosion at our Plymouth, North Carolina facility had an adverse impact on the quarter of at least 15 million. We cannot at this time fully quantify the impact of lost production into the explosion. It was, however, significant. This does not take into account, however, any insurance recovery, which we will experience.

We expect the situation at Plymouth to be resolved by the end of August.

Second quarter results included 7 million from the sale of an apartment complex in California.

I will now review the trends in the quarter by business line. The changes will be averaged Q2 volumes and price changes versus Q1 and where appropriate we will compare June prices with the second quarter average.

I would like to point out that the volumes include only six weeks of Willamette in the first quarter and therefore appear to be very high. I would caution you about reading too much into the volume numbers.

Market pulp volume rose 8 percent. The average selling price, however, was flat over first quarter. The June price was $7 per ton above the average price in the quarter.

Container board volume rose 30 percent and prices increased $10 or $11 a ton. The price at the end of June was flat with the average price in the quarter.

Box volume increased 17 percent. However, due to the mix, prices were down about $5 or $6 per ton. Box prices at the end of June were below the level of the quarter; once again a mix issue.

Fine paper volume increased over 26 percent. Prices were up $20 per ton on average in the quarter. Prices at the end of June were flat with the quarter.

Domestic log volume increased 3 percent and prices rose 6 percent. Prices were flat entering the third quarter.

Export log volume increased over 54 percent but prices were off a couple of dollars. At the end of June, however, export log prices were $10 above the average price of the second quarter.

Lumber volume increased 23 percent and prices rose $14 per thousand board feet. However, at the close of the quarter in June prices fell over $25 per thousand board feet from the second quarter average.

Plywood volume rose 6 percent and the price increased a couple of dollars. The price at the end of June slipped almost $10 per thousand square feet.

OSB volume rose about 14 percent and prices rose $10 to $160 per thousand square feet in Q2. At the end of June prices fell $5 to $7 per thousand square feet.

Turning to down time, pulp and paper mills took 91,000 tons of maintenance related down time in the second quarter, of which Plymouth accounted for about 30,000 tons. Down time at pulp and paper mills in Q3 is projected to be 89,000 tons, of which 61,000 is maintenance related.

Container board mills took 34,100 tons of down time, all of which was maintenance related. Container board mills at this time have scheduled no outages for the third quarter.

In wood products, lumber operated at a 96 percent operating rate and is expected to continue to operate at this rate in the third quarter. Plywood mills operated at an 87 percent operating rate in the second quarter, which is expected to increase slightly to an 89 percent operating rate in the third quarter.

OSB mills operated at a 94 percent operating rate in Q2 and is expected to operate at a slightly higher rate in Q3.

Wood products operations, however, will be curtailed if this is necessitated by changes in business conditions.

I will now turn the call over to Dick Taggart, who will review the outlook for the third quarter.

Thank you, .

As we look - beginning with pulp, paper and packaging, market pulp conditions, as mentioned, were improving at the end of the quarter. The low inventories and the weakening U.S. dollar helped pulp pricing. We have increased, as you now, paper grade pricing by $10 per 10. demand remains strong in Europe and in Asia, with a $20 price increase announced for those grades beginning in July.

Our un-coated pricing stabilized in June, following partial implementation of the April price increase, which was $40 as you will recall on only certain grades. We realized about three-quarters of that increase. Industry supply and inventories are in very good shape. Demand, however, is recovering slowly, and further price improvement, we expect, will require some additional improvement in demand.

Our inventories in un-coated are extremely low. And we will continue to be effected by the recovery outage in , North Carolina, where one paper machine will remain down until the end of August. There will likely be no additional earnings impact from this event, however, as we expect to settle our insurance claim, which will be recognized, we expect, in the third quarter.

Shipments in container board, shipments are slowly improving. June was the first month, if we look at constant units, essentially same-store sales, that we had year-over-year improvement in shipments. Export prices for were increased in June and will be increased again in September. A higher in medium prices, resulting in higher box prices in the third quarter.

We have announced an eight percent price increase, which will be effective and beginning in mid July, which will be implemented through the third quarter. Our system continues to run very well, and our integration rationalization plan is on schedule.

With box prices expected to improve and prices stabilizing, and with benefits being realized from integration, we expect some modest improvement in earnings in Q3 compared to Q2 in both pulp and paper and in container packaging.

As we look at timberlands, and may comment on this further, volumes in the third quarter are expected to be lower. This is due to the traditional seasonal shutdowns that occur each spring during the fire season - sorry, some are during the fire season. And the woods are particularly dry this year, and so we are anticipating perhaps somewhat higher than normal curtailments in our logging operations.

Our is expected to be lower by 10 to 15 percent. And this will be occurring in a market for pricing that's somewhat mixed. As reported, we have slightly stronger prices in the export market, where we are getting the benefit of the weaker dollar and low inventories and a somewhat weaker domestic market as a result of the weakness in lumber earnings at this time.

Earnings for the quarter are expected to be slightly lower than the second quarter, as a result of the seasonally lower volumes. In products, our demand is good, but the markets, for the most part, remain oversupplied, resulting in weak pricing. Lumber inventories that appeared to be, to have been built in advance of the final CBD ruling being imposed are still being worked down. We expect that process to run its course in the third quarter, as current pricing is below cost for many high cost mills, we believe, and we expect a supply adjustment in the third quarter.

Pricing is uncertain for the third quarter, and our ongoing duty and final, at the finally determined rate, will be approximately $20 million per quarter. At this time, we expect the combination of the weakness in prices and the imposition of the duty to result in a slightly lower earnings in our wood products operations in the third quarter, compared to the second. In our real estate company, the backlogs are still running at approximately six months. We have pricing improvements continuing in Southern California, but the mix of homes being sold is shifting a somewhat lower margin mix, in terms of the projects and the geographic areas where the sales remain strong.

In the third quarter, we do not have planned any multi-family or commercial projects being closed, so earnings will likely be ten to 15 percent lower in the third quarter than in the second. However in the fourth quarter, we do plan closings of one or two multi-family projects. The Willamette integration is continuing, as Rich will bring you up to date on in a moment, and there will be further costs incurred in Q3 for employee severance, changing control of contracts and employee rationalizations. The amounts at this time have not been determined, but it will be announced as those decisions are made.

With that synopsis of the outlook, I'd like to turn the call over to Rich Hanson, Executive Vice President of Timberlands, to bring you up to date on our integration with Willamette.

OK, thank you Dick. Just to comment on Timberlands, and reinforce what you've said, we saw pretty stable prices in domestic logs, particularly in saw log grades. And we saw some improvement toward the end of the quarter in the export log markets, and that was due to the strengthening of the yen and some more, some reduction in the competition from Europe, from laminated beams, because of the near parity of the euro now, which gave them less advantage into Japan. But our customer base in Japan continues to be strong and performing well in a very difficult market.

Let me move on now to the integration. As Bill Stivers commented last quarter, we assumed control of the Willamette Industries in February, on February 12th, and really began the integration immediately. Beginning with teams of people from both Willamette and Weyerhaeuser to develop proposals around the strategy to combine the businesses and functions, and to identify the leadership to lead forward as a single company.

We managed, as many of you recall, Willamette as a separate entity during the period of time up until June 1st, with an operating committee, to maintain continuity of operations while the integration teams did their work. And with hind sight, we feel that worked very well, we've seen no deterioration in the operating performance of Willamette, and in fact, we've seen very significant improvement in safety results, which is very gratifying.

The 1st of June, then we dissolved that operating committee, which I had chaired, and we moved to a structure of reporting relationships for a single company. By June 30th we had fully merged Willamette into Weyerhaeuser, and we're managing as a single company now. As we look at the forecast of the agreed upon strategies for synergy from the integration team recommendation we remain very comfortable that we'll realize the synergies that were forecasted at the outset of $300 million a year.

The leaders that are now in place across the company as we manage as a single company are implementing those strategies. Many of them, and I shared some of those with you before, were implemented immediately, but as we go out into the coming months these leaders will be implementing those integration strategies and realizing the value of the combination.

But beyond that, I want to comment briefly about what we see in the months ahead, and that is a major challenge to implement the best practices from both companies. And we're determined that we're going to create and are creating an environment where the Willamette people can make a difference in adopting best practices and improve this company.

As I've said before, we're not simply creating a larger company; we're creating a company that is going to perform better and realize better margins over time.

The major value in this merger is to create a mindset to put in place those changes and those opportunities as we go forward.

For example, in the pulp and paper area we know that Willamette had superior results and excellent manufacturing costs. We simply must learn from that and adopt that and integrate it into our system.

In engineering and construction management there's also lessons to be learned and business practices to be adopted.

And in general Willamette managed their support functions very efficiently and with a very lean mindset and we will be making changes and are making changes in those areas, which will reduce costs and improve margins.

So the challenge is to retain the talent at Willamette and to adapt those best practices and we'll be as a senior management team very involved in this, very focused on it and inspecting for those kinds of changes as they are implemented over the several months ahead of us.

So on balance we're very pleased, again very confident that we're going to achieve the synergies that were forecast and the transition has gone very well to this point, so we're pleased about that.

So, Kathy, I'll turn it back to you.

Thanks, Rich.

Jennifer?

Yes?

Will you now open the line for questions?

Great. We will now begin the question and answer session. To place yourself into the question queue please press star-one on your touchtone phone. If you are using a speakerphone, please pick up your handset and then press star-one. To withdraw your request press star-two. Please go ahead if you have any questions.

And your first question comes from Matt . Please go ahead, sir.

Hi. Thank you. I'd like to start with just clarifying the guidance that you gave us, Dick, and specifically for wood products when you said that you thought wood would be down a little bit from 2Q levels in the third quarter. Were you saying that after you've pulled out the CVD refund, so were you saying that relative to a $30-some-odd million number?

That's correct, Matt, relative to the 36, $38 million number.

OK. And then the same thing for , were you given the guidance down 10 to 15 off of the $79 million number or 72?

Off the 79 in that case, because apartment sales for us are not a non-recurring event. They just appear two or three times a year. They are ongoing. But I was using as a base there the reported earnings for .

Good, OK.

And then changing gears and looking at the synergies, can you say how much the synergies might have impacted the second quarter and give us some guidance for third quarter?

, at this time, we know we have gained some benefits. But we have - as just indicated, we've just put the plans in place and we are just beginning the tracking. So we do not have a quantification of this quarter nor any projections on how they might unfold over the next quarter.

OK. Well how about just an update on some of the larger sort of discreet actions that you've already announced in terms of in the third quarter? Can you update us on those developments and what that impact could be?

Well the - the big changes in the third quarter, it would be - the container board facilities that have - that were closed were closed earlier in the year. And so that impact is already in our earnings. The big change in the third quarter will be the startup of the facility, the new machine at and the shutdown of the paper machines at and , in association with that.

And, at this time, we don't have an estimate of what the - what an incremental earnings impact will be that. It will be very dependent on how the startup of that facility goes.

OK. And then I guess last question, I was interested about the operating guidance that gave us. And I understand you gave us that caveat at the end, , that market conditions could change those plans. But you must be a little surprised at how the - particularly the Canadian have continued to run in light of these low prices and the increased costs represented by the .

Can you give us any additional insight into what you think might be going on up there that's allowing them to continue to run?

, are you asking a specific Weyerhaeuser question or an industry question?

Well maybe Weyerhaeuser can add to the - really an industry question, but maybe Weyerheauser has some insights as well.

Well, as you know, we had been running our facilities at about 60 percent of capacity and then we closed one permanently. When we talked about this operating rate, it is with our largest sawmill in Canada, still down because of a fire. So that is not included in that number.

The wood products facilities tend to run on a very short planning horizon month to month. And they're very margin and cost driven. I think the Canadian industry - and it will vary by province, because each system is different, somewhat different province to province. But in the third quarter they - up until the end of May, they had a window where they knew that prices were going to go up next quarter and the duty was going to be going up next quarter. And simply built what appears to significant inventories that were built prior to May that are still being worked off.

And it is our expectation that those inventories, when they're worked off, will bring a better supply and demand balance in the lumber business. We hear reports of many curtailments now of Canadian saw mills, and clearly we review our own every month regarding their margins and cash flows to make decisions about not only whether to shut the miller down, but whether to take shifts off and so on. Saw mills can adjust frequently by taking shifts off, as opposed to total curtailment, and that's generally how supply adjustments take place. But that is our belief as to what is going on in the lumber business right now.

OK. And then just lastly, if you add up the guidance that you gave us by segment, down timber, down wood, down RICO, but up pulp, paper and packaging, does your, does some of your guidance result in a number that is flat above or below the second quarter number that was just reported?

I don't have an estimate.

OK. So you haven't summed up those. OK. Thanks.

There are obviously ranges depending on a number of variables that could make the quarter better, and we have a number of things in play with the start up of Kingsport, the impact of Plymouth, whether that will get settled and the timing of the recovery of wood products prices that will make a big difference in the quarter.

And we have the insurance settlement.

And we have the insurance settlement, whether that claim is settled in the third quarter or in the fourth.

Good. I just wanted to make sure it wasn't obvious that it was going to be up, down or sideways. Thanks.

Next question.

Your next question comes from . Please go ahead sir.

Just a couple of things. Can you amplify on the timing of the ramp up of Kingsport, so that we can have a sense of your current expectations on that project? And I wonder if you could give us a little more color on your operating rates in the white paper business, and what your mix looks like? It's a little harder to keep track of now that you've got the Willamette stuff. In between forms and cut size?

Well the ramp up at Kingsport, it will start up we believe end of August, first of September. And the initial production rate will approximate the amount of capacity that is being closed. So we would not expect any increase in production initially. As a result of Plymouth being down, we are actually buying paper from our competitors to run at this time. And so as we resolve the situation of Plymouth, we will be then making decisions on other machines, as indicated, that will be adjusted as the production rate of Kingsport ramps up. We expect it not to reach its full capacity for, until well into next year.

OK, so if we said mid '03, that would be a reasonable time to expect it to be, more or less?

Middle through probably near the end of '03.

OK. Late '03.

Yes. About 18 months.

OK. And can you, can you remind us what your mix is between, you know, roll and cut size in forms business, and give us a sense of how those individual markets are performing?

I don't have any more color on the individual markets, . We are run about 50 percent cut size, I think Willamette was around 20 percent in the forms market. The cut side, the copy paper business is quite good. The volumes are good. It is the commercial printer, the rolls that are the weakness in the commercial printers, and those customers whose business is more heavily dependent on advertising revenue where we still see a good deal of weakness.

OK. And you said that your inventories in uncut and free share are low. Is that true of all of the other businesses you're in, including the wood businesses at this point?

My comment was specific to paper and to container board. In the wood businesses our inventories are probably closer to normal in lumber.

Rich, you may comment on logs.

hanson (?): Log inventories are normal to low and getting lower as we move into the fire season.

OK.

So that I'd say that our wood products inventories would be more the normal level.

OK. OK, thank you.

Our pulp inventory is quite low as well.

That covers it. Thanks very much.

Next question?

Your next question comes from Chip . Please go ahead.

Yes, good morning. A question regarding your current debt situation with the merger now closed: Have you termed out all the debt that you had planned to from the merger and could you just sort of give us an idea of when your bank lines and what you have coming due in the next year or two would be?

Chip, at this point we have about $400 million of commercial paper outstanding between the real estate company and the parent company. We will probably maintain about that amount of commercial paper. We may elect to term out some of the paper so that we can increase the commercial paper capacity a little bit at the parent company.

We have, as you know, 2.6 billion in credit facilities. We are fully drawn on a $1.3 billion five-year facility. We have very little drawn on the 364-day line.

We will be renewing the 364-day facility beginning next year, in early next year and we don't anticipate any difficulty at this time.

In terms of our refinancing, we have roughly a billion dollars of maturity each year or in five of the next six years, and so they're spaced pretty well. But the liquidity position of the company is extremely strong right now with significant credit capacity to both deal with the normal seasonal fluctuations in working capital and to facilitate any refinancing needs over the next few years.

Chip, this is Bill Stivers. I might just add you may remember that we set our maturities schedule also so that it would accommodate our deduct pay down that we have. As you know, we've indicated that we plan to pay down debt to restore our ratios, so we tried to put that all together.

So that with the five-year credit facility and the commercial paper we have outstanding, as Bill said, the schedule of our maturities we have plenty of flexibility to pay down our debt as well as manage any refinancing we may have to do over this period.

OK. Shifting gears to container boards, you know one luxury that you have as a U.S. company is that you're not 100 percent, you know, recycle-based as a company, but I know you're probably roughly 50-50. Could you tell us, of the fibers, what that ratio is? And then whatever portion is recycle-based or . How much of that portion are you able to get normally from your own box plants? Meaning you don't have to go out and buy it.

The first question, , how - what's our recycled versus , it is roughly 55, 56 percent recycled. That will be changing a little bit over the next few months, as there is a new fiber line coming on at Willamette that will allow us to shift from to in one of our Oregon facilities.

In terms - your second question was, how is it sourced or...

Yeah, that 50 percent that's recycled, are you - you probably have a lot of waste coming out of your box plants, I would think.

We supply it to our own recycling business, and we are a net seller of recycled fiber with our own collection system in some areas, not only from our own box plants but from some others. And so that margin we get on recycled fiber does mitigate the cost impact to us somewhat of a period like we've just been through with the sharply-rising prices.

But we still experience a significant increase in costs to our liner mills. But we buy a fair amount on the outside.

Now when you look at your ...

To put it another way, our whole objective is to eliminate , eliminate trim...

Right.

... if that's where you're getting at.

So we try to minimize the amount of waste in our own box plants that's recycled.

Got you. And as you look at the costs hitting in the third quarter versus the second, what is that - assuming there's maybe some moderation as we hear might be happening, how much of an increase did you experience in the second versus the first? And what do you think the third versus the second will be like?

Well you know, , we had a very strong run-up in in the first quarter versus the second. I think the increase was averaging about ...

The increase was - in June, was about $30 a ton just in June. And so we would expect - and even if prices stabilize - to see the average go up at $25 to $30 a ton in the third quarter versus the second.

And the first versus the second versus the first, do you have any idea what that change was?

Yeah, let me...

No, I'd have to - , we'll have to get back to you on the exact numbers here. I don't think we have it.

It was up roughly about $20 - well...

Our expectation, , however, is that we will see some moderation in the third quarter, as the higher prices draw more waste into the waste stream. And we have seen some back-off in the demand from the export market. So that - we expect to see some moderation in the trends.

OK. Thank you.

And your next question comes from . Please go ahead, sir.

I was wondering if you could talk about the improvement that you had from the first quarter in timberland profit up to 175 million from 119 in the first quarter? And I know you had Willamette through the whole quarter, but, you know, Willamette wasn't huge in the log business. Could you go through the, what accounted for the delta here?

, this is Dick. Rich Hanson will comment on that in a minute, but I just wanted to remind people that in the first quarter, you know, Willamette was only in for half of a quarter. We had not yet split their wood products and Timberlands, and so all of Willamette's Timberlands in the first quarter were in our wood products segment, not in our Timberland segment. So there was no contribution at all in the first quarter. Rich, do you want to ...

Yes. I'm sorry, how much would you say was involved in that, you know, that switch between the two segments, how much did that account for?

We don't, we're not able to break that down at this time. We didn't go back and do the first quarter.

OK.

But, I think the point here, this is Rich Hanson, is that we did have a strong quarter, good, you know, good operating rates as relates to harvest, a little bit of strength in the export log market toward the end of the quarter, coupled with Willamette. You saw that move up in earnings there in the second quarter in Timberlands, and that'll be followed by a quarter where we traditionally take a lot of downtime due to fire season. So, you know, you can expect that to, we had a really strong quarter, and it'll be followed by a seasonally lower quarter.

Were there any significant land sales in the second quarter?

No there were not.

OK. And how are you changing the marketing of logs or maybe staying with the same kind of marketing of logs that Willamette did of douglas fir logs, out of the west coast?

You know, I mentioned earlier that we had some very strong customers, and that in a weak market in Japan, our export log customers are actually continuing to gain market share. And we welcome the additional supply from Willamette. And in fact, we're pushing even more aggressively at extracting the export quality douglas fir from the harvest. And we have a coordinated marketing approach now across our whole Washington, Oregon and coastal British Columbia organization to market logs into that export market.

And we have kept the key log marketing manager from Willamette in our organization, and it's working very well in terms of protecting some of the customer base that Willamette had, and then shifting toward some of the historical base that Weyerhaeuser has. So it's gone very smoothly, and we've actually moved up the volume into the export market.

The benefit that you're getting from a weaker dollar, is that strictly just occurring from a price standpoint, and, you know, the translation effect, or is it starting to enable you to actually pick up some share versus other competitors?

It's, I would say the shares, just our mills in Japan that we sell to are very cost competitive, very strong in their markets, and the, and the weaker dollar, stronger yen has allowed them to pay more and they have some modest margins at this point in time. They're actually operating in the black. And also some of the share increase could be, it's a little earlier, or little early to know for sure, and the positive impact on price was the strength in the Euro relative to the dollar has caused the European exporters of laminated beams to Japan to have to move their prices up and that's been positive for us.

: Rick, this is Dick . I want to respond to Chip question and clarify on what's happening to OCC in our system.

Our June price was up almost $40, it was $39 from the prior month per ton delivered to our facilities. Our delivered OCC costs in our system are running around $130 a ton now and so that's probably up closer to 40 to 50 above the second quarter.

Dick, just since you brought that up, if you have a 40, $50 increase, you would have to then start to get a reasonable amount of the box price increase through to offset it, I would think, in order for you to have up earnings. Is that the way you're sort of looking at that when you made the statement that you thought container board numbers would be up in this third quarter?

hanson (?): That's correct, Rich. We do expect that with the combination of the export minor price increases, which are already in place with the higher box prices and some mitigation in Western OCC costs and the continuation of the synergies. You recall I used the term "modest" in terms of improvement.

But clearly it is the higher earnings in the quarter will be dependent on achieving pricing improvements.

And just on your comment on Plymouth, so there should be no negative impact in the third quarter from Plymouth. Does that mean that just from that, profitability will be up $15 million in the pulp and paper segment?

hanson (?): That's correct. The 15 million was mainly lost business and incremental expense, which are covered by business continuation insurance, where that the insurance recovery has not been booked. And when we do we will recover most of that 15 million plus whatever negative effects we continue to experience in the third quarter.

But what about any impact from ? Is that going to have any impact on the third quarter?

I'm sorry. I'm not familiar with.

Didn't you have a problem with the pulp mill? I thought one of your pulp mills.

Oh, .

, I'm sorry.

The problem was relatively short lived and will not have a material impact on the quarter.

OK. And just --

It was roughly a million dollars at .

Okay. And then just two last questions: Are we going to get third and fourth quarters of last year restated numbers for the new segments or do we have to wait for the earnings to come out?

They will be restated when we report them.

And then lastly, did you pay down any debt in the quarter?

We paid down a modest amount of debt in the quarter, approximately just under $200 million.

Thanks.

The Weyerhauser company reported debt is roughly $13,257,000,000. And we look at net debt after cash and short-term investments. So we had about . So net debt was running about $13,116 -- $13,117,000, - or .

Thanks.

Next question, please.

Your next question comes from . Please go ahead.

Could I ask the questioners to please hold their questions to one, with perhaps a follow-up, so we can have a chance for others to ask questions. Thank you.

Sure. And I just wanted to clarify, on the timberland, I believe, , you said that it would just be slightly lower earnings in the third quarter?

That's our expectation. The big driver is the , which is a 10 to 15 percent reduction, and with relatively stable pricing, some modest improvement. And so that would say that earnings could be in that five to 10 percent range lower if we're just driving with them with the volume.

OK. And now...

But I would add fire conditions were a major factor here.

That's right. And there's a lot of uncertainty around that.

Sure. And it may be trying to get around some of the timing issues. When I think about kind of the - when you think about full-year harvests, et cetera, in this type of pricing environment, what type of run-rate in that division is feasible over an annual basis, do you think? It seems to have been quite a nice step up that we saw relative to where the run-rate had been.

Well if your question is, are these harvests sustainable aside form the seasonality, they certainly are sustainable. You know one of the things that I didn't mention about that strong quarter was we had a good quarter in our international operations in timberlands as well, in Australia and New Zealand. We were profitable in our coastal timberlands operations.

And we even had, due to some scrambling and marketing in the southern operations, positive results. So in that quarter, everything went very well in the second quarter. So we're being a little cautious about the third quarter, with the main factor being that fire risk.

OK.

But those are sustainable harvest rates.

And actually I really was focusing on the seasonality part of it. So for the fourth quarter as well, is that a very good baseline number of pricing?

Well I sound like the old farmer, you know, but - you know as we get into the late in the fourth quarter, then we run into winter risk and wet weather and other kinds of interruptions. But the prices we're looking at we think will be fairly stable going out through the fourth quarter.

As you know, as many of you have written about the impact of the duty is shifting demand for lumber from Canada to the U.S., which is resulting in demand for timber and pretty good stable timber values at this point.

Yeah, and that's true. And there's a lot of - there seems to be a lot of activity with the type organizations, pension funds. You know looking at, acquiring timber, which is keeping values pretty stable in the West.

OK. I'll let someone else take the floor and come back if there's time - thanks.

OK. Thank you, . Next question.

Your next question comes form . Please go ahead, sir.

Good morning.

, I wondered if you guys could update us first on just capital spending, as well as potential divestiture plans at this point?

Sure - yeah?

Yeah, in terms of capital spending through the, through the first six months of this year, cap ex is running 469 million, and that's obviously was fairly heavy spending in here for Kingsport. Because it comes up, and by the way, that would be approximately 79 percent of our depreciation and depletion. Which was about 596 million for the first six months. So as you may remember, when we talked originally about cap ex for the year, we had planned, or at least with the Willamette acquisition, had planned on an annualized basis for cap ex about a billion, 150 million. We would now expect that to be under that, and we've been working it down.

But you don't have a, kind of a current number you'd want to share with us Bill?

For the year?

Yes.

I think we'll be under a billion.

OK. And on the divestiture front, any kind of thoughts?

You mean in term ...

I think in the past you'd have said, you know, that that didn't look like that was going to be a big part of the deleveraging mix, and I just, you know ...

Right.

... wondered if you could, if there was any change to that view?

There's been no change to that view. I think Rich continues to work through basically looking at the combined Willamette, or legacy Willamette and legacy Weyerhaeuser Timberlands, in terms of reassessing the strategic priority of all of those lands. So that's a process we said we'd be going through, and one that Rich is conducting at the current time. And that could lead to something, if the determination's made it's really not strategic to hold. But I'd view that as part of our ongoing activities.

OK. And then I had just a follow-up for Dick Taggart. I wondered if Dick could give us a little bit of an update on what you guys are seeing as the biggest pulp seller into the market, in terms of demand from places like Asia and Europe, if you try to just back out the currency effect for you guys in particular? I mean, demand was very strong in Asia in the first quarter, and through much of the second quarter, and has that backed off a little bit, and then what are you seeing over in Europe as well?

Well as I mentioned, the demand in Asia was strong for fluff pulp. We have not experienced the same strength of demand for paper grade pulp in Asia. And there is some concern that inventories are being built in China, and that we may see some slowdown in that demand as price increases go into effect. Europe, again the fluff demand is also good. Paper grade shipments have also improved. The fluff demand we think is sustainable in Europe, just because of ongoing demand. And certainly the currency is making it easier to implement the price increases, but I don't know that the currency is the reason for the price increases. I think it's mainly the low inventories and the underlying demand .

Great. Thanks Dick.

Next question.

And your next question comes from . Please go ahead.

Yes please. Just I guess given the volatility you've seen out in the equity markets, could you give us some, any sense more of any need to revisit your assumptions on your pension plan funding? Are there any issues there?

Your question is given the volatility in the equity markets, do you revisit the assumptions on the pension funds. Well, we don't review the pension fund assumptions every quarter and so that's an annual process. As many of you know, we have reduced our expected returns this year compared to prior years and that's a review we go through annually, along with all of the other variables that affect pension fund accounting, of which there are a number, and we will do that in a normal course of our annual review but at this point in time we don't see any reason to revisit those, Don. Clearly you don't change a long-term assumption based on one quarter's movement in the equity markets, regardless of how radical it is.

No, I think I just missed your revision downwards in the assumptions you had made I guess previously.

Just a separate question is just really with regard to I guess your views on the Scandinavians, I guess in the North American market. They appear to have backed out of the Japanese a little. Do you see them coming in, displace or refocusing on North America in perhaps a longer term sense than they used to be, given that the Canadians are being shut out?

That's a lumber question, Don?

Yeah, it's a lumber question.

Well, as Rich mentioned, we've seen the Scandinavians less active in the Japanese market and the same thing is true in the U.S. market, lumber markets, and this we think is mainly a currency effect as well as some improvement in demand hopefully in Europe. But we believe that that will be heavily currency influenced, the Scandinavians shipping lumber to both Japan and to the United States.

OK, thank you.

Next question, please.

And your next question comes form Lisa . Please go ahead.

Hi. Afternoon. Just a couple of nitpicky questions. Firstly, Kathy, could you just go through the down time numbers that you gave us again? Did I hear you right that the market related downtime is just going to be 28,000 tons in paper for the third quarter?

Yes. In the third quarter, let me see, pulp and paper mills are projected to be down 89,000 tons, of which 61,000 is maintenance. That's correct. Container board mills at this time don't have any downtime scheduled for this third quarter.

OK. And looking at the CVD, you gave us the number for the write back of the accrual. What was the number in terms of the negative impact that you had in the quarter from the ongoing CVD?

There was very little negative impact in the quarter. The duty began to be imposed on the end of May and so you had the month of June, which would have been about $7 million. It runs around $7 million a month.

OK, so you broadly had about 7 million in the second quarter? You're talking about 20 million in the third quarter, so that would be about 13 quarter on quarter?

That's correct.

OK, that's great. Thank you.

OK.

And your next question comes from Peter . Please go ahead.

The reviews that I was referencing as the senior management team and the reviews of the progress on the agreed upon strategies for combining the companies and the synergies that result from that. But what I was really saying there, , is that beyond that we know that there's a lot of opportunity to adopt best practices and to, you know, build on the talent that we have in Willamette and to create an environment where the Willamette - these key talent in Willamette feel like they're making a difference and are, in fact, making a difference.

And that's the challenge of the senior management team, to both inspect for the strategies as they're implemented going forward that have been documented and agreed upon in our process, but also look at how we're dealing with change management and adoption of best practices. And I guess what I'm saying - and I didn't mean to be negative about it - but the better we do that, the more the likelihood is that we're going to continue to retain the key talent that we have in Willamette.

OK.

So, basically, I think it's important that the leadership, management, that type of thing, is basically all in place.

Yes.

Yes.

OK. So it's really an ongoing philosophy...

Yeah, with a very high retention rate of who we wanted.

Yeah, OK. All right, great.

I had a question on the Canadian business. I'm curious if you've seen any effect of sawmill closures on raw material of costs? You know I was in Canada. I guess I'm talking specifically about the wood chip market. Have you seen any change along those lines as of yet?

Not at this time, . Though, clearly, if there are significant closures for an extended period of time in Canada, that will at some point impact chip supply.

OK. And just, lastly, if I could, I believe that in your corporate and other line you included a $22.5 million charge. So if we excluded that, it was $39 million, which was, you know, a lot lower than I was looking for. Can you provide some rough guidance on what that line item may look like on a going-forward basis?

When you say...

What charge are you referring to?

What $22.5 million charge are you referring to, ?

I thought that the net items were $22.5 million, which I thought were included in the corporate and other line.

No, those are the facility closures that are largely in the container board segment. And the is in the wood products segment. Most of the nonrecurring items are in the - are spread into the specific segments. Not in the corporate and other line.

OK. And so the corporate and other line has been running around $60 million, and that's a good number going forward?

Yes, that's a reasonable assumption.

OK, great. Thanks very much.

We'll take one more question, please.

Absolutely.

And your final question comes from . Please go ahead.

Thank you.

Just a couple of quick ones. First of all, since we're already past the midpoint of July, are you gaining the eight percent increase in box prices that you had hoped for?

Well, , it was only effective in mid July, so we're just beginning that process. It will likely be through August and near the end of the quarter before we really know how successful we will be.

There is some business that is indexed to pulp and paper , since the price printed higher, the box prices will go up immediately. But other customers are on quarterly contracts. And so it may take a whole quarter to get the eight percent fully implemented.

Are you seeing any resistance either from your end clients or from third-party box producers?

Well it's a negotiation process. And so I don't know that I can really comment on the degree of success at this point, because it is so early in the process.

OK. And my other question was, and I recognize the Weyerhaeuser operating philosophy, would you ever revisit the kind of run full philosophy in wood products, given just how weak pricing is? You know, you're talking operating rates in the mid 90s for OSB and pretty high for the other products as well? Is that truly a profit maximizing action?

Well I don't believe that I would guess I would question your statement that we have a run full philosophy. We have a run full plan this quarter at this point in time. Last year at one point we had a third of our OSB capacity curtailed on a rolling basis. And so we do, when we feel it's appropriate, adjust our production schedules to the, to the market demand, and we try and react to the demand in our system.

Recall we have a large wholesale building materials distribution system that purchases twice as much plywood, or as much plywood as we produce. It's a large purchaser of OSB, and so we gauge our production against that demand, and we try not to ensure that we don't build inventories in the process. And so it's, I don't, I guess I just question your basic assertion that we have a run full philosophy.

But I guess what I was saying there is either, when you, when you have a plant running, you want them to do the very best they can, and then it's either on or off, as opposed to a throttle back.

Well it's probably true in OSB because of the nature of the production process. In lumber, we frequently will run, take one shift off, run four days a week, and adjust the facilities incrementally in that way, which you can do in lumber, to some extent in plywood, but is not practical in OSB.

OK. Thanks very much.

OK, thank you for calling in to the call. I will be available in about ten minutes time if you have any additional questions. 253-924-2058.

Thank you. This concludes today's conference call. Please disconnect your lines, and we thank you for your participation.