威爾豪瑟 (WY) 2002 Q3 法說會逐字稿

Welcome to the Weyerhaeuser Third Quarter Earnings Conference Call for October 22, 2002. Your host for today will be Kathryn McAuley. Ms. McAuley, please go ahead.

Welcome to the Weyerhaeuser Third Quarter Earnings Conference Call. I’m Kathryn McAuley, your moderator for today’s call. This call is being web cast at www.Weyerhaeuser.com. If you have not received a copy of the earnings release, please contact my associate, April Meyer, at 253-924-2937. After today’s call, we 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 next quarter on this call.

Our presenters today will be Steve Rogel, Chairman, President and CEO, Bill Corbin, Executive Vice President of Wood Products, Dick Taggart, Vice President, Finance, who will discuss the Weyerhaeuser pension plan, Bill Stivers, Executive Vice President and CFO and Steve Hilliard, Vice President and Chief Accounting Officer are also present.

We will be covering a great deal of material on today’s call. To ensure that we are able to answer all your questions, we ask that each questioner ask only one question and return to the queue for any follow-up questions. I will now turn the call over to Steve Rogel.

Thank you, Kathy, and good morning. Since I last spoke with you at our May analyst meeting, we’ve made significant progress toward our goals, despite challenging business conditions. The industrial recession has impacted our Pulp, Paper and Packaging businesses. However, during the third quarter, we did see some encouraging signs. Pulp prices rose and there were modest, but steady, improvements in Packaging, Containerboard and uncoated free sheet markets.

Record housing demand continued to benefit our real estate business. But, the unintended consequence of the [CBD AD] penalties resulted in a vastly oversupplied domestic lumber market, which had significant adverse impacts on our wood products business.

Weyerhaeuser continues to work for a negotiated solution to this problem. Bill Corbin will address the issue in more detail later.

Before we get into the operations, I want to mention something. There has been a lot of interest across all industries about pension plans. Today we’ll be providing you with more information about Weyerhaeuser’s plans. Dick Taggart will be covering this later in the call, and I don’t want to steal his thunder. However, I will tell you that it does not look like that we’ll be required to make any contributions to our U.S. plans next year. We may be required to make a modest contribution to our Canadian plan this year and next.

The business climate has been more difficult than we anticipated when we acquired Willamette. We have continued to diligently work on what we can control and have made steady progress in delivering on the plans laid out at the time of the acquisition. Today, I’d like to talk with you about what we have accomplished.

Willamette integration has proceeded swiftly and is on target. In the spring, each business formulated an integration plan and many of these plans were activated even before we began operating as one company on June 30.

The plans were developed by teams of Weyerhaeuser and Willamette people who worked together to look for the best ways to combine the resources and skills. Employees of both companies worked together enthusiastically and it was not the Weyerhaeuser way nor the Willamette way but a new way of creating a better company.

When we acquired Willamette, one goal was to capture $300 million in annual synergies by the end of three years. We expected to capture 40% of the synergies by the end of the first full year following the merger and 30% in each of the subsequent years.

I am happy to report that, not only are we on track, but we are achieving synergies faster than expected. At the end of the 2nd quarter, the annual synergy run rate was $42 million. At the end of the 3rd quarter, the run rate was $128 million, on an annualized basis.

Based on our experience with other acquisitions, the P&L impact lags about one quarter, so the benefits should become more obvious early in 2003. About half of the synergies are coming from Pulp, Paper, Containerboard and Packaging businesses. Another 40% from timberlands and Wood Products and the remaining 10% from procurement and other savings.

Prior to the Willamette acquisition, Weyerhaeuser had embarked on an SG&A cost reduction program that we called Support Alignment. The Willamette acquisition has accelerated simplification of the way we do business. Last week we announced a headquarters region head count reduction of 750 staff positions. We continue to look for ways to streamline our cost structure.

We have been taking a close look at all our assets and had rationalized some prior to acquiring Willamette. We committed to you that we would continue this process of rationalizing our under-performing assets. Since the merger with Willamette, we have permanently shuttered three containerboard machines with a combined annual capacity of 515,000 tons, five box plants and 215,000 tons of uncoated freesheet capacity. And we have closed six wood products facilities. We’re constantly reviewing operations and will continue to rationalize facilities as necessary.

Bill will address how we’re approaching the over-supplied wood products markets. Due to these rationalizations our production is in better balance with order flow. Thus, down time on our pulp and paper machines will be strictly maintenance-related and market down time should be minimal. Of course, we are constantly monitoring market conditions and will make adjustments as necessary to keep our inventories in balance.

During the acquisition we talked about Weyerhaeuser capital discipline, achieved through our ability to identify the right high return capital projects compared with Willamette’s engineering prowess. We believed that the combination would be very powerful. This is another area where we are ahead of schedule. Early on, Willamette engineers were added to Weyerhaeuser projects, and Willamette engineers, working with the engineers at our Plymouth mill, contributed to restarting the mill in record time.

At the time of the merger, in February, we projected 2002 combined capital spending to be approximately $1.2 billion. Going forward, we said that we would reduce that number to about 80% of depreciation. We now estimate 2002 capital spending to be just about $950 million.

Currently, we’re in the planning stages for capital spending for 2003 and do not have an estimate finalized. However, we expect capital spending to be significantly lower than our projected results for 2002. We’ll continue to reduce this spending as we maximize our operating strength.

Since the acquisition we have been operating with the twin goals of capturing synergies and paying down debt as quickly as possible. Through the capturing of synergies we will improve our profitability and increase our cash flow, allowing us to reduce our financial leverage. We’ve talked about synergies, now I’d like to focus on the goal of reducing our debt to our target range in three to five years.

Earlier today, we reported the sale of our western timberlands, 115,000 to Hancock Timber for $211 million. We will use these net proceeds, plus the $25 million in proceeds from a smaller timberland sale to repay debt. As we told you at the time of the acquisition, we continue to review our timberlands portfolio and will consider selling non-strategic lands. The net proceeds from any sales will be applied toward debt reduction.

As you can see, we are moving ahead rapidly at Weyerhaeuser despite the challenging economic environment. We’re working to deliver on our objectives when we acquired Willamette.

To review progress We have reached our first year synergy goal in the first six months of the merger. We’ve stepped up our overhead cost reduction program. We have significantly rationalized under-performing capacity. We’ve reduced our capital spending, and We have sold non-strategic timberlands and used the net proceeds to reduce debt.

We are making the tough decisions and are focused on driving improvements to the bottom line. Thank you, and now I’ll turn the call over to Bill Corbin, Executive Vice President of Wood Products for Weyerhaeuser. Bill.

Good morning. Today I’d like to cover current market conditions as they relate to supply and demand, explain key third quarter operating conditions, such as start-up of new facilities and their direct impact on Weyerhaeuser’s business, provide a brief overview of the impact of the softwood lumber issue and conclude with Wood Products strategy of continuing to focus on the basics, as we go forward.

Let me start with current market conditions. In the housing market, declining interest rates have kept housing starts very strong, particularly in single-family units, which are the key driver for lumber and structural panels. Mobile home construction decreased from mid-year 2001 levels, but has stabilized this year. Multi-family starts have remained relatively stable this year, as well. In total, the residential market remains quite healthy.

The industry has also seen another year of growth in the repair/remodel market, bolstered by low interest rates and home mortgage refinancing. Housing momentum will carry into next year, as starts are expected to remain relatively healthy.

One concern for next year might be remodeling expenditures, if consumer confidence continues to erode because of employment concerns or rumors of war. Pricing for structural panes, although not strong, have been more stable than lumber. The industry is gradually improving as structural panel supply and demand are coming more into balance, as capacity growth has slowed.

The combination of strong housing starts and repair and remodel, plus a strong Canadian market, has resulted in demands this year coming in about 1 billion square feet above forecasted levels. The bulk of the increase is in [OSB], which is increasingly taking share from plywood in the repair and remodel market, leaving plywood demand coming in close to expectations.

I believe there will continue to believe rationalizations in plywood. The lumber industry has struggled in Q3 with the impacts of over supply. North American demand for lumber is flat to slightly increased, but recent supply has far out-paced demand. This leads me to a brief overview of the softwood lumber issue and the unintended consequences of the CBD and AD penalties.

The impact of the CBD and AD has been higher, not lower, volumes of Canadian lumber being shipped into the U.S. The method the Department of Commerce uses to calculate dumping margins and to review final penalties has encouraged Canadian producers to run greater volumes in order to lower their costs.

It also provides an incentive to avoid production curtailments that would be the right financial choice under depressed market conditions. Overall, Canadian production, for the first seven months of 2002 was up 8.5% over last year during the same period.

To put this into Weyerhaeuser perspective, we export, roughly, 20 million board feet per week of company produced softwood lumber from Canada to the U.S., or about 6% of the total Canadian softwood lumber exports to the U.S.

The impact of the countervailing duties on Weyerhaeuser incurred costs was $31 million in Q3 and will be approximately $70 million for the year. Because of our unique product position and duty rate, we’re paying about $5 million more per quarter than our average competitor in Canada would be on our volume, and roughly $10 million more per quarter than the company with the lowest duty. This is a very unfair competitive disadvantage.

Overall, the industry is beginning to rationalize supply, taking more downtime, particularly in the south. Recent data shows Canadian lumber shipments to the U.S. are moderating as well.

Other unusual events in the third quarter negatively affected the company’s results by approximately $10 million. They included the start-ups of our [Canora] engineered wood products mill and our Louisiana particleboard mill, which are both doing very well.

Operating losses associated with previously announced mill closures and reduced production at our Sutton OSV mill, due to the loss of a key machine center in early September. These impacts will remain about the same in Q4.

In response to market conditions, we will take appropriate action in our structural lumber and panel systems during the fourth quarter. These actions, most likely, would include some curtailments due to planned maintenance and capital projects and extended downtime during the holidays because Christmas falls in the middle of the week this year. While we haven’t finalized these plans, whatever action we take will be applied throughout our system.

Strategic Direction. Finally, I’d like to talk about our key strategies, which we are continuing to focus on.

First, we continue to optimize from our machine centers back to our timberlands. Thinnings from our key timber lands into dimension lumber, plywood and veneer is a good example.

Second, as our announcement today, to close the Enumclaw and Snoqualmie lumber operations demonstrate, we are keeping focus on our fixed sell/close strategy of improving operations and quickly rationalizing poorer performing units to continue leveraging down our costs and structure in all of our [indiscernible] product lines.

Third, we’re leveraging our presence in the market place, with our largest and our best customers to grow our top line. They give us consistent take-away and product mix, which create higher operating rates for us and consistent volume, quality, and mix for them. We continue to see profitable growth in the big boxes and from our dealer and industrial customers.

Fourth, we’re accelerating the pace of improvements in manufacturing fundamentals and aggressively working on supply chain value delivery for our customers. We are getting paid for our efforts.

And fifth, we’re using significant power of our combined research and development and technology base, strengthened by the combination of Weyerhaeuser, MacMillan Bloedel and [TrustJoice] to increase our ability to introduce new and innovative products and processed technology on a regular basis, and to leverage these advances across our large manufacturing and distribution system.

In summary, we are staying the course to rationalize our facilities, increase market share with very large, strategic customers and leverage our strengths to gain manufacturing and market advantage with innovative products and processes.

We’re faced with a very difficult market with lumber over supply and substantial CBD/AD costs. Our operations are running very well and we are aggressively improving value delivery to our customers. We are confident that we’re poised well to gain market share and to take full advantage of market improvements over time. Thank you.

Dick Taggart.

Thank you, Steve. Today I want to provide you with additional information about our current pension fund situation, for both reported earnings and cash funding requirements.

Pension fund under gap, as you know, is relatively complicated and is influenced by a number of variables. The four key variables are the actual rate of return earned by our pension fund, the assumed future rate of return on the funds, the discount rate used to discount the liabilities of the pension plan and the assumed increases in salaries and wages.

In addition, changes in plan benefits, or the make-up of the demographics of plan participants, can both affect accounting and funding as well.

In 2002, Weyerhaeuser is using a 10-1/2% assumed rate of return for pension fund accounting. And, while we have reduced this assumption each of the last two years, it remains one of the highest among publicly reporting companies.

Because of this, we have received a number of questions regarding how we’ve arrived at this assumption, how will it likely change in the future, and what will be the impact of such a change in this assumption on both reported earnings and cash flow.

As we reported last year, Weyerhaeuser reviews it’s pension fund assumption each year, at the end of the year, when actual returns, discount rates and actual valuations are known. We will continue to follow that practice and will provide guidance regarding our pension fund assumptions for next year in our fourth quarter report.

However, in order to help analysts and investors to better begin to understand our pension fund, how we arrived at our assumptions, we plan to broaden our pension fund disclosure in our third quarter 10Q. And today I want to discuss some of the key information that we will be including.

In 1985, Weyerhaeuser began moving towards managing its U.S. pension funds using, what at that time, was a relatively new structure and strategy in managing investments. We utilized synthetic indexing to achieve a benchmark return of approximately 60% equities, 35% bonds and 5% cash. We then invested the majority of the assets in the trust in a broadly diversified set of strategies and funds to add alpha or returns above what that benchmark would deliver.

In 1988, we set our assumed rate of return from the strategy at 11-1/2%. This was arrived at from the view that the benchmark return, which approximated the median pension fund return, would be approximately 8 to 8-1/2% and that we should expect to out perform this benchmark by 3 to 3-1/2%, or 300 to 350 basis points.

Through that 17-year period that ended in 2001, the end of last year, our compound rate of return was over 18% compared to the median large pension fund of just over 11%. The 700 basis point difference resulted in our performance exceeding the [indiscernible] fund by over 60%. And to the best of our knowledge, we had the highest performing large pension fund in the United States, whether measured on a five-year, ten-year or fifteen-year basis.

Our U.S. funds, which makes up approximately 88% of our pension assets, was significantly over funded at the end of 2001. In the last three years, we have increased our pension assets in Canada as a result of acquisitions we have made, to approximately $500 million in U.S. funds, while our new United States fund was at 3.1 billion at the end of 2001.

In July of this year, we added approximately 550 million in assets to our master trust, in connection with the addition of the Willamette funds, plans and employees. The Willamette and Canadian plans were over funded also, but not to the same degree as the legacy Weyerhaeuser plans.

Even though our actual rate of return has significantly exceeded our assumed rate of return since 1988, we did not change that assumption until last year. We lowered our assumption for future returns for 2001 to 11%. At the end of last year, we again lowered our assumed rate of return to 10-1/2% for 2002 accounting.

This assumption was arrived at by assuming that the median pension fund long-term return would drop to 7-1/2% and our alpha strategy, while it would continue to yield a higher performance in the median fund, would yield an incremental 3%, as opposed to the historical 7%.

We will again review these assumptions at the end of the year when we meet with our advisors to test our confidence in these assumptions going forward.

Our current investments in the U.S. and Canadian funds, combined, are 35% in private market strategies, both equity and real estate and 65% in liquid strategies. We are invested with over 125 managers. This is a highly diversified fund, which includes some of the most experienced and successful investment managers in the world.

To assist you in developing your own forecast of how changes in pension fund performance, changes in key variable assumptions affect gap earnings, I will provide sensitivities for the key variables that drive the gap accounting.

I need to caution you that these variables are not linear and are somewhat interrelated. But the sensitivities will provide you with an ability to develop approximate estimates as to what might happen to our pension credit in 2003. There are affects beyond 2003 that, because of the interaction of the variables, I would caution using these sensitivities beyond one year.

As many of you know, the P&L accounting for pensions is driven by gap, while funding is driven by a different set of calculations set by the IRS. These sensitivities are for gap reporting only. As Steve mentioned earlier, we will not be required to make any contributions to our U.S. pension fund this year and it appears very unlikely we will be required to make one next year. We may need to make a small contribution to our Canadian fund this year and next.

Because of the different funding status and pension regulations, the sensitivities I will give you will be somewhat different for the U.S. and Canada and I will provide sensitivities to the four key variables. I will go through these, but I’d like you to know that we will be posting these on EDGAR, so they will be available for reference by analysts in the very near future.

The first and most important variable is the actual rate of return. For each one percent that the actual rate of return is lower than the assumed rate of return for the year 2002 the pension credit will be reduced by $1.8 million in the U.S. and $800,000 in Canada for the year 2003.

In other words, if we had a zero return in both pension funds for 2002, our credit to pre-tax income next year would be reduced by 10.5 times both factors, which would equal $27.3 million.

If we reduced the assumed rate of return by 1%; in other words, if we reduce our assumed rate of return from 10-1/2% to 9-1/2% for next year, it would reduce our pension credit by $17.4 million in the U.S. and $4.8 million U.S. in Canada, or a combined $22.2 million.

If we reduced the discount rate – used the discount liabilities by 50 basis points, or half a percent, it would reduce the credit by 6.3 million in the United States and 2 million in Canada. If we changed the assumed increase in salaries and wages by a half a percent, it would change the pension credit by $10.6 million in the U.S. and $4.8 million in Canada.

Applying your outlook and expectations to the financial markets performance this year will allow you to make reasonable estimates on the potential impact on our gap earnings for next year.

Also, one other item related to pension funds.

As we noted in our earnings release, we have elected to terminate the former U.S. salary pension fund for McMillan Bloedel employees and we will pay out the benefits earned by employees and retirees that have been earned under those plans. This will result in an after-tax charge of approximately $25 million in the fourth quarter. As I mentioned, this is a lot to track on a call, and so we will be making this information available on EDGAR in the next few days.

Kathy, I’d like to –Kathy and I will be available to answer questions following the call. I’d like to turn the call back now to Steve Rogel.

Kathy, I think you’re going to do a follow-up on earnings.

Okay, I’d like to review the second quarter and then I’ll pass it back to you, Dick Tagggart, who will look at the outlook for Q4.

For the third quarter 2002, net earnings for Weyerhaeuser were 6 cents per share. That includes unusual after-tax items of 14 cents per share, of which 5 cents per share is related to Willamette integration costs. And 9 cents per share is related to business disruptions at the Plymouth, North Carolina paper facility, following a recovery boiler explosion in the second quarter. The boiler has been repaired and the facility has resumed normal operations.

Also, in the third quarter, there was a negative foreign exchange accounting translation loss of 16 million, related to the appreciation of the U.S. dollar versus the Canadian dollar. WRECO’s third quarter results included 14 million from the sale of two apartment complexes in California that were originally anticipated for the fourth quarter.

I will now review the price trends in the quarter by business line. The changes will be averaged Q3 price changes versus Q2, and where appropriate, we will compare September pricing with third quarter average. We will also indicate our expectation of price trends in the fourth quarter.

Export log prices increased 8% in Q3 versus Q2. The September price was slightly above the third quarter average. Export log volume went down on a seasonal basis. We expect fourth quarter prices to soften, seasonally. Domestic log prices were flat and we were required they might weaken as a result of weaker lumber prices.

Lumber prices declined 8%, falling steadily throughout the third quarter. Lumber prices in September averaged $266 per thousand-board sheet, or $7 per thousand-board feet below third quarter levels. Lumber prices were flat in Q3 versus Q2. OSB prices dropped 8% in Q3 to $129 per thousand square feet.

Market pulp prices rose 3% or $18 per ton in the third quarter. At the end of September, prices were slightly, a few dollars per to, above the average of the quarter. Due to rising world pulp inventory, prices in the fourth quarter are expected to be flat or down modestly.

Containerboard prices increased $30 per ton, or 8% in the fourth quarter. Prices are expected to be flat, to slightly up in fourth quarter.

The July boxed price increase was not felt in the third quarter. However, boxed prices are expected to increase 4% by the end of the fourth quarter.

OCC prices jumped 33%, or $27 per ton in the third quarter. Prices have declined every month since July and are expected to drop more than 20% in the fourth quarter.

Fine paper prices were flat third quarter versus second quarter, however offset prices slipped about $15 per ton, while copy paper prices continued to rise, increasing $5 per ton. We expect to realize approximately $20 of the $40 per ton price increase in the fourth quarter.

I will now turn back to Dick Taggart.

Thank you, Kathy. We’ve discussed a lot of information today and in closing our prepared comments, I would like to summarize the outlook for the fourth quarter, and note the estimated impact of a number of items that will likely effect the quarter.

As Bill Corbin discussed in his comments, the outlook for Wood Products is very uncertain. Demand typically declines seasonally in the fourth quarter, but many mills are below cash costs and production curtailment and closures in the quarter could result in some pricing improvement, in spite of seasonally weaker demand.

While Wood Product prices remain very uncertain, we believe they are near bottom. Weaker Wood Products prices may lead to weaker domestic log prices, but at this time, we don’t expect our timberlands earnings to change significantly. With prices softening modestly, they would be offset by increase in volumes, which occurs seasonally in the fourth quarter.

In Pulp and Paper, improvement noted by Kathy, and [uncluttered] freesheet prices are expected to more than offset any potential decline in market pulp. Because the Plymouth boiler has been repaired, operating earnings will improve as a result. We also hope to sell our insurance claim, which will add additional earnings in the fourth quarter.

With the start up of the Kingsport machine and closure of the higher cost older machines that Steve referred to, our production costs at Kingsport will be significantly lower. As a result of all of these changes, fourth quarter earnings in Pulp and Paper should be significantly better in the fourth quarter than in the third.

In Containerboards Packaging we expect to see a successful implementation of the boxed price increase by the end of the quarter and lower OCC costs. This should result in improved segment earnings in Q4 despite seasonally lower demands.

Our real estate business will have another strong quarter in single-family home building, as we continue to close the homes that are in our 6-1/2 month backlog. We will not have the apartment sales in the fourth quarter, however, as these projects, as Kathy noted, were completed ahead of schedule. This will result in approximately a 15% decline in pre-tax earnings from our real estate subsidiary.

Overall, the company expects earnings from operations to improve in the fourth quarter compared to the third, which will be comfortably above years-old levels as well. There will a number of unusual items that will likely affect the fourth quarter, some of which we’ve mentioned. But I would like to go over all of them and the estimated impact of these items.

All of these numbers that I will give you are an after-tax estimate. As previously discussed, the ongoing integration costs for Willamette are expected to stay about $11 million in the fourth quarter. There will be a charge associated with the closure of the Sturgeon Falls containerboard facility of approximately 7 million.

We expect the P&L impact of the business continuation insurance settlement at Plymouth to be approximately $25 million, and the previously noted charge associated with the termination of the program with MacMillan Bloedel U.S. salary pension plan are approximately 25 million.

There will be a significant gain on the sale of the Washington timberlands that we announced this morning. And there will be a small charge associated with the closure of this closure of the related Wood Products facility that Bill Corbin talked about. The net gain will be between 80 and $85 million on this transaction.

These items in aggregate will make the contributions earnings in the fourth quarter up between 60 and $65 million. With the improvements in earnings from operations, the special one-time events that are occurring in the fourth quarter and the continued reduction in both working capital and capital expending, we expect to meet our debt reduction goals for 2002.

With that brief summary, I’d like to turn the call, now, back to Steve Rogel.

Thank you, Dick. Now in summary, I’d like to highlight some of the key points before we open the call up to your questions.

Despite the weak economy and difficult operating conditions, Weyerhaeuser is sticking to its game plan. We’re capturing the synergies projected in the Willamette transaction ahead of schedule. We have sold and will continue to sell non-strategic assets to reduce debt.

We are rationalizing under-performing assets in our business segments. We are substantially reducing capital expenditures going forward, without constraining our ability to maintain our facilities at optimum efficiency.

In Wood Products, we will be taking down time in the highest cost, least efficient facilities to balance the supply and demand for our products. And, we are managing out pension plan effectively.

In short, we’re working to deliver value to you, our shareholders. With that, thank you very much and we’ll now take questions.

If there are any questions on the phone lines, please press star 1 on your touchtone phone. If you’re using a speakerphone, please pick up your handset and then press star 1. Your first question comes from Chip Dillon on Salomon Smith Barney.

Good morning. A question related to the wood area, if you could, first of all, tell us, at today’s prices, how much of both Canadian, or what proportion and U.S. capacity would you guess is losing money on a cash basis? And, secondly, if Bill could explain to us how the cost position in Canada goes down when they produce more. I would think that would create more overtime costs and more strain on loggers, etcetera.

Thank you Chip. I’m going to ask Bill Corbin to take both parts of that question. Bill.

Chip, if you take B.C. as an example, the average producer in British Columbia today, would be under water on a cash basis. The very best mills, the few very best, might be close to break-even. The costs go down because of additional productivity. Some of the operations are rationalizing lower performing units and giving more volume and time to the better operating mills. But by increasing productivity, costs do go down and offset any additional overhead, just adding a shift, for example. And, I’m reminded here, that it’s a total cost calculation.

Your next question comes from Mark [Aldee] of Deutsche Bank.

I wondered, Steve, if you could just give us a little bit more of an update on the containerboard side of the business and what you’re assuming for the fourth quarter. [technical difficulty] be a little bit more aggressive on the price front there than what we’re hearing from some other folks in the business.

Well, Mark, our containerboard business has been strengthening. Our survey of our regional managers indicates that the price increases that we have in place will go in. I think, as you well know, the placement of those prices is dependent on the contractual requirements in place, so it’s a staggered implementation throughout the quarter. But we feel pretty confident in getting those increases and maintaining the volumes. Dick or Kathy, do you have anything to add?

I would only add, Mark, that we’re not suggesting it’s easy, but it is our best view at this time, that by the end of the quarter, we will have the $25 box price increase pretty much in place.

The next question comes from Steve [Checlover] of [D.A. Davidson].

Could you give us a little sense of how your [technical difficulty] negotiate settlement on the soft and lumber dispute and how you feel that you might get some resolution? Are you optimistic or not?

Thanks for the question, Steve. The company has always maintained the position that this has to be a negotiated settlement between governments, that it can’t be settled through the imposition of duties, either countervailing or dumping duties.

We’re confident that there’s been enough stress put into the system now, that not only do we have everyone’s attention on both sides of the question from the manufacturers standpoint, but we have serious attention from both governments. So, the Weyerhaeuser Company’s position is we’ll provide facts and data; we’re equally large on both sides of the border and will attempt to provide information and resolution steps that can get us off the precipice here. So we’re trying to take a constructive approach to it, rather than a confrontational approach through trade sanctions.

The next question comes from [Lisa Shawfield] from J.P. Morgan.

Hi. I was wondering if you could update us on the Kingsport ramp-up and how that may affect earnings quarter and quarter? And, also, did I hear you right, that you’re taking any market-related down time, not even in the pulp business?

There are two questions there, Lisa. The first is the Kingsport start-up and ramp up, as we started up the new machine in Kingsport, we immediately took down two other less-efficient machines in the system, so that we would balance out the ramp-up of the new machine. It came on line very quickly and very efficiently. It was within the first 24 hours we were producing saleable paper and it is operating right on it’s start-up curve and it’s running in the range of 800 to 850 tons per day.

With regard to the second part of your question, I’m going to ask Dick Taggart.

We estimate, Lisa, on the tons that have been produced at Kingsport, prior to that, which would be about 160 to 200,000 tons per year, we are saving about $100 a ton – we expect to be saving about $100 a ton once we have smoothed out the start-up which we expect we will achieve very early in this quarter.

I think you also had a question on downtime. In general on the system, and specifically, we regard to market pulp, the current situation on our fine paper machines, particularly in the cut size arena, we have very strong order back logs and we’re only planning our maintenance downtime in that sector.

With regard to pulp, we’re operating normally, but we will not build inventories and will take downtime for maintenance and to curtail production to inventory, as needed.

The next question comes from Mark Connelly of Credit Suisse First Boston.

Just a quick question on containerboard and white paper in general. You’ve announced some system rationalizations. Can you give us some perspective on where you are in that process? Are you pretty much done with your big closures? Should we be expecting more announcements? Is your integration level where you want it? Is your OCC where you want it?

Yes, Mark, on containerboard we’ve completed the rationalization that we’ve announced with regard to machines. Our balance on integration with cut-off with our box plants is at 90 plus percent. So, we feel that we’re in a much better position with exposure to open market sales, both domestic and export.

On the white paper side, we pretty well completed the rounds of rationalization of machines that we had previously indicated. But, everything that we have is on constant analysis for its performance in the system, as well as balancing our capacity to produce against demand for the product. So we don’t have anything current, but everything is constantly under watch.

Your next question comes from Matt [Burler] or Morgan Stanley.

My question has to do with the fourth quarter guidance, and maybe I could break it down in the following way. On real estate, when you say, results of 4Q will be slightly lower than 3Q was that excluding the apartment sale or not? On building products, given your comments that you think you might be at cycle bottom and you will be taking increased downtime, does that mean that you think it’s possible 4Q results could be not much worse or even slightly better than 3Q?

On the Pulp and Paper side, Dick, I think you said results would be significantly better, were the words you used, is that using the $40 million number, second number, that you would get if you added back the Plymouth or are you just referring to the $10 million reported number.

And last, corporate expense, how do you suggest we look at that? We take the 80 some odd million and subtract the [FX], the 85 minus 17, should we use 68 million as a benchmark going forward? Thank you.

Dick, I think that’s a good one for you.

I’m going to try to work through all those changes. First, let’s make sure I got them – on WRECO, the base was the actual earnings in the third quarter. So, the decline was due strictly to the fact that we would not have the apartment sale in the fourth quarter. So when I talked about the decline, it was including the apartment sales. If you exclude the apartment sales from the fourth quarter, there would be very little change in earnings from WRECO between the third quarter and the fourth quarter.

In Wood Products, we were intentionally vague because of the high degree of uncertainty. You don’t know the exact timing of when the market will feel the supply effects of the production adjustments that we are making that others are announcing. And, so, it could go either way. And that’s why we were uncertain. We could be somewhat lower and we could be somewhat better. And it’s really too soon to tell.

Regarding Pulp and Paper, when I made the comment significantly better, I was doing it in reference to our reported earnings in the segment for the third quarter, the $10 million number.

Regarding corporate and others, since the ongoing Willamette transition costs are in that, deducting the 17 million foreign exchange translation is a reasonable assumption to use going forward. I hope I touched all your points.

The next question comes from Rich [Schnieder] at U.B.S. Warburg.

Considering that you announced 750 position reduction under the Support Alignment program, I was wondering if you can update us on where things are on the Support Alignment program on how much you’ve achieved, how much more you want to accomplish? Squeeze in here – could you talk a little bit about your outlook for pulp? You’ve made some just brief comments on that.

Rich, okay. You’ve referred to Support Alignment. That was the internal effort that’s ongoing at Weyerhaeuser to reduce general and administrative expense in the company. The 750-person reduction in work force over the next two years is a part of that ongoing effort. It is not a completion of that effort, but we’re not in a position to release any numbers in terms of savings that we have going forward, at this point in time.

However, it is fair and appropriate to tell you that as we took in the Willamette people and systems, knowing they had simplicity as a model, we’ve taken those lessons to heart and are applying those learnings throughout the company to improve the efficiency of our operations.

With regard to the pulp question, Dick, can you take that?

The pulp markets for us are pretty good for fluff still. Fluff demand is relatively stable. There is increasing competition for fluff as others are seeking to get into that business, but at this point, they’re relatively stable.

We are seeing, because of the higher inventories, particularly in Europe, some softening of demand in Europe and some potential weakness. And that is the market in which we have the greatest concern where there may be some price weakness as we get into the fourth quarter.

In Asia, that market continues to be discounted to the other markets, but that’s not new information. But at this point, Rich, the pulp market is one that we see as potentially seeing some weakness in paper grade pulps in the fourth quarter.

Next question comes from John [Tramasels] at Prudential Securities.

Thank you for your earlier explanation of your pension plan. Forgive me if it’s inspired more questions. Could you explain in the 35% of your plan assets that are real estate and private equity, how much is residential real estate, how much is non-residential, or commercial, real estate and then how much is other private equity, roughly? And then, in the 65% that’s liquid assets, roughly split between stocks versus bonds, and then I have a follow up question.

John, I don’t have the split in the private markets count. It is primarily private equity and there are about 45 different managers in that area and we do not have the breakout of all 45 of those portfolios. We review those periodically with our advisors, and so I don’t have that detailed a breakdown for you.

In the liquid strategy, there are virtually no long bond or long equity managers in that 65% of the liquid strategies that we referred to.

The next question comes from Chip Dillon from Salomon Smith Barney.

Yes, I was just wanting to follow up on the question about the lumber situation. I didn’t know if Bill had any feeling as to why the British Columbian producers are so kind to the U.S. consumers, basically paying us to take their lumber. And how long does he think that situation will last?

Bill, I think that was addressed to you.

Chip, the – you go back to the first part of the year, first of all there was not bad performance in the first and second quarters, and then there was a healthy rebate, you might recall, that many producers are looking at as, basically, a pool to operate from.

There’s a fair amount of determination to lower cost and therefore there’s a great effort to improve productivity and in fact, run those mills out, in order to impact the review process that will take place with the duties at the end of the first year. So it’s an ongoing equation.

What’s happening right today, as I mentioned, is that shipments into the U.S. fell sharply in June and July. They began to pick up again in September, but we are starting to see the impacts of them not being able to carry this situation.

Your next question comes from Mitch [Vocket] of King Street Capital.

In light of the additional details on those [vestes] liabilities disclosed by Georgia Pacific, and also (Needles vakos) disclosure several months ago regarding asbestos, would you be able to provide any color on the asbestos claims?

Yes, I believe that we can do that today. Dick, do you want to give a follow up?

I’d be happy to. Did you know in all of our filings we have not disclosed any asbestos liability? And the reason for that is that we have no material exposure. We do have asbestos claims though and I’ll try to go through those to give you a feel for what they are, and the level of them.

We have claims that occur in four different categories; we have very few product claims, which I’ll tell you about. We have some premise related claims. We have some very old claims for merchant marine, sailors who served on Weyerhaeuser ships many, many years ago and we have some worker compensation claims.

In our product claims, the only product we’ve ever produced that contained asbestos was a fire core, a fire retardant door where asbestos was encapsulated in the door. And, it was not intended to be exposed. There have been a few people who – installers, who sawed openings in the door to install windows or locks and we have 20 cases related this product.

That caseload increased from 12 at the end of the second quarter. The average settlement of those cases is about $5800. We have no reserve established because we don’t have enough experience and we have insurance that’s subject to our normal deductible. This is a product that we produced between 1968 and 1972 and there are not that many doors out there.

In Paper Products, we purchased asbestos on it some years ago and conducted research and no trials incorporating asbestos in the paper, but never produced product and since we didn’t’ produce the product, as the cases related to paper products are coming up, they’re being dismissed for lack of evidence.

We currently have 541 such cases. They have increased by about 190 in the third quarter. As I mentioned, we have not paid any money out for any settlements in these cases, and as they have come up they’re being dismissed for lack of evidence.

We have 27 cases that are premise related brought by people who are not employees but believe they’ve been exposed to asbestos while working at our company facilities. These are largely contractors. This number has stayed constant during 2000, 2002. We’ve had two cases involving spouses and children of employees, who allege to be exposed when asbestos was taken home on clothes and so on. The average case settlement of these since 2000 has been about $10,000. We have insurance coverage, again, subject to a normal deductible.

The marine cases, we have about 1400 cases involving seaman who claim to have been exposed while serving on Weyerhaeuser vessels. Some of these were during the Second World War when the vessels were under the command of the United States Government. There’s been an increase of three cases during the third quarter. The costs have been nominal, as many claimants never served on our vessels, or served on vessels, as I mentioned, that were managed by the government.

We’ve established reserves of $2.4 million for these claims and that’s unchanged since the second quarter. We have marine insurance for these claims with very low deductibles.

We have 399 workers compensation cases involving asbestos. Obviously, this liability is limited by statute. We have a reserve of $17.3 million and 6.2 million has been charged against the reserve through the third quarter of this year, and we have insurance coverage subject to normal deductible. And that is the complete inventory of our current asbestos claims.

Your next question comes from Don Neiman of I Cap.

Good morning. On the pension fund situation, Dick, could you indicate what the returns, actual returns to date, have been through the nine months on four of the pension plans and what you would anticipate for the full year? And could you update us as to what you think the pension income credit will be for the full year?

Don, we, as I mentioned, will not make any estimates as to what the credit will be next year until the fourth quarter. Your ability to project the financial markets is every bit as good as ours and should be better given that’s the business of you all and not us.

We certainly are not immune to what’s happening in the financial markets in our pension funds and I have not yet seen our third quarter reports. So we will continue the practice of reporting our actual returns with our fourth quarter call, Don. But any of you who follow the financial markets can make reasonable assumptions as to what kind of returns people are realizing with that benchmark.

Your next question comes from Mark [Weintrap] of Goldman Sachs.

First, on the lumber market, can you give us a sense of how much you believe the issues are structural over supply versus how much might be CVD related and consequently, whether or not this might be a multi-year type of process to get better in supply and demand or if it can be addressed more quickly? And then, just real quickly, on the pension side, is there potential for any meaningful balance sheet impact with what’s been going on in the market, or not really?

Thanks Mark. We’ll take the pension question first, since Dick was just on that, and then we’ll get the over supply CBD question.

Well, there won’t be any balance sheet impact in 2002 because there will be no change in our pension credit for 2002. This is an annual calculation. Obviously, a reduction in the pension credit, which we would expect to incur next year, if current financial markets continue to behave the way they are, there would be a balance sheet impact as result of lower earnings next year. But there will be no cash effect this year or next year, as we mentioned. So the balance sheet affect will only be felt to the extent that it flows through income, Mark.

With regard to your questions on the lumber markets, are problems a structural over supply question, or is it CBD/AD related? I would have to say it’s both. If we look at capacity, and it depends on who’s measuring the capacity, it’s dependent on the number of ships that you anticipate that a [indiscernible] will run, we’re operating in a market of about 63, 64 billion feet of structural lumber products being consumed a year with capacity anywhere between 71 and 77 billion board feet.

So, in the best of times, there’s structural over supply in the market. That was under some control because of the previous softwood lumber agreement with Canada. Today Bill has adequately described what the perverse impacts of the CBD and AD have done to that market. So we have more than enough capacity in the market place and the unintended consequences of the U.S. government have stimulated operations.

Your next question comes from Bob Sherman, a private investor.

You mentioned two items, if you sold timberlands to reduce your debt $236 million, what’s your planned reduction for debt this year, 2002? Do you see foresee raising capital next year to maintain operation? I’d most like a scenario. And if so, can that be done and still maintain your [indiscernible] rating by S&P?

Okay, the two questions are selling of timber or other assets, and then raising capital expenditures? I’d like Dick Taggart to take those.

Our debt reduction targets for this year were just under $13 billion for Weyerhaeuser Company, excluding the real estate company. Those were the goals that we shared with the rating agencies and our banks earlier this year.

Regarding next year, at this time, we don’t anticipate having to raise new capital for financing the company. We expect to continue to make progress on debt pay down. We may – we do have some debt issues maturing next year that may require entering into the capital markets for refinancing of debt and for managing the liquidity of the company but we don’t expect our debt increased next year.

Your next question comes from Peter [Rushmeyer] at Lehman Brothers.

Thank you. Steve, in your closing comments, you indicated you’ll look to continue to sell non-strategic assets. I presume it relates to timber and possibly other non-strategic assets. I was curious if you could quantify in some way how big a bucket we’re looking at on non-strategic timber lands and how big a bucket we’re looking at on non-strategic manufacturing assets?

Peter, that comment was intended to indicate that we constantly assess both categories of assets as to one, their strategic value to the company, and two, can it be placed at a reasonable price out to someone else? We are in the process of identifying it. We’ve not released any indicative numbers of how much that would be.

I think Dick Taggart’s comments about debt reduction, I think, are the key markers to watch, as we go forward here. We intend to achieve the debt reduction through improved operations of the company and if necessary, the reduction of capital spending, as we’ve already indicating, and including the selling of non-strategic assets. So, the key numbers to watch are our debt.

We have time for one more question.

Your last question comes from Steve Checlover of D.A. Davidson

This might be a long question better done off line, but it seems like you’ve re-stated the volumes for your paper operations and what not. Is there something that we’re missing here?

Steve, why don’t’ I get back to you and walk through it off line?

Just so others will know, there is a slight restatement of the containerboard volumes from second quarter, for the second quarter and that’s to adjust for facilities that have been closed. But we will go off line and reconcile Steve’s question.

Thank you very much for joining us today. Give Dick and I a few minutes to return to our offices and we’ll be available to take any questions which remain. Thank you.

That concludes today’s conference. Please disconnect your lines and thank you for your participation.