威爾豪瑟 (WY) 2002 Q4 法說會逐字稿

Good morning and welcome to the fourth quarter 2002 earnings conference call for January 22nd 2003. Your host for today's conference is Kathryn McCauley. Please go ahead.

Thank you, Jennifer. Welcome to the Weyerhaeuser fourth quarter earnings conference call. I am Kathryn McCauley, Vice President of Investor Relations. Joining me are Steve Rogel, Chairman, President and CEO, Bill Stivers, Executive Vice President and CFO, Dick Taggart, Vice President of Finance and Steve Hilliard, Vice President and Controller.

This call is being webcast at www.weyerhaeuser.com. If you need a copy of the press release, please contact April Meyer at (253) 924-2937. I'd like to draw your attention to the warnings statement in our press release concerns the risks associated with forward-looking statements. Please read the statement carefully, as we will be making forward-looking statements on this call. I will now turn the call over to Steve Rogel.

Thanks, Kathy. Last year, 2002, was a very busy year in which we accomplished a great deal. As you know, on February 12th, we acquired Willamette Industries. The transition process began immediately and has gone very smoothly, even better than we expected. Weyerhaeuser and former Willamette employees are working well together, and they're being very diligent in combining operations to ensure the best practices of each company are captured. I'm pleased to report that we have made great progress.

When we made the acquisition, we laid out several goals: To achieve $300m in synergies in three years, to reduce capital spending and to reduce debt. Business conditions have been more difficult than we anticipated early last year. Nonetheless, we've stayed the course and we're achieving our goals.

We told you we expected the acquisition to generate $300m in synergies by the end of the first quarter of 2005. I'm happy to report that we've made significant progress, and at the end of the fourth quarter, our synergy run rate was $184m, well ahead of expectation for the first full year of the merger. As you know, it takes time for synergies to drop to the bottom line. However, we believe some of the synergies were evident in our good operating performance in the fourth quarter, despite very difficult market conditions. Initially, we estimated capital spending for the combined company to be 1.15b. Once our folks began working together, they found opportunities to reduce spending and still do the projects that needed to be done.

Capital spending in 2002 was $960m, almost 200m below our first estimate. This year, 2003, we estimate capital spending to be at $750m.

Both companies had invested wisely in their operations. Consequently, our facilities are in excellent condition, and we can maintain them at this level of spending. But there is more to it.

When we made our offer for Willamette, you can recall we told you that Willamette had a reputation for engineering, expertise, and I operating prowess. We've been able to beneficially use those skills in reducing the capital spent while improving capital and operating effectiveness.

I'm also very pleased that we achieved our target of lowering our debt at the Weyerhaeuser company level to $12.7b at the end of 2002. By the end of 2003, we expect at the time to be below $12b. Debt reduction remains the highest priority for Weyerhaeuser.

The proposal we presented in November to resolve the Canadian softwood lumber dispute has had an impact, we believe. We were very encouraged by the reactions from all the involved parties. During the coming year, we'll continue our efforts to encourage both Governments to fairly resolve this difficult issue. During the 2,003, we expect the economy to recover at a very slow pace, and our businesses have planned accordingly. The lackluster economic environment, however, will not deter us from staying the course. We will continue to achieve synergies, drive costs out of our businesses and reduce our debt. I'd like to turn the call back Kathy now.

Thank you, Steve. I’ll now review the first quarter including price trends. Net earnings for Weyerhaeuser in the fourth quarter were 57 cents per share, which included unusual items after tax of 16 cents per share. Excluding these items, earnings per share was 41 cents. As outlined in the press release, I'll review these items. A gain of 29 cents per share on the sale of timberlands in Washington state. This gain was net of costs associated with related facility closures and severance.

A benefit of 11 cents per share in insurance recovery for the outage at [Plymouth]. You will recall the outage began after a boiler incident in early May and continued into August. A charge of 10 cents per share for the termination of the former [McBloedel] pension fund for UF employees. A charge of 9 cents per share for Willamette integration costs. A charge of 7 cents per share for facility closure costs. A benefit of 2 cents per share due to less depreciation as a result of the adjustment of the Willamette acquisition.

During the fourth quarter, Weyerhaeuser incurred 23m of countervailing and antidumping duties and related charges. For the full year in 2002, total charges amounted to 64m.

I will now review price and volume trends in the quarter by business line. The changes will be averaged Q4 price changes versus Q3. Export log prices rose 4.3% in the fourth quarter. Volume also was higher.

Domestic log prices and volumes were flat. Lumber prices declined $4 per thousand board feet and shipments fell off 6%. Plywood prices decreased on average $5 per thousand square foot and shipments were flat. OSB prices dropped $2 per thousand square foot on flat shipments. Market pulp prices decreased $17 per ton in the fourth quarter. However, shipments rose over 10%. Uncoated free-sheet prices rose on average $30 per ton and shipments were seasonally slow. Containerboard prices increased $7 per ton. Containerboard mills took 35,000 tons of market-related downtime and 4,000 tons of maintenance downtime in December. Box prices rose 2.3%. And OCC prices dropped $38 per ton in the fourth quarter. I will now turn the call over to Dick Taggart.

Thank you, Kathy.

As we enter the first quarter, as Steve indicated, we expect to see the effects of a slow global economic recovery. We're planning for a weakening U.S. dollar and continued strong residential homebuilding.

We have continued uncertainty in our wood products markets , and as I discussed the market outlook for the next quarter, I'm going to make comments on earnings that will be the result of changes in market conditions. Because of the significant change in pension-related income and expense, I will discuss the segments excluding any pension effect, then summarize the effect at the end of the market outlook for each segment.

In the wood products market, we've we typically see spring improvement due to the seasonality in homebuilding. Because of the uncertainty around industry supply and inventory levels, that increase may be minimal this year. Prices in recent weeks have been inching higher, but it is uncertain how many strength there will be. We do expect OSB prices to improve more than lumber, as that business does not suffer from the same oversupply problems. At today's prices, we would expect losses in the Wood Products segment to be slightly lower n the first quarter than we experienced in the fourth.

In the timber land segment, we are experiencing slightly lower log prices in the west both for export and domestic markets, and we are expecting lower timber land sales in the first quarter than in the fourth. In the fourth quarter of the year, the company, as it does periodically, funded the foundation by making a contribution of timberlands. That does not affect earnings, but it affects the earnings in the segment, and then it is subsequently reversed in the corporate and other expense. That amount in the fourth quarter of the year was about $10m.

In addition, we expect timberland sales from our regular trading activity to be approximately $20m lower in the first quarter than in the fourth.

Pulp and paper earnings are expected to improve modestly from fourth-quarter levels. Pulp prices are improving slightly while paper prices are expected to remain stable. Shipment volumes in the first quarter market, pulp are expected to be lower in the fourth with paper shipments steady.

Containerboard packaging earnings are expected to be slightly lower in the first quarter of the year, primarily due to higher levels of both maintenance and market-related downtime. We are currently experiencing significantly more downtime in the first quarter than the fourth. We have 40,000 tons of maintenance downtime scheduled in the first quarter, and if shipment rates don't improve from the current level, it will be necessary to take approximately 100,000 tons of market-related downtime. This downtime is being driven not by weakening markets as much as the productivity improvements Steve referred to from the synergies we're achieving in combining the two companies, in spite of having permanently closed 700,000 tons of Containerboard capacity.

Box prices are stable in the U.S. The demand remains relatively weak, and export liner prices are under some pressure. The residential homebuilding business continues to be strong. Ending this year with a continue strong backlog of sold homes he we have yet to build and sales rates continue to be above year ago levels. Volumes are expected to improve slightly in the first quarter, while margins are expected to decline modestly due to the regional mix and increases in some land prices. Earnings in the fourth quarter are expected to be -- in the first quarter of this year are expected to be similar to the fourth quarter of last year.

The Willamette integration costs are expected to continue at the rate of about $15m a quarter next year. As we noted in our earnings release, our agreement with Evergreen Timber Trust for the sale of timberlands from western Washington has expired. And we are in discussion with other interested parties on that timberland, and we expect to sell those timberlands this year.

As noted in our press release, the book accounting for our qualified defined benefit pension plan will result in an after-tax expense of approximately $20m in 2003. This compares to an after-tax credit to income of approximately $107m in 2002. Funding requirements will not change significantly. We made an $11m contribution to our Canadian fund in 2002, and we'll make a 13m contribution in 2003.

Based on advice received from investment advisors we have lowered the long-term assumed rate of return rate of persons to 9.5% from 10.5%. This is based that 60% equities 35% bonds and 5% cash will earn approximately 6.5%, and that our structure and strategy will outperform this benchmark by approximately 3%. Our actual performance over the last 18 years has been significantly above this, and our out-performance of that benchmark has been approximately 6%. Additionally. We have lowered the assumed discount rate to 6.75% in the U.S. and 6.5% in Canada.

Our release shows the annual after-tax effect for each segment and the distribution of that effect by segment. As you know, this is reported by segment and is reported embedded in our earnings on a pretax basis. To help you with your estimates for the first quarter, I will give you the change in the pension credit between the fourth quarter and the first quarter by segment. In timberlands will be $2m, Wood Products 20m, containerboard packaging 13 approximately, pulp and paper 8, real estate 1, and in corporate and other 4. With that brief overview, the first quarter, we'll be happy now to take your questions.

Jennifer, could you please open the floor up to questions.

Yes, thank you. We will now begin the question and answer session. In order to ensure that as many participants as possible can ask questions, we will take only one question at a time from each caller. Participants are welcome to rejoin the queue if they have additional questions. To place yourself into the question queue, please press star 1 on your touch tone phone. If you're using a speakerphone, please pick up our hand set and then press star 1. If you had like to by the draw your question, do so by pressing star 2. Please go ahead if you have any questions.

And the first question comes from Mark Connelly. Please state your company.

Hi. This is actually Dohyun Cha filling in for Mark. I had a quick question first on synergies. If you can somehow quantify by segment what the benefit from synergies were from the third to the fourth quarter and just a quick update on what your inventories in Containerboard look like at the end of the quarter and whether or not you thought it was high, low, et cetera.

We have not disclosed the synergy change by segment, but let me talk about that they are heavier to pulp paper and packaging and to the fine paper business. And timberlands, they've had very little effect in wood products, though there has been some. Regarding Containerboard inventories, they did not change as much as we had expected in the third quarter because of the higher production rates than expected, and that's why we have increased our planed downtime for the first quarter. But they did not increase significantly. They stayed relatively -- relatively flat at the mills and increased somewhat at the box plant.

So is it the goal to get inventories down further by the end of the first quarter?

Yes.

Can you quantify that at all?

No, I can't. Not at this time.

Thank you.

Next question?

And your next question comes from Chip Dillon. Please state your company.

Yes, hi. Chip Dillon, Salomon Smith Barney. Can you please reconcile your press release that says you earned $1.34 from operations with what we have been carrying all of us on first call for the whole year? If you add up the numbers plus the 41 cents you've get 1.18. 27 39 11 41. And again, there seems to be some confusion as to how you get to 1.34.

Chip, I don't have that reconciliation right in front of me, and it will take a minute or two to do it. And, so, we'll either come back to it later in the call or we'll have to follow up with you.

Yeah, we'll have to see what the difference is with first call because, as you know, Chip, there are items carried in first call that are treated somewhat differently. So let us kind of look at the reconciliation and get back to you on that.

Thank you.

And your next question comes from Rich Schneider. Please go ahead.

Rich Schneider Yeah, Dick, you had mentioned about Wood Products and seasonally, you know, first quarter is usually somewhat better than the fourth, yet you said that supply inventory situation appears to be a little more difficult. Could you go through that situation and could we be looking at this being somewhat of a conservative view on your part, or what are you exactly seeing out there?

Well, Rich, the uncertainty is there is no reliable data on how much inventory exists in the lumber business, and what the inventories in the pipeline are. And, so, what is unknown is whether or not there will be any price response to the normal, seasonal demand that will obviously come, given the strong rate of housing starts that we have seen.

And that's why we're very cautious about the outlook. In OSB, there doesn't seem to be the same level of inventory and so we're a little more optimistic that we will see some price improvement in that area. But the uncertainty is simply around the lack of any data and the concern that there may still be some significant inventories of lumber, particularly Canadian lumber that is not yet sold.

What's different about this year than others? Just the mess with the duty situation?

Yeah, what's different is simply the unintended consequences of the duty that producers continue to run full in order to drag down costs to minimize the antidumping duty that will be determined upon audit at the end of the year. And that is resulting in -- has resulted, through most of this year, of inventories being built and production being built beyond the normal response of the industry to changes in market demand.

Thanks.

Next question?

The next question comes from Pete Ruschmeier. And please state your company. Thank you.

Thanks. Pete Ruschmeier with Lehman Brothers. Congratulations on a good quarter.

The questions I have relate to the timber business. I was curious if you could give us an update on where your manufacturing facilities are on self-sufficiency, on fiber and where that may go over time. And related to that, if you have any updates on your timber harvest strategy, and I'm really talking over a long period of time, I'm looking over the next three to five years, do you have much of a change in your harvest schedule based on the maturity of your lands in the south and also the Willamette was expected to step up their harvest plan as well.

Pete, it's Steve. I'll try to tackle that question. First, with regard to timber self-sufficiency. Of course, in Canada because the mills are tied to timber licenses, they're all fully self-sufficient. If you swing to the western U.S, we have 100% self-sufficiency in the west. Much less so in the U.S. south. They’re predominantly a purchaser of outside supply. But there is where the growing supply of our own plantations come into play. We are and have been for the last couple of years beginning to harvest that so-called wall of wood that we've talked about for many years. The first harvests are thinnings, commercial thinnings. We're processing that through our facilities today, but we're, at the moment, investing in modifications to our facility set in the mid south in order to accommodate the increased harvest and specifically the diameters and lengths we'll be receiving, we're adapting the equipment to it. So that harvest is underway and will pick up in following years.

Okay. Related to that, I guess, the 750m of cap ex, does that include spending on timber, and if not, could you indicate what that is.

That includes spending on reforestation and roads. It would not include any small timber land purchases we might make to block up our existing ownership.

But generally those small purchases are 1031.

Yeah, 1031 tax exchanges so they're kind of self funding. They include capitalized interest, IT spending, property plant and equipment and normal reforestation.

Great.

And your next question comes are from Lise Shonfield.

, J.P. Morgan. I have got a question on timberlands. If you strip out the one-time gain from the 3 -- I think it's 318, you get – I’m wondering if you could reconcile the 138 up to the 201 by going through kind of pricing volume and perhaps additional timberland sales that you had in the quarter. And also on sort of a related issue, could you take us through why your guidance for the one-time gain was -- guidance was initially 97m, and I think you came out today saying it was 65. Was that due to the fact you didn't sell all of the timberland you expected to in Washington?

Well, Lise, this is Dick Taggart. Let me tackle those two things as best we can. First, in terms of the reconciliation, the 201, if you take out $10m that I mentioned for the contribution of timber to the foundation, you get to the 191. The timberland sales, as I indicated, were about $20m higher than the normal level. We get to the 171. The change then from the 138 to the 171 is largely due to a seasonal increase, as we've mentioned a number of times, normal seasonal increase in volume -- harvest volume and related log sales in the fourth quarter relative to the third. Our export log volume -- sales were up almost 25%, and pricing was reel relatively steady. So most of it was the normal seasonal volume increase third quarter to fourth.

Thank you. That's very, very helpful.

Related to the gain on the timber sale, the original estimated gain was, as we stated, an estimate, did not include a step up -- a book step-up in basis of the timber that occurred when we blended the Willamette timber that we acquired with our western timber, which we do to pool -- create the depletion pool, and did not include some of the expenses associated with the transaction that were incurred in structuring it as an installment sale. The cash proceeds did not change; and, so, the cash flow from the acquisition did not change and the contribution of cash-to-debt reduction did not change.

Thanks very much.

And your next question comes from Mark Weintraub.

Goldman Sachs. I think Dick had a brief mention about the weaker dollar, and I was just curious as to whether or not you are seeing any impact in any of your businesses from the week evening in the dollar, and where would you be expecting to see that benefit first?

Well, Steve will comment on that.

Mark, I think we are beginning to see it in pulp, particularly, because of the closure of the dollar with the euro, and that's helpful to us. With regard to the Canadian, U.S. dollar, of course, there's not been that much change, so we don't see much impact there.

Okay. And real quickly, on corporate expense, even if you make the adjustments for the foundation contribution and the McBlow pension charge, was a pretty high number in the fourth quarter. If you can speak to that and give us an sense of what an appropriate baseline is for '03 to '03 to be using.

If you make the adjustments in the corporate expense you have to take out the MB tension charge, also the Willamette integration which is 23m, The foundation reversal, so that takes you down to something a little below 70m.

And for a baseline for '03?

I think that's a reasonable starting point. We, as connected -- as I said, we expect at $15m in ongoing Willamette integration cost, we expect. And, so, that would probably take that number on an ongoing basis between 65m and 70m.

Super. Thank you.

And your next question comes from Mark Wilde. Please state your company.

Mark Wilde with Deutsche Banc. Dick, Steve, I wonder if you could talk about the currency issue, about other businesses that you think may start to see some effect from a weaker dollar if the dollar slips further through the year, lumber, Containerboard prices, things like that.

Well, Mark, the -- we're beginning to see the benefits in other currencies, not just the dollar, to the strengthening of the euro that's making us more competitive for example with lumber in Japan. We're seeing it in Japan with log prices remaining stable to actually, in some cases, improving modestly, even though market demand has not changed that much. You begin to see it a little bit in how it affects all of our key export markets, whether it's OCC or liner board. But it's not as pronounced or dramatic as we see it in this -- as Steve indicated in pulp. Lumber imports from Europe has been making some inroads into the U.S. Those are beginning to slow down. And, so, we're seeing it, you know, on the margin in a number of places, but as I mentioned, not as dramatically as we see it in pulp.

One of the things you had mentioned were kind of export containerboard prices still coming down in the fourth quarter, and it seems like the dollar should start to have some impact there as well.

Well, a couple of points there. For us, we've curtailed exports of liner board to a great degree, and the main export market for us would be into Asia, particularly China. So there hasn’t been that significant of a change. What's going to drive demand, I think, from China is their soaring production of goods, outstripping what they can produce on their own for liner board.

Okay. Steve, would you care to make any kind of estimate about the productivity gains that you guys mentioned on the call here in terms of what you picked up when you put these two containerboard systems together? You talked about how your volume has been stronger than you expected even though you shut down nearly three-quarters of a million tons of capacity. Can you put a number on that, a 3% gain or 5%?

Well, pretty close. Actually, in Containerboard, you can use a number of roughly 6% of productivity improvement. That stems from things like grade rationalization on mills and machines, but more so it's the transfer of knowledge, the running -- the core system mills at much better run rates and efficiencies than we have in the past. And a particular example would be our Valiant, Oklahoma mill. We've just had a tremendous improvement in productivity in the last year in Valiant.

Thanks.

Your next question comes from Steve Chercover.. Please go ahead.

Good morning. Back in December, as I recall, you gave us some guidance that earnings would come in around 50 cents, of which 25 cents would be extraordinary items or one-time items. And you've come in with operating earnings at 16 ahead of what we would have expected, and the extraordinaries are a little bit lower. Can you flush out the big changes there on the operating side?

Steve, this is Dick Taggart. I don't know that there were any big changes. The largest might have been the higher-than-expected export log volume, in that we had one ship sale that we hadn't expected, and that's a significant number that was booked in '02 that we thought would be in '03. But other than that, we didn't anticipate the adjustment to the purchase price that had a net benefit of 2 cents from a depreciation standpoint at that time. That work was still in progress. Beyond that, we just had -- every business was just a little bit better than we expected. We just saw improvements kind of across the board.

Okay. Can I ask one other quick one to make sure I understand what you've given us on the pension side?

Uh-huh.

If I understand correctly, it's worth approximately 48, 49 cents in earnings in '02, and that will go away a little bit more in '03. Is that right?

That's correct.

Okay. Thanks so much.

Your next question comes from John Tumazos.. State your company.

John Tumazos from Prudential Financial. In various basic industries, many companies are changing their pension expense or balance sheet items such as yourselves. It is more common for the balance sheet change to be larger than the current year income statement change, commonly by a ratio of 5 or 10 to 1. You may notice that IP's guidance was $100m change up in current year expense and 1.5b hit to equity. Alleghany Technologies had $120m change in current year expense and a $600m hit to equity. Yours is most unusual with 190-year current pretax effect swing that only $110m hit to equity. Unique complications in your case of the Weyerhaeuser Willamette merger, Canadian versus U.S. plans, the shift from an assumption of 600 to 300 basis points of [out performance] return, could you somehow explain why the hit to the balance sheet is so small in relation to the size of your company?

Well, John, I have not done an analysis of other companies, and so I don't know how to comment on other companies. I have looked at IP's. I think that what you will find is that, given the GAAP accounting of pension funds, deferred gains and deferred losses are amortized over some period of time and, at certain points, you have to recognize those deferred gains or deferred losses. Some of the companies I'm familiar with that you mentioned had large deferred gains that they reached a funding point that they had to recognize those deferred -- they had deferred losses that they had to recognize. In our case, we had deferred gains because we were significantly over-funded. And, so, we did not have significant deferred losses that had to be charged to shareholders' interest.

So you have a current funding requirement without having a [bath] loss that you have to take to equity?

Well, no, we had a $13m funding requirement --

I'm saying future, not past.

Future being -- 2003, we will have a funding requirement of $13m, and for our Canadian plans, and we don't expect to have a significant equity adjustment at the end of this year at this time. The equity adjustment is largely related to Canadian plans as well, with many of which -- most of which we've acquired in the last two to three years.

So the absence of prior book gains on assets being erased prevent you from amortizing a gain in the income statement, and that's why the income statement effect is large and not the balance sheet?

John, I'd have to work through the details of this with you off the call.

Certainly do. Please call me afterwards.

Your next question comes from Craig Ransom and please state your company.

J.P. Morgan. Can you talk about the debt reduction? There was a pretty big number for debt reduction in the quarter, where that cash flow came from. Was that working capital? Just provide some color on that, please.

Craig, I think the balance sheet is attached, and as you will be able to see from the balance sheet balance, attached to our earnings release, you will be able to see that we did have a significant reduction in working capital.

Okay.

We had the proceeds from the sail of timber in the fourth quarter.

Right.

And we had significant earnings and cash flow from our real estate business.

Okay.

To the parent company.

Okay. So cash from the operations side, mostly from the real estate business?

That's correct.

Craig Ransom Okay, great. Thank you.

And your next question comes from Don Roberts. Please go ahead and state your company.

CIBC. Focusing on the white paper business, the industry stats still look pretty I anemic there and yet you’re getting some decent numbers. Could you give a little more color in terms of the breakdown of the different segments where it looks the demand looks both on the pulp and printer side. And how comfortable you are with order books and so forth.

Sure, our fourth quarter outlook is stable. We’re not predicting great growth but I think our plans are to hold onto the gains that we made there In the printing business was differential by the type of market that we're in, but generally positive.

And the order book said they had been expanding over the last month or so for the printing, do you find?

The order books look quite good on the printing side, Don. That part of the business has a little bit of a seasonal slow in the fourth quarter, but it looks pretty good.

Thank you.

And your next question comes from Chip Dillon. Please go ahead and state your company.

Yes, Chip Dillon again. I think the answer to my question might be that you are now including the loss from the disruption in Plymouth in the third quarter of 9 cents, and you never said what it was in the second quarter but I'm guessing it was 5 cents. -- Because that's the differential between what first call has and --

I think we can reconcile the numbers, but I think that's probably it.

So you just need to verify if the second quarter Plymouth hit was 5 cents The question I have is simply this, and you may have answered it, when you guide us in the press release and the conference call to a change from the fourth quarter levels, are you including in that guidance the pension differences that you mentioned? In other words, were you, for example, should we take the fourth quarter wood number take off 20m and then assume it's whatever your guidance is, or do we take the number as it's stated as from operations in the fourth quarter and then assume that's the base?

Chip, I think when Dick gave his guidance, what he said when he was giving the guidance in two parts. He was giving the outlook for the business X pension adjustment, and then he gave you the items for pension adjustments in the second part of his discussion.

Okay. At least where it says the first quarter earnings, you're expecting to be unchanged in the fourth quarter from the real estate business, and I know it's a small number. We should, first of all, subtract a $1m from the fourth quarter's 81 and start with 80 and use that as the base from which you're talking about?

Yes.

Okay. Thank you.

Thank you. And our next question comes from Lise Shonfield. Please go ahead and state your company.

J.P. Morgan. Thanks for having me on again. Just a couple of financial questions. The first one was just you look like you've capitalized a bit more interest this quarter than you have in prior quarters. Can you give us some color on that, and can you also give us guidance on the tax rate going forward?

The overall capitalized interest for the year was 50m. The capitalization based upon the construction and construction projects during any given one quarter.

The capitalized interest, Lise, will tend to be higher when we have large projects over a long-term duration such as the Kingsport machine, and so on. And smaller when our capital spending is associated with smaller short-term projects.

It looked like 29m capitalized interest in the fourth quarter versus a run rate of 16 in the second quarters. Do we use the 16 going forward or is the 29 the new base.

I don't have that detail in front of me. I will have to follow up with you on that.

Okay. Any comments on the tax rates?

The tax rate going forward will be slightly higher this year. It will go from 35% to 36%.

Okay. Thank you.

Thank you, and your next question comes from Pete Ruschmeier. Please go ahead.

Thanks. Just a quick follow-up. I was curious if you could comment on Kingsport in terms of how it's progressing up its learning curve versus your expectation; how the manufacturing costs at that facility look relative to your expectations. That will be helpful. Thanks.

Okay. I'll try to take that one on. The paper machine came up a little after mid-year. It is running extremely well. It is at its production curve, actually slightly above it, but it is running pulp limited. That mill had a rebuild strategy in stages, so it is running with the older pulp mill being supplemented with pulp from the outside from our other pulp mills in the system. We don't expect the startup until in the second quarter late of next year, and at that point, the mill becomes self-sufficient and the machine can take another step in its production curve. But basically, it's performing extraordinarily well.

Okay. And perhaps a related question. Some of your competitors have struggled with distribution businesses and paper, but they nonetheless have a capital source of demand for their output. You have a different type of situation. Could you just describe from a strategic point of view what your strategy is for distributing and selling a product, whether that's going to change in the future.

I think you're referring to white papers.

Yes.

Okay. Well, we had two systems that we put together. We had the Weyerhaeuser system and the Willamette system. Weyerhaeuser had a mix of going to market utilizing merchants and, to some degree, going direct. On the other hand, Willamette had been a direct seller, primarily of commodity products, not utilizing the merchant houses. As we go forward, I would say the strategy is a blend of the two. We are going to go to the market directly where it makes sense and we'll use the merchant community to go to market where it makes sense to use the merchant in dealing with many of the smaller customers, the inventory and the billing considerations that always come into play when you use a merchant. So we'll have a blended system that uses both direct and the merchant houses, but the percentage that's direct has gone up as we acquired Willamette.

Okay. Great. Thanks.

This is Dick Taggart. In response to Lise Shonfield's question on capitalized interest, I'm not sure what she's looking at. But if you'll look at the schedule attached to the earnings released shows the capitalized interest for the year remains relatively stable after acquiring Willamette. First quarter was $4m. The second quarter 16. The third quarter 16. The fourth quarter 14, for a total of $50m for the year.

And your next question comes from Mark Connelly. Please go ahead and state your company.

It’s Dohyun again. I just had a quick question on timber land's business if you could give us any better guidance as to how we should be modeling it, the kind of swing that we saw this quarter, you know, [$16m] is about 15 cents on the bottom line, and I'm wondering what we should expect in ’03, if you could give us any better guidance on the seasonality. And just a quick housekeeping question on the one-time charges this quarter. You had $19m after tax on Willamette integration. I think, Kathy, you said it was 23m pretax. And I was wondering if you could give me the pretax impact of the $15m of closure costs that you had and which segments that affected.

Probably I think on the individual items I'll have to get back to you on that because I have the after-tax numbers here. On the timberlands, I think Dick walked through the timber land differential and another question reconciling the number. Basically we get down to a number that is about 170 if you back out all the adjustments and perhaps a little better item. And we commented that the third quarter is always a seasonally weak quarter, and this is largely because of fire -- fire issues in our western timberlands. And, so, typically the fourth quarter is a lower quarter -- excuse me -- the third quarter is a lower quarter and the fourth quarter is a more normalized quarter. And I think you will just have to look at the fact that we had better export volumes and prices, and our guidance is that we don't expect prices in export volume to be the same in the first quarter.

Okay.

I think what wasn't said, and qualitatively, there has been a synergy gain with the addition of the Willamette lands to the Weyerhaeuser lands. We've been able to rationalize the costs better are where the logs flow to in terms of a mill keeping logistics costs lower. Operationally, it's helped up in the export program in the west. And in the U.S. south, the northern Louisiana lands of Willamette are being integrated in with the Weyerhaeuser lands in Arkansas and Oklahoma to feed the mill system through there. And we're seeing a synergistic effect.

Very helpful. Thank you.

I think that concludes our conference call. We're out of the time available. We want to thank you today for joining us on the conference call. And if you have any additional questions, Dick and I will be available to take the questions throughout the day. Thank you and have a good day.

Thank you. This concludes today's conference calls. Please disconnect your lines, and we thank you for your participation--- 0