威爾豪瑟 (WY) 2003 Q1 法說會逐字稿

This conference call is being recorded. Welcome to the Weyerhaueser conference for April 25, 2003. Your host for today's call will be Kathryn McCauley. Ms. McCauley, please go ahead.

Thank you, Michelle. Welcome to the Weyerhaeuser first quarter 2003 earnings conference call. I'm Kathy McAuley, Vice President of Investor Relations. Joining me on the call today are Steve Rogel, Chairman, President, and Chief Executive Officer; Dick Taggart, Executive Vice President and Chief Financial Officer; Steve Hilliard, Vice President and Chief Accounting Officer; and Bob Dowdy, Vice President and General Counsel. This call is being webcast at www.weyerhaeuser.com.

If you did not receive a copy of the press release contact April Meyer [ph] at 253-294-2937. Please read the warning statement in our press release concerning the risks associated with forward looking statements as we will be making forward looking statements during this conference call.

Weyerhaeuser reported a first quarter 2003 net loss of $54 million or 24 cents per share which included the following after tax charges: Five cents per share for the cumulative effects resulting from the adoption of FAS 143 which relates to asset retirement obligation. 23 cents per share for reserve related to the Northwest Alder lawsuit which Weyerhaeuser plans to vigorously contest. 8 cents a share for [indiscernible] integration cost. And 7 cents per share for the previously announced closure of the Millport, Alabama, plywood mill.

During the first quarter countervailing [ph] and anti-dumping duties on software lumber Weyerhaeuser exports amounts to the U.S. amounted to $24 million. Due to weather induced raw materials constraints in the U.S. south, downtown time was taken at five sawmills. In the first quarter container board mills took 181,000 tons of downtime, 141,000 thousand tons of downtime was market related and 40,000 tons were for scheduled maintenance. During the second quarter container board mills will take 40,000 tons of regular maintenance downtime and expect to take 28,000 tons of market related downtime for a total of 68,000 tons, that's in container boards. During the second quarter, fine paper mills are projected to take approximately 41,000 tons of downtime; 18,000 tons of scheduled maintenance and 23,000 tons of market-related downtime to balance orders with production for a total of 41,000 tons in fine paper.

I will now review price and volume trends in the first quarter versus fourth quarter 2002. Export log price realizations declined 2.6%. Realizations were adversely affected by higher ocean freight cost. Export log volume declined 30% from fourth quarter. Fourth quarter shipments were exceptionally high, I should note. The West coast port lockout pushed third quarter shipments to the fourth quarter and in addition Japanese wholesalers moved first quarter orders into the fourth quarter. Domestic log volumes rose 4.2% from fourth quarter. Prices, however, were flat. Lumber prices were on average $4 per thousand board feet above the average of the Q4 price. Lumber volumes increased 1.8% in the quarter. Average plywood price were $3 per thousand square feet below Q4 level. Plywood volumes rose 2% in the first quarter. OSB prices were $25 per thousand square feet higher than in fourth quarter. ASD, however, volume was flat due to weather-related problems.

Market pulp prices increased $30 per ton during the quarter, that is from January to March. Shipments declined 9.8% from fourth quarter. However fourth quarter shipments were high due to Q3 shipment delayed by the West coast port lockout. Ship availability also was very limited during the month of March. Consequently, shipments were low for March. Uncoded free sheet prices declined 8% per ton from the fourth quarter. Shipments were flat. I'm sorry, $8 per ton. Container board prices declined $5-6 per ton from the fourth quarter. Shipment volumes dropped 6.8%, reflecting 181 tons of downtime taken in the first quarter. Box prices were flat in the quarter and box shipments increased 1.9% from fourth quarter. OCC prices were flat.

I will now turn the call over to Steve Rogel. Steve?

Thank you, Kathy and good morning. Business conditions were very challenging during the first quarter. Nonetheless, we worked diligently at Weyerhaeuser on our goal of capturing synergies and improving capital efficiencies to meet our debt reduction targets. At the end of the first quarter, we estimate we reached an annualized synergies run rate of $261 million pretax. You may recall our goal was to achieve $300 million in synergies over three years. We are clearly well ahead of schedule and now expect to achieve our target synergy level much sooner. Synergy improvements were, however, offset by higher energy, transportation, health care and pension costs. Healthcare costs are rising $10-15 million per quarter. At Weyerhaueser we generate two thirds of our energy requirements, however, we have seen purchased energy costs rise. Natural gas costs alone were $40-45 million higher than in the first quarter of last year. As a way to further lower cost, we have been working on opportunities to boost energy self sufficiency.

In January we started up a joint power project at Grand Prairie that is estimated to save about $6 million a year in energy costs. At Kamloops [ph] and Port Wentworth, [ph] other energy-saving projects are underway. As with the energy example, we are looking for cost savings opportunities throughout the company while controlling those costs that are indeed controllable. Speed, simplicity and decisiveness as well as frugality have become watch words at Weyerhaueser.

Manufacturing efficiencies continue to improve. As we reconfigure our larger manufacturing systems and as we take advantage of [indiscernible] expertise, our container board and white paper machines are running 6% to 9% respectively above projected operating rates. This does lower our operating costs, however, with demand sluggish in both container board and fine paper markets, we are taking market-related downtime to balance production to orders and to not build inventories. We will continue to review our manufacturing systems to assess if further permanent rationalization is necessary. Over the next few quarters, regardless of business conditions, we expect you will see the benefits of the synergies that we've captured. The efficiencies in operation and reduced support service costs.

We remain focused on our number one priority. Our commitment of repaying our debt. In the first quarter, our debt increased approximately $300 million. This was due to a seasonal working capital build of just over $400 million. Our working capital typically peaks in the March-April period, thus we expect to see meaningful progress on the debt reduction goal in the second quarter.

During the quarter, we made a member of management changes. Rich Hansen, who many of you know, has been named Chief Operating Officer. Rich has an excellent background for this job with wide company experience. In addition heading up timberlands, Rich also ran the Willamette transition. Rich will take on operating responsibility which frees me up to focus on developing the long-term strategic direction.

I would like to turn the call over to Dick Taggart. Dick was one of the recent promotions. He was named Executive Vice President and Chief Financial Officer replacing Bill Stivers who will reach the mandatory retirement in June.

Thank you Steve and good morning. While Steve mentioned the economy being sluggish in the first quarter, we are seeing signs of improvement in a number of our businesses. At this time however it is difficult to say whether it is anything more than normal seasonal improvement in these businesses. As we enter the second quarter, the timberlands business remains relatively steady. Export and domestic volumes are expected to be slightly higher than in the second quarter than in the first. Prices are expected to be flat in both the export market and in the southern domestic market. In the West we expect prices to be somewhat lower. Operating earnings in the timberlands business are expected to be in line with the first quarter levels.

We will experience a significant gain of approximately $143 million on the previously announced sale of the western Washington Tree Farm which we have sold that will close in the second quarter.

In wood products, prices have been improving in the last few weeks, particularly in Orient Stranborne [ph]. Improved pricing along with seasonal improvements in demand will result in improved second quarter wood products earnings. Segments earnings, however, will continue to be impacted by countervailing [ph] and antidumping duties on softwood lumber the company produces in Canada and ships to the United States. These charges are estimated to continue to be between 25 and $30 million a quarter. We will continue to rationalize our wood product systems and expect additional charges as we make decisions on the sale closure of facilities.

Pulp and paper earnings in the second quarter are expected to be better than the first. The segment will benefit from rising pulp prices and somewhat lower energy costs. Fine paper products and shipments are expected to be flat. We believe an improvement in the economy is essential to lead to increased advertising in order for fine paper demand to improve. To balance orders with production and manage inventories to our target levels as Kathy mentioned earlier we will take an estimated 41,000 tons of downtime in the fine paper system. Earnings from container board packaging recycling are also expected to be slightly higher in the second quarter. Container board demand has been steady and export liner board prices have increased. Packaging volumes will be seasonally stronger particularly in the produce markets where we have a strong market position. We expect pox box prices to be modestly lower. Improving business conditions and lower energy prices will be partially offset by higher OCC costs and the 68,000 tons of downtime which will be lower than the amount of downtime as Kathy noted in the first quarter.

Business conditions for the real estate company continue to be excellent. March traffic was strong. The backlog of sold but unclosed homes slightly increased to about six months. Second quarter earnings will be lower than the first quarter however. The first quarter was positively impacted by the sale of an apartment project and two office buildings. In addition, some single family closings will be shifting to the second half of the year due to production impacts of the scheduling of closing and opening of new projects in California.

In the first quarter, the company benefited from a positive foreign exchange gain resulting from the appreciation of the Canadian dollar versus the U.S. dollar. As the Canadian dollar strengthens, we have a positive balance sheet effect and a negative operating cost effect. In the first quarter, we had a net after tax gain of approximately $18 million and we expect approximately a $5 million after tax negative currency impact in the second quarter.

As noted on the fourth quarter earnings release information, we experienced a change of approximately 14 cents per share in pension-related income and expense between the fourth quarter of last year and the first of this year. With minor trueing in the second quarter, we expect our pension expense to remain at this level throughout the year. One note, is if you adjust for pension-related income, earnings from operations in the company improved in the first quarter from the fourth quarter of last year.

In the first quarter, we experienced an increase in debt as Steve mentioned of approximately $300 million, which was entirely due to financing the normal seasonal build in our working capital which was approximately $400 million. Traditionally this working capital peaks in the March-April time period and will remain flat in the second quarter and decline in the third and fourth. And we would expect that pattern to occur this year.

Our capital spending in the first quarter was approximately $141 million which is consistent with our target of $750 million this year and represents 44% of our DD&A. Willamette [ph] integration cost we expect to continue to be approximately $20 million per quarter through the first quarter of next year when we end the scheduled payment of some of the severance and change in control costs.

In summary, we continue to adjust our prediction manufacturing systems to changing market conditions. We are at -- the underlying efficiency or our company continues to improve. We're experiencing modestly better pricing in a number of our businesses we expect to translate into improved earnings from our operations in the second quarter compared to the first. And we can expect to continue to make meaningful reductions in our goal to reduce our debt.

With that brief overview, we will be happy to turn the call back to Kathy to lead the question and answer session.

Michelle, I think we are ready to take questions. I would ask that questioners to please try to restrict yourself so we can get all the questions answered. Thank you. Michelle?

We will now begin the question and answer session. Thank you. The first question is from Chip Dillon. Please state your company name.

Smith Barney. Good morning. Dick, you were saying towards the end of your presentation that there was an 18 cent after tax gain that would turn into a 5 cent loss. If you can repeat and clarify what you were referring to. It may be the foreign exchange, but we don't know what the dollar will do in the next three months. Secondly, If you can tell us where in your statements of segments where the integration cost of about $20 million showed up this quarter and what you consider to be the after tax impact this quarter.

Thanks Chip Dick?

Chip, what you are referring to, the 18 -- the foreign exchange effect was not 18 cents, it was $18 million. So, that would be something under 9 cents, closer to 8 cents per share. We experienced, when a Canadian dollar strengthened, a positive foreign exchange translation on U.S. dollar held in Canada and the Canadian dollar intercompany receivable in the U.S. At the same time our operating costs in Canada are increasing. We have the balance sheet exposure behaves like a hedge against the operating cost increase. But the effect of the Canadian dollar is immediate on the balance sheet items, but it affects your operant [indiscernible] costs throughout the year. So we have the net effect of the balance sheet gain and the operating cost increase was approximately $18 million after tax in the first quarter. If there is no change in the Canadian dollar, that impact relative to the first quarter going forward will be a negative $5 million quarterly throughout the rest of the year.

Gotcha.

Where are our --

Integration.

Integration costs largely show up in the corporate and other areas as do the foreign exchange translation. So they somewhat tend to offset each other. The corporate and other areas is approximately at its normal level.

Thank you.

The next question is from Rich Snyder of UBS Warburg.

Can you break down that looks like about $27 million Willamette integration where they showed up in the different segments. And can you talk about going from the fourth quarter to the first, what impact energy had. I know you said something like $41 million year over year, but can you do it from the fourth to the first and where that showed up in the segment and the same thing with weather-related issues.

The Willamette integration costs, as I mentioned, are primarily in the corporate and other segments. There are small amounts that appear in the other segments, but it's largely in corporate and other. There is about 4 million of it that occur pretax that occur in pulp and paper. The amount in the other segments is about $6 million occurs in pulp and paper and the other segments are about $1 million apiece. Most of it occurring as I said in the corporate and other.

Your question on energy, fourth versus first, it probably would be very similar and approximately the $40 million dollar range. We started seeing increases in the fourth quarter. It would be largely in the first. It may be slightly less than the $40 million, but not a lot.

And the weather impact?

The weather impact for us in the south as Kathy mentioned were largely experienced in our saw mills where we had a downtime in a number of saw mills where we have a higher percentage of logs that we purchase from other parties. Our pulp and paper system was able to run with pretty tight supplies at times. Of course we were taking downtime in our container board system which reduced our demand for chips. Because of where our timberlands are located, that we are residual based from our sawmills and wood thinnings operations are able to operate, some of them in wet weather, we were able to supply all of our pulp and paper facilities with chips, though we had to scramble and wood costs were probably higher as a result. I don't have the exact amount. The major impacts from the weather were due to what happened to residential construction and the slowdown in the wood products demand which had started to improve in the first quarter prior to the weather impacting residential construction.

I guess what I was getting at indirectly was it looked like you had a fairly large drop in the pulp and paper segment in operating costs from the fourth quarter to the first. I was trying to see if weather and energy --

The question as to where our energy cost would be impacted, they would be first of all mostly in pulp and paper and secondly in container board and very little impact in wood products.

Okay. Anything else that impacted pulp and paper?

No, there was just the rising energy cost. There were some shipment on the pulp side as I noted, particularly in March we had some problems with pulp shipments because of ship availability. There was some sort of dislocations there.

A couple of things, Rich, maybe to consider. One is that as you know pulp is sold on a delivered cost basis and so there energy costs in terms of freight costs particularly in offshore shipping. Also the pulp shipments, revenue is not recognized until the pulp arrives at the customer which can sometimes be 4-6 weeks after it's shipped. So the second to most recent price increase will not hit our P&L for a large part of our shipments until April.

Thanks.

Your next question comes from Mark Connelly. State your company name before your question.

Can you help us understand where the synergies are showing up by quarter or in general and what you would have actually booked in the quarter rather than the run rate?

Mark, I'm going to give that question to Dick.

Mark, we don't have that. As I told Rich, the energy will show up in the cost of goods sold, largely in pulp and paper. And container board. Very little in the other businesses. The energy impacts on higher transportation costs --

I'm sorry. My question was synergies, Dick, and not energy.

I'm sorry, I thought you said energy, Mark. I misunderstood.

Close. I'm trying to get a sense of, you know this is a very big synergy number, and trying to get a sense of how that broke out actually in the quarter rather than with the run rate. If I recall, last quarter you said it was primarily in the timberland area.

We don't track it on that basis. We track it on a run rate. I would expect that some of these synergies are calculated, as you know, at a normalized price and they are assuming you are operating full out and particularly in container board when you take the amount of downtime we do some of those would not show up in the P&L in the first quarter. I can break down the run rate for you by segment and the fourth quarter versus the first and you can do some imputing.

That would be great.

Between them. The products in timberlands arena, we have those combined. We were at about a $56 million run rate at the end of the year. We were at about $104 million run rate at the end of the first quarter. In pulp, paper, and packaging. We were at $140 million run rate at the end of the year and $147 million run rate at the end of the first quarter. In purchasing, we were at $22 million at the end of the year, at $37 million at the end of the first quarter. If those will add somewhat higher than the $186 in the fourth quarter and I will have to go back and reconcile that for you off the call. We have some of the purchasing also showing up in the segment.

That's helpful. Thank you.

The next question is from Mark Willby. State your company name.

Deutsche Banc. You mentioned in the real estate segment there was an apartment project and a couple of office building sales in the first quarter. Do you have an idea on the gain on those?

The gain on those would be about $19 million as I recall. I'm going to have to confirm that number, but it would be that order of magnitude.

Just so I'm clear on the Canadian dollar, $18 million net after tax gain is a function of both the balance sheet issues with the debt as well as your estimate of what the Canadian dollar appreciation from an operating standpoint?

That's correct.

Then finally, could you talk a little bit about what you are seeing out of Asia? You guys do a lot of business across Asia and log and lumber business. I'm curious as to whether you are seeing impact from this SARS outbreak or what you are anticipating over the next few months. I know it's hard to call, but can you give us some color.

You want to talk about the Canadian dollar, Dick?

I answered on the Canadian dollar, but the question on Asia Steve Rogel may want to comment on as well. I will make a couple of notes. We expect our log shipments to be consistent with the first quarter. We have not seen -- those are largely to Japan. I'm not aware of any SARS-related impacts at this time. Our pulp business has been improving in Asia. Steve, do you have other information?

I do think it's too early for an impact of SARS to show up on our books or shipments. Pulp has been strong and actually liner board exports have picked up a bit and of course we've had strong OCC and other recycled grade shipments into Asia, particularly China. Those markets have held recently strong for us.

If you think about just businesses for you that are probably the most elaborate to China, would they be pulp and container board?

Yes. That would be true today.

Great. Thanks.

There relatively few logs in that direction.

The next question is from Peter Ruschmeier. State your company name before your question.

Lehman Brothers. Good morning. I wanted to ask a question of Steve if I could. With energy costs at the highest levels we've seen in decades, you mentioned that you are working on projects in Grand Prairie and Kamloops. [ph] Just curious if you could you help us understand even more specifically the types of projects going on, the amount of capital required and I assume these are high IRR project and that would raise the question of do you have more of these types of opportunities in your system?

Good question, Pete. The types of projects we were in the first case at Grand Prairie, a cogeneration plant that was built on site by transCanada pipelines and were both an electrical host and a steam supplier. We have a joint interest in the project. The other two projects we named were steam turbine generators both in Kamloops and in Board Wentworth. [ph] As far as high return, all of those projects are high return and in our capital spending, Marvin Cooper, who runs that group is actually prioritized the high return energy projects and there are a large number of relatively small projects that are getting underway and they are also ranked by returns. You would see our capital spending for optimization in the mills, particularly be focused on quick return energy projects.

Any way to quantify, if we looked over a multiyear period if you felt that energy cost stayed high, presumably that would mean you would have many of these high return projects. Are we talking about $100 million of capital that have very quick payoffs over two to three years for each project. Is there a way to quantify what kind of opportunity that is?

I'm certain there is. I don't have the project list at my fingertips, but I would say in order of magnitude, you are probably in range. When you look at the number of mills and the number of projects over a period of years, certainly between 1 and $150 million is not unreasonable.

Okay. If I could ask another question, that was a relatively short one on shifting gears to real estate, you had seven consecutive years at least of positive revenue growth and off to a good start this year, do you expect continued revenue growth in that business given the backlogs you have and can you talk, maybe Steve, more strategically as to what are you starting to bump into feeling as to how fast and how large you can grow this business whether you are starting to come head-to-head with your home building customers more directly.

Well, first the last part of your question, Pete, in terms of the size of our home building operation at about 4500 homes a year. Certainly that puts us in the top 20, but not anything close to what the large home builders are doing. We do feel that we have room to grow. We have been very patient over the last seven years in doing our business properly and right. So, it's been a very good growth story not only in terms of the volume of building, but in terms of the returns we have been able to generate from it. We definitely have a modest growth scenario, but we are not putting a great deal of new capital into that business as we work out of some of the master plan communities we have, we will be going with that capital more and more into just the direct home building business. In terms of opportunities, certainly we think there are opportunities for RD home constructions in California. Currently, if we talk about the market place, the strongest is California, Las Vegas and fairly good in Washington, D.C. Houston and Seattle in the Puget Sound are a little bit slower

Thanks very much.

The next question is from Jared Murhoff [ph]. State your company name.

Prudential Securities. It appears in your guidance on the container board and packaging segment and I think you may have mentioned this in your comments, in looking for slightly better results on a modest improvement and demand, you are not looking for price improvement. Does this mean you don't expect the price hikes announced for April or mid-April to go into effect on box and container board?

We said that the export price is increasing. For container board. The conditions in the export market have been pretty good. When we look at the domestic price increase, we don't raise prices unless we anticipate that we will have that price increase be successful. We are looking at some improvement in that market.

I think also to clarify, we do expect the May increase that we announced in container board to be successful, but we are about 90% integrated. Our earnings don't increase unless the box prices increase. My comment relative to softer prices was relative to the box price and not to the liner board price.

Have you not announced a concurrent box price increase?

We have not.

The next question is from Lisa Shawnfield, state your question.

JP Morgan. One question. You have been at the forefront of trying to get negotiations going on the software lumber agreement. Can you give us an update on the current state.

I will take that one. The negotiations as you know have been at least publicly in the state of suspended animation for a while. Behind the scenes both the Canadian side and the U.S. side are working their positions with both governments of in order to try to get back to the table and get resolution. We don't have any inkling, at least as of yesterday as of when that is going to occur. The three issues, as you know, remain -- first, the interim agreement which would change in its current form the deposits to taxation schemes. The second issue is with regard to the deposits. Who gets the deposits. And then the third is the long-term settlement which are the policy bulletins developed by the U.S. Government, the Department of Commerce.

Our understanding is those policy bulletins are all but ready to go out, just waiting the trigger of both sides getting together to come to some agreement. I'm not sure which is the chicken or the egg and whether bulletins have to go out or people have to get back together, but those are the three main issues. People have drawn up their positions pretty closely on them. There has been some talk on rather than a border tax out of Canada, some sort of volumetric basis like days of old, but I'm not familiar with that getting anywhere. Most people don't like it.

Okay. So just to come up with some likelihood of getting a resolution in the second half of the year, do you actually think it's a possibility or does it seem to be pushing out?

Well, I think that we are optimistic at Weyerhaeuser at getting something going in the second half of the year. Of course the economic pressure on everyone is extreme. I think it would be in everyone's best interest to get this thing resolved so we can get about the business of normal competition. At this point there are no guarantees that will get done.

Great. Thank you very much.

The last question is from Akiva Cohen. [ph] State your company name before your question.

Morgan Stanley. Just looking towards second quarter, given your guidance for flat operating earnings and flat working capital, in combination with the proceeds from the timber sale, would it be fair to say that we should expect debt to fall comfortably below year end debt levels?

I wouldn't project it that far because we will not see a reduction in working capital. The $145 million or $150 million that will be applied to debt reduction from the timber sale will accompany whatever we generate from our operations which will, as we said we expect to see lightly better in the second quarter than in the first. Whether that will bring us back to year end levels or not, I'm not prepared to say.

Also, can you give us an update on the I guess what's outstanding under your revolvers and the status, I assume that you renewed the 364-day.

The 364-day was renewed. Successfully. We downsized it as you know from $1.3 billion to $1.2. We had $600 million drawn on the five-year facility at the end of the quarter. We were using -- we had $435 million dollars in commercial paper. We still have about $520 million in debt maturities remaining for this year.

Okay. Great. I assume that will be repaid through cash flow and asset sales as opposed to refinance.

As you recall, we did a $600 million bond offering in December of last year in anticipation of this and drew down and paid off a large portion of what was drawn under the revolver.

Great. Thank you very much.

That concludes today's questions. I will turn it back to Ms. McCauley.

Thank you everyone for joining us this morning for the conference call. Dick and I will be available later to take additional questions you may have. Thank you.

This concludes today's conference call. Please disconnect your lines and have a wonderful day.