威爾豪瑟 (WY) 2003 Q2 法說會逐字稿

Good morning and welcome to the Weyerhaeuser second quarter 2003 earnings conference call for July 25th, 2003.

Your host for today will be Kathryn McAuley. Please go ahead, ma'am.

Thank you. Good morning, welcome to the Weyerhaeuser second quarter earnings conference call. I'm Kathy McAuley. Joining me Steven Rogel, Chairman, President and Chief Executive Officer, Dick Taggart, Executive Vice President and Chief Financial Officer and Steve Hillyard, Vice President and Chief Accounting Officer.

This call is being web cast at www.weyerhaeuser.com. The earnings release and the chart that will accompany today's call can be found on our web site.

If you would like a copy of the earnings release, please contact April Meyer at 253-924-2937. 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.

I would now like to turn the call over to Steve Rogel.

Thank you, Kathy. Business conditions have been challenging since the start of the year. Nonetheless, Weyerhaeuser employees have worked diligently, capturing synergies and improving capital efficiencies to meet our debt reduction targets.

When we acquired Willamette Industries, we said we expected to achieve $300 million in synergies in three years, or by the end of the first quarter of 2005.

From the start the transition has been very smooth. Employees from both companies worked closely together, creating a new Weyerhaeuser from each company's best practices, resulted in a much quicker than expected transition. The run rate of our synergy capture has been well ahead of projected targets. I'm very pleased to report today that we have achieved our synergy goal more than a year and a half ahead of schedule.

Make no mistake, this was not an easy target. And it was due to the hard work of our employees-- and I'm very proud of their accomplishments.

Meeting our goal, however, does not mean we will slow down our cost improvement efforts. In fact, it is quite the opposite. The merger has helped us identify new opportunities to further improve efficiencies some synergy benefits have been constrained by weak markets in many of our businesses. These synergies will quickly become more visible when business conditions improve. Having achieved our synergy target under such difficult business conditions makes me very optimistic about what we can achieve, especially when the economic winds are finally blowing at our back.

Frugality has become a watchword at Weyerhaeuser. This is perhaps most evident in our disciplined capital spending program. Capital spending for the first six months of the year was $319 million, in line with our 2003 annual target of $750 million. During the second quarter, we reduced our debt by $334 million from the first quarter.

When we met with the analyst community in New York in May, we said that our overriding goal was to pay do you down our debt. Meeting our synergy target is a very important step in helping us achieve that goal. However, this is just a step.

To meet our debt reduction targets week, must now drive these benefits to the bottom line, simplifying our process says, optimizing operating systems and rationalizing underperforming assets will help us do that, as we face up to the challenges in our markets.

During the second quarter, we continued the process of rationalization as there were more announcements in wood products and fine paper, where we face our greatest challenges.

We're taking a close look at our other businesses too. The process of rationalization is ongoing, as we adapt to the challenging market conditions of our industry. Now, I'd like to turn the call back to Kathy McAuley. Kathy?

This morning, Weyerhaeuser reported second quarter 2003 net earnings of $157 million or 71 cents per share, which includes the following after-tax items.

A charge of 8 cents per share for the closure or impending sale of facilities. A charge of 8 cents per share for integration and restructuring activities. A gain of 43 cents per share for the sale of timberlands in western Washington, and a gain of 3 cents per share for the settlement of insurance claims relating to the company Cemwood litigation. These adjustments total 30 cents per share.

Countervailing on Weyerhaeuser experts to the U.S. was $26 million in the second quarter. During the quarter, Containerboard mills took 27,000 tons of market related down time and 43,000 tons of maintenance down time, for a total of 70,000 tons. White paper mills took a total of 60,000 tons of down time. 30,000 tons was market related and 30,000 tons was for maintenance.

I will now review the price volume trends for the second quarter of 2003 versus the first quarter. 2003. Export log price realization declined 2%, however expert volumes increased 23%. This, however, was over a depressed first quarter level. Domestic log prices in the west were down 2% from the first quarter, and volume was up 3%. Southern log prices increased 6%.

However, the wet weather in the south resulted in a drop of involve 9%. Lumber prices for the quarter averaged $2 per thousand boards above the average of first quarter prices. Softwood rows 5%. Plywood prices averaged $8 per thousand square feet higher. Western buying was higher and southern plywood volumes were down 13%. Again, this was due to wet weather affecting log availability in the south.

OSB prices increased $21 per thousand square feet and volumes were 7% higher. Market pulp prices rose $37 over the first quarter average on flat volumes. Uncoated free sheet prices declined $17 dollars in the quarter, and volumes were 2% lower than in the first quarter. Containerboard prices fell $7 from the first quarter average. However, volumes rose 10%, boosted by a normal seasonal increase in demand. Box prices also fell $7, but the seasonal effect pushed volumes up 6%. OCC prices were $12 per ton higher from in the second quarter from the first quarter.

With that review, I will turn the call over to Dick Taggart.

Thank you, Kathy. Before discussing the outlook for the third quarter, I would like to highlight the major earnings impact that occurred in the second quarter when compared to the first.

Kathy referred you to two water charts which we have posted on our web site. The first one is simply a chart showing the adjustment of our reported operating income for the special items that occurred in both the first quarter of 2003 and the second quarter of this year. When we adjust the reported operating income, which is a pretax measure, as you know, for those items, we have $251 million dollars of adjusted pretax income in the first quarter, compared to $297 million in the second.

That $46 million increase in pretax income was driven by a lot of things, but the major drivers were $72 million in earnings improvement from a combination of volume and price across all of our businesses. This would exclude the real estate company.

Energy and raw material costs were increased by $43 million during the quarter. Pension costs and medical benefits for both employees and retirees increased $7 million in the quarter. And that's primarily in medical. Foreign exchange, while we had a positive balance sheet translation that was $12 million higher than in the first quarter, there was a $33 million increase in costs from appreciation in the Canadian dollar, for a net currency effect of $21 million in costs, that affected us in the second quarter.

These will be reported in the segments and affect both wood products and pulp and paper. Synergies and other cost reduction efforts contributed $45 million in the quarter, when compared to the first quarter.

As we enter the third quarter, pricing remains mixed. Raw material and energy costs are stable. Medical costs continue to increase, and the Canadian dollar has reversed and begun to weaken.

In timberlands, our western timber harvest will be lower because of the normal seasonal curtailments that incur in the third quarter because of the fire conditions. Log prices are expected to be modestly lower in the south as logging conditions improve there. And in the export market. With these changes will result in slightly lower earnings in timberlands in the third quarter when compared to the second. Wood products prices have improved significantly, and while lumber has softened somewhat recently, we still expect third quarter wood products prices to be better than the second, with OSB being particularly strong, which has begun pulling up plywood prices as well. Earnings will improve in this segment, and we expect to be profitable in the quarter before any special items that may occur.

As Steve mentioned, the process for rationalization is ongoing, and there may be additional charges for wood products in the third quarter. In pulp and paper, fluff pulp remains strong with some prices improving in some markets. However, we are seeing weakness in paper grade pulp prices and in uncoated free sheet. Demand remains flat with these products, with the exception of fluff pulp and earnings as a result are expected to be lower in the third quarter than in the second. In Containerboard packaging, we're experiencing modest price erosion and flat demand which will result in slightly lower earnings in the third quarter than in the second.

Our real estate company continues to experience a very strong backlog and closings will -- as we projected in the second quarter, will increase in the third, as we have opened a number of new developments in the third quarter. This will result in the modest increase in earnings in the third quarter when compared to the second.

Our capital spending plan for the year remains at $750 million, but our spending, as Steve indicated, is running slightly below that rate. Working capital increased from seasonally higher accounts receivable during the quarter, even though inventories came down. Steve mentioned that we reduced our debt by $334 million in the quarter, to $12.7 billion at the Weyerhaeuser company level. We expect to make continued progress on debt reduction in the third quarter, though not as great as in the second. Debt reduction for the year will be heavy in the fourth quarter, as we experience the normal seasonal decline in the working capital and the proceeds from the timber sales that are currently in process that we would expect to close in the fourth quarter.

With that summary, we will be happy to open up the call for your questions.

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. To place yourself into the question queue, please press star 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before entering your the request. If your question has been answered and you wish to withdraw your request, do so by pressing star 2. Please go ahead at this time if you have any questions.

Our first question comes from Rich Schneider, please go ahead, sir.

I wonder if you would talk about the weakness that you experienced in pulp and paper that I know had possibly to do with the Canadian dollar impact.

I was wondering if you could sort of quantify that and maybe even take a stab at quantifying the impact of all of the down time you took in the quarter. Could you work through some of the dynamics that went on in that operation?

Well, Rich, in the quarter, as I mentioned, we took 30,000 tons of market related and 30,000 tons of maintenance downtime. This did have an impact on the quarter. We don't have the ability to quantify that specifically for you, but certainly that was an effect in the quarter.

As you, I think, are probably aware, white paper prices began to erode as we went through the quarter, and we saw a very lackluster demand in the market. We than may be reflecting a level of unemployment in the economy, but it's really hard to specify exactly what had caused the turn in that market and the softening of the market.

The Canadian dollar certainly did have some impact. We are experiencing higher costs in Canada, and maybe Dick would like to speak to that a little more, but that impacted our white paper business, and our pulp business and our word products business were the three businesses where we have significant operations in Canada. Dick?

Rich, the impact on operating costs from the strengthening Canadian dollar in the quarter was for the whole company, $33 million, we estimate. Of that is correct the products we produce in Canada are paper grade pulp, uncoated free sheet and lumber and strand board. We don't have a precise split of that $33 million between pulp and paper and wood products, but they were both -- but they both had a meaningful part of that $33 million.

Looking into the third quarter, are you expecting a similar level of down time in the pulp and paper operation?

At this time, we're not making any projections of down time. We will continue to operate against our orders, and we'll have very rigorous goals in tightening our working capital.

So we will be continuing to work to control inventories, perhaps even bring them lower, and so we will be adjusting our production against whatever the order demand is. We don't have any projections at this time, but we will take the down time necessary to keep our inventories in balance.

Just the financial question. I know it's very difficult. As you look at where the Canadian dollar is right now and impact on the third quarter, it doesn't look like you'll have any balance sheet translation positive impact in the third quarter. Could you go through -- would that mean that corporate and other would be back up to around $60 million? Could you give us some idea of how this is going to work as you look at the third quarter?

I think corporate and other will be back up. It had a positive impact from both the Cemwood settlement and the -- If the books were to close today, we would have a negative currency translation on the balance sheet of about $18 million. There would be no change in cost. From the accounting standpoint -- I guess it's worth keeping in mind that balance sheet translations are accounted for based on the quarter end exchange rates, where the operating costs are accounted for on the aggregate exchange rate that occurs through the quarter.

So, they are -- those two exchange rates can be quite different quarter to quarter, and so there would be very little change in the average exchange rate, even though the point to point exchange rate has weakened between 3% and 4%.

Just last question. On the tax rate in the quarter, very confusing quarter with all of the charges and the adjustments. After you take out all of the charges, what -- that you've identified, what do you think your tax rate was in the quarter?

Tax rate will be 34.5% is what we expect it to be for the year. I think we adjusted that down about a half a percent from the first quarter, because we think that's where it will be for the year.

Okay. Thank you.

Thank you. Your next question comes in from Chip Dillon. Please go ahead.

Good morning. As we have seen a number of companies report, especially in Canada the last couple of weeks, I notice that almost all of have negative EBIT in their lumber operations , because they break them out (inaudible).

That would be after a tariff, if you took that away, they would still be losing money, and all of them with the tariff a negative EBITDA.

I wanted to ask you, (A), does that hurt the case of Canada in terms of the anti-dumping, when they clearly are losing EBITDA and even without the tariff, EBIT? And secondly, what do you think will happen given the whole lumber situation in the next 3 to 6 months?

Good morning, Chip, this is Steve. I'll take the part of the question that has to do with the agreement itself and let Dick and Kathy hand handle the EBIT impacts that you talked about.

As of yesterday, the two governments who have been meeting pretty continuously in the last two weeks have put out a proposed settlement between the two countries. That settlement looks very fair to us between the two sides. Of course, there's so many disparate parties on both sides that it will take salesmanship on everybody's side to get acceptance. My personal view is that we will ultimately get acceptance. Sooner is better than later, but the proposal itself looks like a workable agreement to us. It contains both an interim agreement and policy papers for a long-term negotiated agreement province by province.

And the interim part, I guess, is more or less a quota system or --

It's a market-share based system. In a way you can say it's a quarter based.

Chip, I don't know that I can comment on how the coalition or others may interpret the fact that the comedians have negative -- the Canadians have negative EBIT in their operations, how they would interpret that as it relates to dumping.

We feel that the dumping is -- if you are selling product in one country at a lower price than your home country and certainly that's not happening in Canada at this time, if you adjust for the duties.

And so it's our view that the current market conditions are hurting everyone, not just the comedians, and -- not just the comedians, and that it's really on a process that Steve described that will hopefully lead to a resolution and it will, I don't think be impacted by the performance in just this last quarter.

Okay, and just the second to the last question. On the slide 3 where you talked about the net impact of foreign exchange, are these sort of your estimates as to how foreign exchange might have affected prices or even volumes?

Or are they actual direct accounting charges that you took that you assume would not occur if the current fee were to stay flat?

Well, the balance sheet translation is a direct accounting entry. That's the positive increment that comes from the strengthening Canadian dollar, which was $12 million higher in the second quarter than in the first. The other -- the cost increases, the $33 million cost increase, is our estimate of what happened to our Canadian dollar costs when translated into U.S. dollars as a result of the strengthening Canadian dollar.

Got you. Okay, thank you.

Your next question comes from Mark Connelly. Go ahead, sir.

First, your uncoated free sheet realization seems weaker than what we've been hearing from others. Can you give us a sense of what's going on there? And second, can you tell us what's happening to inventories overall and what the inventory number would have been without the impact of currency?

Mark, I'll talk about uncoated free sheet and I'll let Dick talk about inventories. As we commented earlier, we saw the market for uncoated free sheet weaken as we went through the quarter. We also, as we noted, took a 60,000 tons of down time during the quarter and both of those impacted our performance in that segment.

And Mark, the inventory reduction comment I made, as our inventories in total were down $20 million. And I don't have the data adjusted for currencies on that. I don't know what inventories were held in Canada versus the U.S. I don't have that data.

Okay. You know, at the meeting in New York, comment was made that if demand got worse for uncoated free sheet, you would consider further capacity rationalization. Hasn't it gotten worse here? And are you considering further capacity rationalization?

Mark, this is Steve. With regard to rationalization, during the last quarter, we did announce closure of one machine. And as our business goes forward, as with all businesses, we're continuing to evaluate what our directions will be, but I don't think it would be appropriate to comment on future projections of closures.

Okay. Steve, with the synergy program now done, can we expect a new cost reduction program out there or a new target? Or are you just going to, you know, do it behind the scenes and just work on getting costs down?

Well, certainly the first thing, Mark, is our efforts to reduce costs are in place and ongoing. What we haven't done is set a new public target, but the one thing that we want to assure everyone is we're working diligently on getting additional benefits from integration of the companies we have acquired, but the second focus is reducing our SG&A costs as well as just the general operating costs in the company.

Those are ongoing and they are very fruitful, but we're not making any projections forward.

Okay, thanks very much.

Thank you. Your next question comes in from Rick Skidmore. Please go ahead.

Thank you. I had three questions. First, Steve, can you talk to -- coming back to the lumber agreement, if it is a quota, can you talk about -- or market share that you mentioned -- can you talk about how that might be applied on a company basis across the various companies in Canada, and what impact that would have or that you would expect that to have on your Canadian business?

And then secondly, I wanted to follow up on debt reduction. Given that the pace of debt reduction and your expectations for the back half of the year and what you've outlined internally and with the rating agencies, what are your expectations regarding potential asset sales to help you accelerate that? Or are you on track with where you think you ought to be?

And lastly, just on what you are seeing in your order files for July and into August in the white paper business? Thanks.

Well, I have three parts to that question. This is Steve. I'll take the quota and market share question that you have. There has not been a set down discussion in Canada about how the market share might be divided by company. Certainly within the agreement, I think the eastern provinces, who have much lower production, will be treated like they have pretty much in the past.

But that is one of the things that the Canadian side will have to work out is what market share might be assigned to each province and to each company, so it is nothing that I can give you a reduction on the impact on our company.

This is Dick Taggart. Regarding our debt reduction plan for the year. Our debt target, as we have said a number of times, we've shared with the rating agency is just be low $12 billion for Weyerhaeuser company. We're at $12.7b at the end of the second quarter.

Given the timber sales that are currently in process and the normal seasonal decline that occurs in our working capital, we expect to be able to achieve that target with those two actions as well as the cash flow we will generate from operations in the second half of the year.

The last part of your question is order files and the white paper business continues to be quite lackluster. We're not seeing a turn in that business. And so no improvement near term.

Thank you very much.

Thank you. Our next question comes in from Steve Chercover. Please go ahead.

I've got a couple of questions pertaining to soft lumber and a couple on paper. Starting with the softwood lumber, in the context of the proposed settlement, is there any discussion on what will happen to the duties that have been paid thus far? And are there any exemptions discussed for cedar or nonstructural grades of lumber?

Steve, you were coming in pretty weakly, but on the softwood lumber agreement, I think you were asking about has there been any agreement on the disposition on the collected duties?

That's correct.

There is a proposal within the proposal on how to split the deposited duties. My belief is that there is a set aside for market development and then have goes back to the Canadian companies and half back to the U.S. side.

So there will be some sort of compensation to U.S. producers who put their hands out then?

The way I've heard the proposal discussed, the money Goss back to the U.S. government, but it's my supposition that it gets distributed out to the companies.

Okay, and perhaps you didn't hear the second element of my question, which was, are there any exemption for cedar or nonstructural grades contemplated?

At this stage, I'm not aware that there are I exemptions for cedar or other nonstructural grades, but I've just had a preliminary reading of the proposal.

Okay, and then two quick ones on the pulp and cedar side, if I could. Some of your counterparts in the industry have discussed their prognosis for pulp market, which suggested inventory should remain flat for the remainder of the summer and even some view that pulp prices are coming up.

Do you see that happening? And secondly, in so time as you take down time in your free sheet mills, and they are integrated, do you shut down the pulp mill as well?

Looking at the pulp market, Steve, the pulp market, we feel that there is not a lot in the pipeline in the pulp market. And we're, you know, we're looking at a normal seasonal low that occurs, particularly in Europe on the demand side. But we don't see the, you know, the inventory being particularly deep at the consumer end.

So, we are looking at a market that certainly is one that is not as strong as it had been, but nonetheless, we're in the normal seasonal low period.

Concerning the white paper market, maybe we can talk about that when we take the mills do you know whether or not we will take the pulp down also.

Generally in our uncoated Free sheet mills, we don't have that much excess pulp capacity, and those mills where it's a marginal production, we take the whole mill down, we've got one mill that does have very high capacity in pulp, and it would continue to run, unless the pulp market called for curtailment.

Thank you.

Steve, I think it's also worth knowing that, again, half of our pulp is (inaudible) and there the market remains tight and the inventories very low.

Thanks, Dick. Thank you very much.

Thank you, your next question comes in from Peter Ruschmeier. Go ahead.

I had a couple of questions. Dick, you mentioned you are looking closely at working capitals. I know you have been. Can you elaborate on anything in particular, any programs in particular you may be focused on there.

And then more specifically, what's your outlook for the second half of the year in terms of working capital as either a source of user cash?

Well, there is no specific program per se, Pete. We sell against normal industry terms and our receivables, we work very diligently to keep current and in good shape, and they are. So the seasonality in working capital is largely one of accounts receivable as sales rates decline in the holiday period, following Thanksgiving. And so, that decline is typically $300 million to $400 million.

We have a -- also an ongoing efforts to learn to operate our businesses with lower in process inventory, lower stores inventory in our facilities, and lower finished goods inventory in our distribution system and in our box plants, where the majority of our working capital is held. And so we would expect to see some decline in inventories as well.

And so our typical pattern is very little change in the third quarter in working capital, and then a $300 million to $400 million decline in the fourth quarter.

I think it's fair to say that all of our operating divisions are attuned to watch their sales and inventories very, very closely. And in today's world, they are much more prone to take downtime earlier to balance than perhaps they were in past years.

So, from the standpoint of watching things, inventories are much more closely watched today and mills are balanced to it.

Okay, great. And just a clarification question on your guidance for the real estate business. I think you said it's going to be up sequentially in the third quarter. Is that with or without the $12 million benefit from the sale, the commercial building?

That is just from hire level of single -- from the higher level of single family closings.

In other words, you expect it to by higher than the $91 million?

Yes, we expect it to be higher than the $91 million.

Peter Ruschmeier Moving on to containerboard, 70,000 tons of downtime, could you just elaborate? Given your high integration ratio there and demand was up seasonally sequentially, 1Q, 2Q, what's driving that? Was that largely maintenance related or is that market related?

Well, in containerboard, we took 20,000 board of market related and 43,000 tons of maintenance. It was a little higher to maintenance in the quarter.

If you recall, when we met in New York, we talked about our productivity being very good in containerboard and one of the -- perhaps the good news/bad news stories of the acquisition is the synergies that we were able to get out of the combined system and the improvement that we saw in operations.

So, part of the downtime was the weakness in the market. We saw normal seasonal pickup, but we didn't see anything beyond seasonal pickup, and we've been producing that at higher levels.

Okay. Now, last question, if I could, coming back to the exchange rate with Canadian dollar, if I'm doing my math right, the Canadian dollar strengthened by about 6 cents in the quarter. Does that imply that, you know, it's a $5 million or $6 million impact for every penny changed in the Canadian dollar, Dick? With today's currency?

I wouldn't -- I wouldn't want to give you a sensitivity quarter to quarter because the -- we have a foreign currency translation on about a $900 million dollars in either third party debt or intercompany receivables that are impacted by that translation.

And so it's pretty easy to calculate what that effect would be. The operating costs that we have about a billion dollars a quarter, and so it's comparing how the average exchange rate compares to the point to point exchange rates, will determine what happens during the quarter. And so it's very difficult to give you a sensitivity in terms of any given quarter because the two rates, the average and the quarter end rate can vary considerably.

Understood. Okay, great. That's helpful. Thanks very much.

Thank you. Your next question comes from Don Roberts. Please go ahead.

Thank you. Dick, I had difficult getting onto the web site so I apologize if it's answered there, but on the gain of the $47 million, is this before or after tax?

Don, all of the numbers that I quoted were before tax.

Okay. And relating really to the U.S. dollar debt on the Canadian sub, is that the balance sheet translation or is it dealing with things like cash assets in Canada?

The foreign currency translation on the balance sheet is impacted by two things, the first is that you indicated we have U.S. dollar denominated debt that is legacy Bloedel debt, held in a Canadian subsidiary, subject to that translation.

And we have an intercompany receivable that from Weyerhaeuser company limited to Weyerhaeuser company that (inaudible) additionian dollar asset on our U.S. -- on the parent company's books that is subject to that translation.

So when you referred to the -- if you were to close the books, given the exchange rates, this $18 million hit, does that correspond to the $47 million -- I mean, are we talking apples to apples?

Yes.

Okay. Second point more on I guess the market side, I know the base period was pretty low, but I guess I was still surprised by the increase in log volumes, especially on the expert market. Could you give us a little more color on that? And specifically on the Japanese market, where you see both the log and the lumber --

Well, on the log market, if you'll recall, in the fourth quarter, the fourth quarter shipments were somewhat impacted by the port lockout on the west coast.

The second factor in the fourth quarter, we had a very high shipment level, as some of the Japanese saw millers brought some of their purchases forward in anticipation of a stronger housing market in Japan over the winter, and so our first quarter shipments level was reflecting the fact that those sales were brought forward. So we did see good expert log markets.

Some of it was the impact of the distortions that had occurred over the last few quarters.

Sort of looking forward in terms of where you see the Japanese demand here both as on the log as well as the lumber side, what's the sense on that?

Well, we have a reasonably optimistic view, Don, of the Japanese market for the high quality logs that we're putting into it. Our major customer there has a growing business, and we see a reasonably strong year there.

Okay. Thank you.

Thank you. Your next question comes from Steven Atkinson. Please go ahead.

Good morning. Just a couple of quick questions. Number one, in terms of the comment on item 4, you mentioned a $25 million gain related to CEM wood. And then you talk about a $7 million after tax. Can I assume those are the same things?

Steven, one is the pretax and one is the after-tax measure. The Cemwood settlement has a unique tax structure. Ps a legacy MB claim settled through an off shore captive insurance company that has a unique tax --

That's good. The second thing on the foreign exchange gain, I assume it was distributed between the affected divisions, meaning the wood products and the uncoated free sheet?

That's correct. Wood products, uncoated free sheet and market pulp.

Okay. Third question, relating to the softwood situation, there is a NAFTA ruling, supposedly august 15th regarding the countervailing duty, considering the large amount of duties that Weyerhaeuser has paid, wouldn't it be better to wait for what happens on that?

This is referring to the fact that, where the dumping was regarded as shall we say too high and had some flaws in it, theoretically, what I'm being told by others is that the CBD also has similar situation.

It's hard to speculate how they are going to come down with their rulings. As you know, in the rulings that have come out, they've been a mixed bag. We've had some positives in them, and then, of course, there have been some rulings that we would have rather had products like cedar out of these duties and they are not yet.

But I'd hate to try to project what they are going to rule. They always surprise you. Hopefully positively.

Yeah, no, I was thinking more of the fact of the division of the $1.5 billion that was collected. Really what I'm asking is will there be any input from the industry or is this more like a fait accompli from the government?

The industry is going to have lots of impact. The way it works at least on the U.S. side is fair lumber coalition will have to accept the proposal in the end and withdraw their complaints. And of course, on the Canadian side, there is going to be a lot of negotiation amongst the provinces and every company is going to have its say about market share. So there's a lot of work to be done.

And again, you asked about the duties on deposit. Could you restate that a bit?

Oh, it was really where I think the -- what I gathered was that it would be divided up 50-50. And so that if, for instance, the NAFTA rules that the countervailing duty is too high as well, then what the the Canadians are saying is that they have an argument that maybe it should we something more than 50%.

And so really, just the idea of, you know, maybe one should wait until after August 15th, but it sounds like this is going to be a long process, so this is going to happen anyway.

These always tend to be stretched out processes, and I think your thesis, if NAFTA rules that a portion of the duties were not proper, I suspect that that portion would be remanded back to Canada because NAFTA has the effect of rule of law on the states.

Thanks. That's very helpful. Thanks a lot.

Thank you, your next question comes in from Mark Wilde. Go ahead.

Can you update us on what's in the timber pipeline as it stands right now?

Yeah, Mark, we've got two big tracks that have been advertised for sale and we expect to have closure on those in a fairly reasonable period of time, because there has been a lot of interest in them. There is a large tract in Tennessee, and a large set of tracks in South Carolina.

And what's the total on those, Steve? What's the total acreage that's involved?

I think there is 175,000 acres in one set and 165,000 in the other.

And any thoughts on whether you might look at additional timber sales over the next 12 months?

I will repeat our commitment and that is to lower our debt, but I can't project forward for you decisions that are yet to be made.

That's fair enough. Now, the other question I had, the capital spending is actually running meaningfully below the full-year target. I just wonder whether that also tells us anything about what you might spend the next year.

Well, that's a good question, but at this point, with just half the year gone, I would hate to project that we will come in significantly below $750 million, because capital spending is project related. I'm sorry?

I was just going to say, it's going to be kind of lumpy in

Yes, exactly. Big projects tend to come in rushes when you are trying to finish them off. Although, I will say most of our large projects are nearing completion and that lumpiness should level out because it's a series of smaller projects.

With regard to the coming years, we set our capital budget in our fall program, but I expect that our disciplines will hold.

And finally, the Canadian dollar has been fluctuating pretty violently against the U.S. dollar, but it did come down quite a bit after you announced all of those coastal BC lumber closures back in June.

I just wondered whether you are thinking about bringing any of that back up now?

We judge by marketplace, our order flow and inventory and of course whether we can be first cash positive and then financially positive in running our mills. And we look at a mill at a time. So, again, I'm not going project forward, but we watched those pretty closely.

Excuse me, I was going to ask Steve's comment, regarding coastal BC, there is big drivers, the demand for cedar products in the U.S That's what will drive that decision.

I think when Steve was -- when you were in New York, Steve said he thought there was about 8 billion or 9 billion board feet of North American capacity overhang in lumber. Is that still a pretty good number, Steve?

Well, I still think it's a good number, Mark. There have been a number of closures going on, but at the same time, other companies have been adding to capacity and increasing shifts.

So as much as I'd like to say that the capacity is has gone down, I personally don't believe that we've seen that yet. Because, particularly on the Canadian side, there has been a lot of work to improve the efficiency of the straight line mills and that has added to the capacity as well as we've seen smaller mills close.

And just finally, on the same lines, have all of these investments in small log optimizing systems and things, have they brought down the cost structure of lumber significantly, do you think, Steve? In the last 6 or 8 years, let's say.

Yeah, first of all, I think we would all agree that the main driver on cost is log price, and we haven't seen any serious reduction there, but on the remainder, the improved yield of the mills has definitely improved the economics in the mills.

Okay, thanks.

Thank you. Your next question comes from from Mark Weintraub. Please go ahead.

I understand that paydown is the top priority still. At what point are you satisfied that you possibly can start looking at acquisitions again? What are the markers we should be looking for?

Well, I think that from my standpoint, the markers are that we get back to our traditional relationships on the ratios of debt to total capital, and then the coverage ratios.

Once they are in balance, then you can begin to look at the other opportunities that are out there. Certainly there are lots of other opportunities available today, but we're pretty darned disciplined in saying that we've got to get our debt down.

Are we talking 40% debt to capital type of target or?

Just below that, between 30% and -- around 30 to 35%. So if we were below 40%, we're in our target range, which is 30% to 40%.

Okay, great. Thank you.

Thank you. Your question comes from John Tumazos. Please go ahead.

In terms of adjusting business to the softness in the containerboard and box markets, is it a better optimization to reduce paper output or box plants targeted toward national accounts?

Or box plants targeted toward local accounts or diverse customizations?

I noticed that there is 20,000 people in their box plants, and there must be an awful lot of tailoring some box plants go to that we from afar probably don't understand.

Well, that's a good question, John. First, taking up the box plant issue. Almost every box plant is tailored to a specific market. If the market has a high volume producer in it using what we call the brown box, it would be pretty much what we would call a straight-line plant, geared for that high volume business, perhaps without a lot of expert capabilities in it.

Other plants in markets where there is a lot of high end box with high graphics and what not, would have a lot different equipment in it. So each plant is equipped for its own marketplace.

What we're trying to target with regard to markets is, again, adapted to each of those markets. Then we have the overriding factor of the consolidated channel to the marketplace, bigger customers that we're having to serve.

Our goal is to have a mix of business in each of the market segments that you've talked about, and broadly the large national account, and then there is the mid-level accounts and then the smaller accounts. We try to Tailor a mix of business -- we try to tailor a mix of business that keeps us operating as full as we can operate and take advantage of both the volume and the pricing opportunities we have.

Thank you.

Thank you. I'd like to turn the call back to Steve for a few closing remarks.

Okay, good set of questions today. Thank you very much for those. In our wrap-up, I would say since we've acquired Willamette, we have three goals, integrate Willamette, capture synergies and pay down get debt.

We told you today that we achieved the first two of those goals. We have integrated Willamette and captured the synergies, but we still have three bills. Pay down debt, pay down debt, and pay down debt.

We're taking our commitment to our investors very seriously and despite challenging market conditions, we intend to meet those goals.

Thank you very much for listening to us today.

Thank you. Ladies and gentlemen, this concludes today's conference call.

We ask that you please disconnect your lines and have a great day.