威爾豪瑟 (WY) 2003 Q3 法說會逐字稿

Please stand by. Your conference is about to begin. Please be advised this call is being recorded. Good morning and welcome to the Weyerhaeuser third quarter earnings conference call for Friday, October 24, 2003. Your host for today will be Katherine McAuley. Ms. McAuley, please go ahead.

Good morning. I am Kathy McAuley, Vice President of IR at Weyerhaeuser. Joining me this morning are Dick Taggart, Executive Vice President and Chief Financial Officer, Bill Corbin, Executive Vice President of Wood Products, Dan Fulton, President of Weyerhaeuser Real Estate Company, Steve Hillyard, Vice President and Chief Accounting Officer. This call is being webcast at www.weyerhaeuser dot com.

A copy of the earnings release, which will be discussed on today's call can be found on our web site, or please contact April Meyer at (253)924-2937. Please read the warning statement in our press release concerning the risk factors associated with forward-looking statements, as we will be making forward-looking statements during this conference call. After I review the trends in the quarter, Dan Fulton will discuss and Bill Corbin will talk about wood products, followed by Dick Taggart commenting on the highlights of the quarter and discussing the outlook for the fourth quarter.

This morning Weyerhaeuser reported third quarter 2003 net earnings of $82 million, or 37 cents per share, which includes the following after-tax item. The charge of $37 million, or 14 cents per share for fiscal end closures (phonetic) , a charge of $15 million or seven cents per share to settle the class action lawsuit associated with the class action anti-trust linerboard lawsuit, a charge of $15 million or seven cents per share for integration and restructuring. These items total 28 cents per share.

countervailing and anti-dumping duties on softwood lumber Weyerhaeuser exports to the U.S. from its Canadian saw mills was $25 million in the quarter. Market-related downtime at container board mills was 89,000 tons in the quarter and white paper mills took 64 tons of market-related downtime. I will now review the price volume trends for the third quarter versus the second quarter. Export log price realizations increased 3% and volume decreased 4%. You will recall that volume in the second quarter exceeded 20%, and this was due to the lingering effect of the last years West Coast port block out. Domestic log prices were off 1- 2%. Western log volume was slightly lower in the second quarter. Southern log volumes declined 5% due to continued wet weather conditions in the south.

Lumber prices in the third quarter were, on average, $33 per thousand board feet above the level of second quarter. Softwood lumber volumes rose 3 %. Plywood prices were $62 per thousand square foot higher than second quarter. Western plywood volumes rose 8%, however southern plywood volumes modestly declined. OSB prices were $108 per thousand board feet above second quarter. Volumes were 1% lower. Market pulp prices averaged $7 per ton below the level of second quarter and shipments were up 7%. Uncoated free sheet prices fell by the mid $30 per ton range. Shipments were flat.

Containerboard prices declined $3 per ton and volume fell 4%. Box prices fell $6 per ton and shipments increased 1%. OCC prices were $6 per ton lower than the second quarter. I will now turn the call over to Dan Fulton.

Good morning. Real estate and related assets reported record quarterly contribution to earnings of $97 million for the third quarter of 2003, compared to $91 million last quarter and $85 million for the third quarter of last year. Results for the third quarter of 2002 included a $14 million gain on the sale of two apartment complexes. On a year-to-date basis through the third quarter of 2003, real estate and related assets reported contribution to earnings of $283 million, which is 11% greater than the $255 million reported for the same period last year.

At last quarter's earnings release, we discussed our expectations for increased earnings in the third quarter attributable to a great number of closings as compared to the second quarter. During the quarter we closed 1,182 homes, which was 18% greater compared to the second quarter and 11% greater compared to the same quarter last year. The level of home closings during the quarter at the higher price levels generated record quarterly revenue for Weyerhaeuser Real Estate Company. Revenues for the quarter were $532 million compared to $430 million last quarter, and $466 million in the third quarter of 2002.

Margins remained firm as the market, particularly in California, absorbed price increases in selected communities. Our average home sales price increased 8% over the prior quarter, and increased 13% over the same quarter for the prior year. As sales price increases reflects both changes in mix of products sold, as well as higher base prices. Our gross margins on a year-to-date basis have increased approximately 100 basis points from the prior year. Traffic to our communities is on trend with the prior quarter, although variable across our operations. In southern California traffic is very strong compared to the prior year. In our markets of Houston, Las Vegas and the Puget Sound region, traffic is comparable to the prior year. And in the Virginia and Maryland suburbs of Washington, D.C. , our traffic has declined compared to the prior year, which we attribute in part to a fewer number of communities open for sale.

Home sales during the third quarter declined 6% compared to the very active second quarter of 2003, over 23% greater than the same quarter in the prior year. On a year-to-date basis, our home sales pace is 14% greater than at the same time last year. As expected, our backlog of homes sold did not close declined nominally from nearly seven months sales last quarter to six-point six-month sales at the end of the third quarter. We are in the midst of a very heavy delivery period of homes to our customers, which we expect will result in further seasonal decline in our backlog with higher earnings from increased closings in the fourth quarter, as compared to the third quarter. In sum, our outlook on our markets is generally favorable, our operations are well-positioned in terms of land and market-driven product offerings to take advantage of the continuing favorable interest rate environment. Now I will turn it over to Bill Corbin.

Thank you, Dan, and good morning. I am pleased to be able to report that the Weyerhaeuser wood products story continues with some excellent results in the third quarter. Here are some of the salient events that occurred. We had very strong earnings of $151 million in the third quarter, with robust structural panels and lumber markets driven by strong housing demands and depleted inventories. I should point out that these earnings include $25 million in charges for the Canadian softwood lumber duties, as well as $31 million in charges for closures.

Weather concerns, namely fear of forest fires in British Columbia the very dry conditions in the West, the very wet conditions in the south, such as Hurricane Isabel, caused production curtailments and buyers to keep very little in the pipeline. Transportation issues in some regions made timely shipments a challenge for us as well. The good news is that we were well-positioned to capture the market runups. Our mills ran exceptionally well. We set all- time weekly production records at OSB for several weeks and sales of engineered lumber products were also at record levels. At the same time, our distribution business was able to capture all-time-high margins, and their expenses and other ratios were excellent. Our average realizations improved, while our COGS stayed flat with last quarter. Wood costs were stable in the quarter, lagging the market increases.

The competitiveness of our Canadian production has improved with costs coming down, but the exchange rate impact has offset those cost improvements and that will be a factor going forward. We continue to aggressively implement our fixed sale close strategy. In the third quarter we closed an engineered lumber plant at Junction City, Oregon, and a veneer mill at Dierks, Arkansas. We also brought some major capital projects to completion in the south, which will help us going forward.

Now, moving to our general view of the fourth quarter. We believe that the fourth quarter is going to be another strong earnings quarter for the structural panel, lumber and distribution businesses. OSB currently has a good order file. In my view, the only barrier to continued strength is weather. There is more lumber in the pipeline, however, and we are seeing downward pressure on lumber prices, but the outlook for Q4 is still good for lumber. We anticipate no market downtime in the fourth quarter. There will be some scheduled maintenance downtime in the OSB business at three mills, but we will still have a very high operating rate.

We expect wood costs to trend higher in the fourth quarter, as they traditionally lag product price increases, and this will impact margins at lumber, engineered lumber and veneer. Strategically, we continue to stay the course, not changing direction, product mix or customers. We are consistently responding to the market rally. We are working smart to be profitable at any level of market conditions. In that vein, I would like to remind you of the four strategies that we discussed at the May analyst meeting, which have not changed. First, continued alignment of our best manufacturing with fee timberlands and defensible positions in Canada. Second rationalizing our wood products business through the fixed sale or closed strategy to position our company for the future. I mentioned at the outset that we closed two facilities in the third quarter, and we expect more closures or sales in the fourth quarter.

Third, leveraging our world class technology. What that means is that we continue to advance the linkage to the market through development of proprietary products and systems, improving manufacturing reliability, and enhancing customer services. Fourth, but not last, is to build upon the strongest market position in the industry. Our business volume with strategic customers continues to grow, quarter by quarter. As I said, we are staying the course. Now I'd like to turn it over to Dick Taggart.

Thank you, Bill. Before discussing the outlook for the fourth quarter, I'd like to point out some of the major changes that occurred in the third. As noted in our earnings release, capital spending of $152 million for the quarter brought our year-to-date spending to $471 million. This compares to $709 million for the same period and time last year, and is in line with our current projected spending of $720 million for this year.

We achieved total debt reduction for the quarter of $360 million; $330 million at the Weyerhaeuser Company level and $30 million in the real estate company. This reduction was achieved largely from operating cash flow, and there was only a modest reduction in working capital and no asset sales of any consequence during the quarter. Our working capital continues to follow the normal seasonal pattern that we've experienced over many years. With positive operating cash flows continuing into October, proceeds from the previously announced timber sales in Tennessee and the Carolinas, and that we expect to close in the fourth quarter, and the normal seasonality in our working capital, we expect to easily meet our debt reduction goals for this year.

Turning to our earnings report for the quarter, I want to cover the major items in corporate and other that created a very large swing quarter to quarter. In the second quarter of this year, at the corporate and other line in our segment reporting, we have reported an expense of $2 million in the third quarter an expense of $94 million. The major changes quarter to quarter incurred in our foreign exchange translation. The income from the Cemwood insurance settlement which we realized in the second quarter, and our accrual for our variable compensation plan. In the second quarter there are three items, the foreign exchange translation, Cemwood insurance and our accrual for variable compensation, totaled a $61 million income, as opposed to an expense. While in the third quarter there was little change in the Canadian dollar, a modest negative, there was an increase in the accrual for our variable compensation and no Cemwood insurance, and those items totaled paid an expense of $27 million.

Our variable compensation was increased as a result of our total shareholder return, which drives the funding of our compensation plan, and it's that total return compared to our peer group. The variable compensation accrual will be finalized at year end, but we would expect little change from the third quarter level at this time, while the foreign exchange translation will continue to fluctuate primarily with the Canadian dollar. The corporate and other line, with no change in the Canadian dollar, should fluctuate between 65 and $70 million. Through the first quarter of next year, after which $14 million in programs will have a transition cost will stop and should fluctuate then between $50 million and $55 million after that. Of course we will continue to fluctuate with the Canadian dollar.

As we look at the fourth quarter at this time, we continue to see a mixed outlook across our business. In timber lands, the export market continues to improve slowly in Japan, with prices expected to be slightly higher in the fourth quarter and volumes steady. Prices domestically, as Bill noted, are steady to a, to higher. We expect our southern harvest, however, to be down significantly as we continue to adjust to unusual weather conditions in the south, and we expect the volume of raw material purchased from others to increase in the fourth quarter, which will result in earnings from ongoing operations to be slightly lower in the fourth quarter when compared to the third. We do expect to report a gain on the timberlands that we sell in the fourth quarter, but since these timberlands were largely legacy (inaudible) timber lands with a stepped-up basis, the gain on these sales will not be of the magnitude of those which we sold earlier in the year.

Bill discussed the wood products markets with you, which will result in another strong quarter, though the normal seasonal pattern suggests that it will be somewhat lower than the third quarter. In pulp and paper, we have continued to experience weakness in uncoated free sheet pricing and in demand for uncoated free sheet. Although we are experiencing improvements in market pulp pricing and in coated groundwood, these price increases will not offset the weakness in fine paper, and we expect lower earnings in the fourth quarter when compared to the third. Containerboard packaging is going into a seasonally slower period, with box prices continuing to gradually erode which will result in lower earnings in the fourth quarter.

In the third quarter we announced the permanent close of our medium mill (sp) in North Bend, Oregon. The economic recovery in North America has yet to translate into improvement in paper and packaging demands, and our focus on cost and productivity improvements may result in additional facility closures in the future. Dan discussed the excellent performance of our real state subsidiary, which produced record earnings in the third quarter and which expect to repeat in the fourth. With this brief overview of business conditions and our outlook for the fourth quarter, we would now been happy to take your questions.

Thank you. We will now begin the question and answer session. To place yourself into the question queue, please press star one on your touch tone phone. If you are using a speaker phone, please pick up your handset and then press star one. If your question has been answered and you would like to withdraw your request, you may do so by pressing star two. Please go ahead if you have any questions by pressing star one now. Your first question comes from Rich Schneider of UBS. Please go ahead.

You had indicated in the release that you saw some strengthening of the Japanese housing market and we are starting to see some benefits from the strengthening of the yen. Could you talk about the conditions in the export log business, particularly to Japan?

Rich, this is Dick. I will make some comments and Bill Corbin may want to add a few as well. The improvement that we are seeing in Japan is in wooden housing starts. Overall housing starts have not improved much, but the wooden component has increased. There has been somewhat of decline in shipments to Japan from Russia, and the change in the yen has improved the competitive position of the Japanese saw mills compared to imported lumber and all of these things have contributed to modest improvement in demand in Japan. In addition, the log inventories in the West Coast have remained relatively low and that has also been a contributing factor.

Rich, this is Bill. And the additional comment would be that the inventory levels in Japan for lumber and panel products is very low. I think there was some probably lack of response to market conditions and that pipeline got pretty low, so that's caused some price increases and additional demand. But that's probably temporary.

In terms of that segment, the timberland segment, as you mentioned, Dick, you expect fourth quarter to be lower. If you go back over the years, seasonally the fourth quarter is usually better, and I guess you are attributing it to the lower harvest levels in the south. Could you sort of quantify how much of an impact all that is having on you and how much you've had to reduce because of the wet weather?

What has happened, Rich, normally the seasonality of our timberlands earnings is driven by the western seasonality, and this year it's being driven by the southern seasonality. Because of the very wet conditions in the third quarter in the south, our land tends to be more operable in wet weather than the industry as a whole. And so a good part of our harvest plan for the year,we moved into the third quarter, it helped manage the whether conditions in the third quarter, which is resulting in a somewhat lower harvest in the fourth quarter as we've adapted to the weather.

This has resulted in us likely purchasing more purchasing more materials in the fourth quarter than we normally would otherwise. Because of the low inventories also in the west and the improvement in export log volume, some of that volume that we will be shipping in the fourth quarter, an increasing amount of it, will be purchased on the outside rather than from our own free land. Bill, is there anything you would like to add on that?

That's basically what's going on.

A last question on the containerboard area, when do you think you would probably make a decision on further possible closure on capacity? And also, are you taking a comparable amount or a high level of downtime, I think you indicated 89,000 tons or so in the third quarter?

Well, Rich, as you know our new policy we don't comment on the amount of downtime that we expect to take in the future. I'll only say that the medium mill that we closed in north bends in the third quarter is the only closure we have planned at this time. I would simply be indicating that in both uncoated free sheet and in containerboard, our productivity continues to grow at a greater rate than our sales rate. And so we would expect to both adjust our production levels to meet the demand, because we are working against very tight working capital management goals, and at some point there could be some rationalization, but it would be premature to speculate as to when that might happen.

Thanks.

Next question comes from Mark Connelly of CSFB Please go ahead.

Just a couple of things on the wood side. Can you quantify the impact of wood costs on the real estate results? I assume those results could have been even quite a bit better had wood not moved up as much as it did?

I will take that one, Mark. The reasons recent spike in lumber panel prices that everyone is aware of has increased our cost $1,500 to $4,000 per house, depending on the size of the home. However, generally we are price protected by our suppliers for raw material increases on homes that are under construction. And also we have partially mitigated the higher cost through (inaudible) purchase in certain products, and in some cases have passed selected price increases through to our customers. So we don't see the increased panel and lumber prices having a significant impact on the results either of the last quarter or for the projected operations in the fourth quarter.

Is Weyerhaeuser providing some of that price protection?

No, they are not.

Second question on timberlands, perennially difficult for to us get right. In the last couple of quarters, we seem to have all been consistently low on the earnings in that segment. Can you give us any more clarity on why that segment keeps beating numbers, and what we might do to do a better job of projecting it?

Mark, on the timberland segment we try to give- it does not fluctuate very widely and I think anyone who follows our guidance on timberlands would not have been very far off.

But the guidance last quarter was that it wouldn't be as strong, and it would be headed back towards a more normal level and this is pretty good numbers still?

It is stronger than expected because of the strength in the export log markets, which we did not anticipate at the beginning of the quarter, and that tends to be the major, tends to be the major driver. I think that we didn't anticipate either the strength of the run up in lumber and the fact that lumber- log prices as Bill noted typically lag lumber prices and we expected the weaker lumber prices in the first and second quarter of the year to be at somewhat weaker log prices in the third quarter, and as as you know, that did not materialize. But our timberlands segment, as you know, tends to be from an earnings standpoint one of the more stable.

Okay. And finally one last question. Is there anything Weyerhaeuser is thinking about doing differently with respect to its credit rating now being on watch for downgrade? Is that affecting the way you are thinking about divestitures or anything else?

Let me correct one thing you said, because it's its a very important difference. You said we were on watch. We are not on watch.

Apologies.

Our outlook is negative, and that's a very, very different thing from the rating agencies' point of view.

Yes, apologies for that. But, nonetheless, It is negative and most people would view the outlook as fairly negative. And the comments, the rating agency comments, were with respect to the industries ability to pay down debt. That's really what I am trying to get to. Is Weyerhaeuser thinking differently about how it's going to work its debt levels down?

We continue to execute against the original debt reduction plan that we shared with the rating agencies at the time of the Willamette acquisition. I think that their recent action on a number of committees to change the outlook to negative reflects their concern about the potential rate of recovery, in particularly packaging and fine paper with uncertainty around how long wood products strength will be here. And that market condition may make it more difficult for us to achieve our debt reduction goal. We have continued to adapt our plans in terms of capital spending and asset sales, primarily timberlands in the last year and a half, in order to continue to perform against that original plan and that we are still working against that original plan and intend to do so.

Okay. Thank you.

Next question comes from Eddings Tebold of Morgan Stanley. Please go ahead.

Thank you, and good morning. Quick question, just wanted to get from you some greater detail about perhaps the level of sales or the progression of sales, in both containerboard and fine paper markets, perhaps through the third quarter, and to get an early read on October.

Sure, Eddings. Will you repeat that? We couldn't hear you very well.

I will speak up. I was wondering if we can get a sense of sales volumes as it progressed through the third quarter, whether or not you believe you are seeing signs of strengthening at some of your key customers for both the containerboard side and the paper business, and what your early prognosis is for October and whether or not that bodes at all well for the fourth quarter?

Kathy may want to comment on this, but let me just make a couple of comments and then she can add her thoughts.

The sales through the third quarter in packaging improved modestly, so our 1% improvement, but that's a normal seasonal pattern. And October continues to follow that pattern, though without - and not reflecting anything we would identify as economic recovery. Our paper sales remain relatively flat and at this point in October are not showing any significant improvement from the third quarter.

The only comment I would add is that the seasonal in containerboard was normal, but there is no recovery or change beyond the normal seasonal pattern. And so we are not seeing a recovery as Dick mentioned in the opening remarks, we are not seeing a recovery coming through in that part of our business.

Next question is some of this recent weather we've been seeing and perhaps you've been seeing in Washington State, will that have any impact? I notice you've been fairly more bullish on the west versus the south. I was wondering if there was going to be any impact from this recent inclement weather.

I'm assuming you are referring to the floods that we've experienced in a number of areas in western Washington.

The mildly inclement weather, yeah.

Yes. The areas that are flooded don't really have a big impact in the areas in which we log, which tend to be at the higher elevations. So I wouldn't expect that the weather in the west will have any material impact on our fourth quarter. Bill, would you like to add anything?

There may be a day or two here, but no consequence for the quarter would be expected.

Great. Thanks very much and I will see all of you next month.

Great.

Your next question comes from Mark Wilde of Deutsche Bank. Please go ahead.

I have a few questions. I wonder, first of all, in building products business, were there any inventory gains in distribution, and if so, can you give us an order of magnitude?

No, there were not inventory gains. There were actually inventory reductions. The quarter was very busy, and demand was very strong through the quarter. So we worked hard to hold our own.

Mark, this is Dick. Let me just add to Bill's answer. While the inventories went down, of course the value of the inventory as prices are rising, we are marketing to market all the time, and clearly we were not replacing inventories at the price that we had purchased them at. And so, in that sense there were some gain on inventory because of the rising prices. I don't know that we could quantify that, but it was certainly a big contributor to the quarter, Bill, wasn't it.?

That's really what I was getting at.

Can you also, just moving over to real estate for a second, can you give us any sense of what type of planned inventory you are currently carrying in the real estate business, if you were to continue to sell homes at existing rates?

We have advised, I think, in recent conferences that we carry around a five-year pipeline of lots. That number is holding fairly constant. That number varies on a market-by-market basis depending upon the length of the lot pipeline that's appropriate, given local market conditions. So we continue to place land as we sell homes, and our pipeline today is roughly in that same range, around a five-year pipeline on average.

Is that true pretty much across the country in the different markets you're in, or does it tend to be a little higher in some areas than others?

It varies by market. It's longer in California, where we have a more extended entitlement process, and by contrast, it's much shorter in a place like Houston, where we don't have zoning and the approval process is pretty much simplified. So it varies and it fits with the local market conditions with respect to entitlements, and also its matched up with value proposition that we happen to maintain for our local operations.

Finally, Dick, I was wondered if you could just talk to the state of the pulp market a little bit, because we hear some rumblings about whether the Chinese have been rebuilding inventories and I'd like to know what you guys, how you read that situation? And also maybe to just talk about what led you to kind of take this stepped approach to pulp prices this fall?

The stepped approach is one that we've followed sometimes in the past. It was what we thought would be feasible to achieve in the marketplace. We did achieve the first increment in October, and we currently feel quite positive that we will achieve the second increment in November. Our prices in Asia have held relatively stable, and I don't know that we know any more about the inscrutable Chinese behavior in the pulp markets than anyone else. So much of the market pulp in China now comes from Russia that a large part of the Chinese buying will be driven on their ability to get staple supplies from Russia, which has always been somewhat difficult.

Is it just a come back to this pulp price and this stepped approach, is it fair to say that where you were concerned about trying to push 30 through in one month would have been the domestic market rather than the offshore market?

Kathy, do you have any thoughts?

No, it's something that we, as Dick said, we've used this approach in the past. We felt that this was, for our customers, an approach that was very workable for them, and no, there's no particular difference.

In the pulp business, Mark, domestically we are primarily a fluff seller and fluff prices have been stable for quite a few months. And we sell some paper grade into the tissue and towel market. Most of our paper grade sales are in either Europe or Asia, so we tend to react in our paper grade pricing primarily for the Asian and European market.

Okay. The reason that I ask that, Dick, is if you look at the uncoated free sheet business, it looks like you and another couple of people took a different stand versus some of the other big uncoated free sheet producers. In terms of pricing this autumn, you took a more conservative stance.

I certainly can't comment on what other companies are doing. We are doing what we think works most effectively against our customer base as we read the supply -demand balance in the industry.

Finally, just on that uncoated free sheet business, laminate did a lot of continuous business forms, and if we look at the industry statistics, that market continues to drop pretty quickly. What are you doing to offset that decline in the forms market?

Well, it's a market that has been declining, but it's been declining for a long time. So we just continue to shift to other markets, and it's one of the factors that leads to the rationalization of capacity over time. As you know laminate also had a very strong position in direct sales to big boxes, which we've also continued, which has allowed us to shift some production from forms to the growing business paper market as these two markets have evolved over time.

Thanks, Dick.

Your next question comes from Chip Dillon of Smith Barney. Please go ahead.

Yes. Good morning. A couple clarifications. At the top of the call, Kathy, you mentioned two downtime figures, 89,064. If you could clarify what those are, first?

Yes, the 89,000 was for containerboard in third quarter and 64,000 was for white paper in the third quarter.

Okay. Then, Dick, you had mentioned on the corporate and other expense line, that in the first quarter, look for something in the $65-70 million range and then after the Willamette transition costs it would be $50 -55 (million). What about the fourth quarter? Are you saying it's going to look on that line similar to the $94 million we saw in the third, or more like the $65-70 million number you say we should look for in the first?

It should look more like the 65 to 70 number, if there's no change in the Canadian dollar.

Okay. I guess the last question is for Bill on the wood side. It looks like we had , when we look at where panels prices are today, including mid-week numbers, it's probably safe to say that when you talk about a seasonal decline contributing to a down number from the third quarter, you are looking for a pretty sharp price decline in panels prices from here, which mathematically seems like it would have to happen for the number to be down.

I think I said that we have a strong outlook if weather holds. The order files are good across the businesses, and if we can shift those order files it will hold up pretty well. Panel prices did hold up for OSB this week. They were off slightly for plywood. Lumber prices are up about $50 on average across the board from the peaks, and futures are up about $80 from the peaks. So if the weather holds, then it could be stronger than we usually have in the fourth quarter, and if the weather closes in, it could come down quickly.

But it looks like your forecast is certainly anticipating that everything is perfect from here on out?

That's correct.

Okay. Thank you.

Your next question comes from Vic Morrismore of Golden Sachs. Please go ahead.

Good morning, it's Rick Skidmore. Just a follow up on a prior question. Bill, could you quantify the wood cost impact that you are anticipating fourth quarter versus third quarter in the wood products business? And then I just have a couple of follow-ups for Dick.

Rick, I really can't quantify it. I don't have those at my fingertips.

Okay. And, Dick, can you just talk to thoughts on the Canadian coast in terms of what Weyerhaeuser is doing with respect to their timber that they own on the coast in BC? And then, second question with relation to Canada, can you quantify what that Canadian dollar receivable at the U.S. subsidiary is, so that we can start to think about what the FX (phonetic) impact might be on the corporate and other, given the Canadian dollar's strong move so far this quarter?

Your first question regarding the fee lands on the Canadian coast, the fee lands on the Canadian coast are managed as part of our overall portfolio of timberlands in the world. As we look at those timberlands and manage them in the same way that we do in Washington, in the south, in New Zealand or in South America. So I don't know that there's anything particularly unique about the BC coast in terms of the way that we thinking about it. We are reviewing, we review the whole portfolio annually as you know and periodically, and so I don't know that there's anything new there. The Canadian dollar receivable is that we have the inter-company receivable that affects the foreign exchange translation, is about $600 million U.S. So it's about eight $800-900 million Canadian.

Thank you.

Your next question comes from Peter Ruschmeier of Lehman Brothers. Please go ahead.

Thanks. I had a few questions for Bill Corbin. Bill, I think you mentioned that one of your strategies in wood products was to use your existing platform to improve your volume with strategic customers. I was curious if you could elaborate on that progress to date? I assume it's fair to say that you are growing your share with those larger customers?

Yeah, that 's right. And quarter to quarter, we are up about 5% and year-to-date, we are up about 8% with our strategic customers.

Okay. I guess, another question, Bill, if you could perhaps give us, shed some light on comparing and contrasting the profits of Canada wood business versus the U.S.? Given the countervailing duties, given the currency, wouldn't it start to make sense for Weyerhaeuser to start shifting more production into the U.S.?

I mentioned that the exchange rate has taken some of the cost improvement wind out of the sales in the Canadian business. We balance our production as well as we can with export shipments into the Japan.

We have moved some of our western lumber production into Japan from Canada. Our product mix, we've held firm on our product mix, and that's a bit of a penalty to us because we tend to have a more higher value product mix than our competitors, therefore a higher duty. But that's just our customer mix. In terms of OSB, our competitive position is good there relatively to our other Canadian competitors. So I don't know that we can do much we already have.

Okay. All right. Can you perhaps comment on the labor negotiations in coastal BC and what you expect going forward there?

Yeah, the labor situation is strained in the coastal operations. The expectations are high and out of sync with the nature of the business, given the duties and the significant Crown reform issues that are there. So, we continue to work with the coalition in the coastal group, and take a pretty strong line in terms of what we really need to come back to profitability as an industry as a whole. So right now it's quite strained.

Is there a time line that you have an expectation to get things worked outer, or is it uncertain at this point?

I think it's uncertain, but it's fair to say that employees really want to work and want to find a resolution.

Okay. Just a quick question, maybe, Dick, I don't believe you have a capital budget yet for 2004 but do you have a range of expectations you could update us with for your Cap Ex for '04?

Yes, Pete. We are projecting no more than a $750 million capital budget for the next two years.

Okay. Just to clarify, that includes timber spending, correct?

It includes reforestation, timberland reforestation. It would not include any small timber purchases we might make in the context of 1031 exchanges.

Thanks very much.

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

Thank you. Last quarter you provided us a waterfall chart, which showed effectively how earnings went from the first quarter to the second quarter, through price in volume, energy and raw materials, pension and medical, other business improvements. Can you give us what those numbers would have been going second to third quarter?

The primary change, Mark, was in that corporate and other, which is what I tried to explain in my opening comments, which was the swing in foreign exchange and variable compensation. Virtually all of the rest of the change quarter to quarter was in price. There was a very small impact in volume of about $80 million, about $19 million in raw material costs, and very little change in any other cost.

Okay. So I take it plus-eight in volume and minus 19 in raw material.

Minus eight in volume. Our volumes were negative when you accumulate all the businesses. The price then was $193 million.

$193 million. Thank you, helpful. Can you give us an update on the pension for next year, and whether or not you've got any preliminary expectations on where expense might be going?

We do not have. We will, I think in the next few weeks, get our third quarter report from our investment managers. And after we've done that, we will complete our analysis of where we expect to end up this year, and then develop our assumptions and our expense estimates for next year in the fourth quarter, and we will update everyone on our next conference call.

Okay. To try and better understand the integration and restructuring charges, which as you noted, were going to fall off and reduce the corporate expense number starting in the second quarter of next year. Have those been non-cash charges or have they been-?

Those that I referred to are cash charges. They were a result of restructuring how we executed the change in controlled payments over a longer period of time, and so they were cash charges.

Okay. So they absolutely do go away in the second quarter, because of all of the severance or whatever it may have been will be in the past?

But those programmed payments will have ended at the end of the first quarter of next year.

Just lastly, one small one. Typically you do a fourth quarter timberland transfer, and that will usually increase the earnings for timberlands in segment reports and decreases the corporate. Are you doing that this year or not?

There was a small contribution to the foundation in the third quarter. I don't expect that there will be one in the fourth quarter this time. But that is always an option for some timber sales and so I wouldn't- I don't have the data to answer that question accurately. It can happen, but if it does it will not be any more than in the $5-10 million range.

Okay. Thank you.

Thank you. Your next question comes from Karen Gill son of Merrill Lynch. Your next question comes from Karen Gilson of Merrill Lynch.

Good morning. Most of my questions have been answered by now but I was just wondering if you could give us your perspective on the ongoing developments of the Canadian lumber dispute.

Bill, would you like to address that?

Yeah, what you read in the papers is pretty current. Some bullish statements yesterday coming out of Canada, with some expectation for an interim solution. Our position, of course, is that this needs resolution and it needs to happen through policy changes in Canada, and we do not believe the legal roadway is the right road to go down. Meetings have been taking place recently. I think the impetus there was the NAFTA panel ruling, and it looks like there is some momentum behind getting an interim solution in place. It's sort of day by day at this point.

Do you have any sense of timing if that were to be successful, or too hard to call?

It's really hard to call. Like I say, there is a little more action in terms of the coalition and the Canadian industry talking, and there's been a fair amount of action between the government participants in just the last couple of weeks. So that's encouraging.

Thanks a lot.

Thank you. Your next question comes from Stephen Atkinson of Nesbitt Burns. Please go ahead.

Good morning. On the lumber, Bill, you mentioned that you expected full operation in lumber. I assume that's predicated on what happens with the weather. Would that be correct?

Yes. The weather, that's correct, and we have strong customer take-aways and we would expect to operate full. The weather could affect log supplies. They are not very high at the moment. Of course, weather can close down job sites, which will slow demand. In normal seasonality we expect to run full in the fourth quarter.

It was really just the idea that there's not an intention to build up inventory for next year?

No interpretation to build inventory, that's correct.

Could you talk briefly about your outlook for your red cedar and the hemlock and Doug fir market?

You are talking about the high-grade species coming out of the coast?

Yes.

Those markets have been impacted significantly by the DVDAD situation, and we are running our coastal business at about 75% operating rate. So demand has been affected significantly. In our case, we ship about two-thirds of our upper grades to Japan and Europe. Those markets have been basically flat. They haven't really grown but they are not really down, either. So we will continue to move volume to those markets.

We missed the spring market this year, which, of course, is the time when you see the biggest demand for cedar and that was a weather-related circumstances. So we would expect more normal seasonal volumes and a stronger demand for cedar in '04 than we had in '03. We still are not running full and we don't expect to run full.

So what that's referring to is the very wet weather we had in the east last year.

That's correct.

Okay. I had a question on uncoated free sheet, where we have some segments growing and other segments shrinking. Would you be able to talk about the outlook for demand and to which segments you like and don't like? That would be for Kathy or whoever would like to respond.

Stephen, we are seeing a lackluster market across the board in uncoated free sheet and aren't really seeing a strong differential in growth and demand for this grade.

I guess I was referring to where you still have growth in the home office, as it were, but the other ones, what they are saying is they are all lackluster?

Over the longer period of time, we have seen growth in the big boxes and business papers driven by home office and other uses, as compared to the commercial printing market. I think Kathy's comments reflect what we see in the market today and as we look out over the next quarter or so.

Thanks.

Your next question comes from Akiva Cohen of Morgan Stanley. Please go ahead.

Something you didn't mention during the rating agency discussion was the Fitch downgrade to BB+. It had quite a people rolling their eyes in the bond market. I was wondering if you could provide some insight into what prompted that downgrade?

I don't know that we can provide any insight as to what prompted the Fitch downgrade. That was an unsolicited rating we got based on public information that you all have. We don't share the same level of insight information or the detail of our plans with Fitch that we do with Standard and Poor's, and Moody's, and so I think I would just refer you to Fitch to talk about why they did what they did. It certainly wasn't based on any information that they received from the company as a result of a discussion with us.

Okay. Great. Did you upstream any cash from WRECO to the parent company this quarter?

We upstreamed sufficient cash from WRECO to the parent company to pay WRECO's taxes.

On the working capital side, if I'm looking at the reduction from 3Q to 4Q on the receivables, last year it was about $200 million. You have about $248 million to go to get to an equivalent level to last year. Should we see something in that that order of magnitude, to $200-$250 million reduction in the fourth quarter?

I think that a lot of that is driven by, as you point out, by receivables. Our wood products pricing has held up certainly much better than a year ago. But a lot of it will reflect, will be a function of what Bill was talking about, and that is the rate at which we see these sales rate decline after the Thanksgiving holiday when people start beginning to take holiday downtime and start- and they really stop buying for the year around the Thanksgiving period. So we don't know exactly how that will unfold. Bill, I don't know if you have any comment.

No, it's always a crap shoot in terms of what happens during that time of the year.

Okay. I guess we'd expect a similar dynamic with inventories as well, that if you see a slow down you will see inventory numbers come down?

Certainly in our building materials distribution business where they replenish against the sales rate, if the sales rate comes down, the inventories tend to come down.

Okay. Great. Thank you very much.

We have time for one more question. Thank you. Your next question comes from Steve Chercover of D.A Davidson. Please go ahead.

Good morning. First question, I guess, for Bill Corbin. With panel prices as high as they are, have you seen any indication that the Europeans or South Americans are starting to target the North American market for exports?

In the case of South America, Steve, we've had a rather steady flow from Chile for some time, and those basically are going into industrial panels, not into construction panels. But we've not seen really any structural panel imports from South America other than just the nominal amount.

The European capability is there for some OSB to move into North America, and that has been happening and in very small amounts, again. But if the market holds as strong as it has been into the early part of next year, we will see some European wood coming into the East Coast, in spite of the exchange rate. But I don't think it's significant, relative to total industry capacity.

But really not enough to budge the needle significantly?

No.

The other question for Dick Taggart, you said you are on track to meet your full year debt target. Can you actually tell us what that is?

As we've indicated a number of times, Steve, the debt goal is under $12 billion at the Weyerhaeuser Company level and holding the real estate company relatively flat.

Great. Thank you both.

Thank you very much for joining us this morning. I will be available for the rest of the day if you have any follow up questions. Have a nice day.

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