威爾豪瑟 (WY) 2003 Q4 法說會逐字稿

Good morning. My name is Angela and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Weyerhaeuser fourth quarter 2003 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone key pad. If you would like to withdraw your question, press star then the number 2.

I would now like to turn the call over to Katherine McAuley, Vice President of Investor Relations. Thank you. Ms. McAuley, you may begin your conference.

Thank you, Angela. Good morning and welcome to the Weyerhaeuser fourth quarter 2003 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations.

Joining me this morning are Steve Rogel, Chairman, President and Chief Executive Officer, Dick Taggart, Executive Vice President and Chief Financial Officer, Steve Hillyard, Vice President and Chief Accounting Officer. This call is being webcast at www.weyerhaeuser.com. A copy of the earnings release and presentation slides, which we will discuss on today's call, can be found on our Web site. If you need any materials please contact April Meyer at (253)924-2937.

Please read the warning statement in our press release and on our presentation slides concerning the risks associated with forward-looking statements as we will make forward-looking statements during this conference call. I will review the highlights of the fourth quarter, Dick Taggart will then discuss the outlook for the first quarter of 2004 followed by comments from Steve Rogel.

This morning, Weyerhaeuser reported fourth quarter 2003 net earnings of $92 million or 41 cents per share. The fourth quarter includes the following after tax items: A charge of $29 million, or 14 cents per share for the closure of facilities. A charge of $17 million, or eight cents per share for integration and restructuring activity. A charge of $5 million, or two cents per share, associated with the settlement of litigation. A gain of $40 million, or 18 cents per share, on the sale of timberlands in Tennessee and in the Carolinas. These items total six cents per share. A quarter by quarter GAAP reconciliation of special items for 2002 and 2003 appears on our Web site.

On our website, you will also find the water fall chart which we will now discuss. Third quarter earnings before special items were 65 cents per share. Modestly higher volumes in the fourth quarter, largely in oriented strand board, contributed two cents per share. Lower prices reduced earnings by 9 cents. Raw material costs were 3 cents higher. This was due to a lower plant harvest in the south which increased outside log purchases in the fourth quarter. Higher manufacturing costs, mostly energy costs, reduced earnings by ten cents per share. Other miscellaneous items contributed two cents per share. Earnings in Q4 were 47 cents per share after these adjustments.

I will now review the key drivers in the quarter by business segment. Timberlands: Sale of nonstrategic timberlands in Tennessee and in the Carolinas were completed in the fourth quarter. The pretax gain of $61 million was applied to debt repayment. Excluding these timberland sales, fourth quarter timberlands earnings were down slightly from the third quarter as the lower harvest in the south increased outside log purchases. Southern log volume declined 4% from third quarter and prices were flat. Domestic log prices in the west rose 5% and volume also increased 5%. Export log prices rose 2% in fourth quarter and volumes were up 7% over third quarter.

Wood products: Fourth quarter earnings were lower than third quarter, primarily due to volatile wood products prices. Lumber prices declined in the west and raw material costs rose in the south as outside log purchases increased. On average, softwood lumber prices declined $14 per thousand board feet and volumes dropped 5%. OSB and plywood prices increased dramatically and were declining sharply late in the quarter. Fourth quarter OSB prices were on average $22 per thousand square feet lower than the third quarter average. OSB volumes rose 16%. Significantly higher OSB prices negatively affected margins for engineered wood products. The sharp decline in structural panel prices late in the quarter adversely affected earnings from building products distribution.

The program of asset rationalization, which Bill Corbin discussed on last quarters conference call, resulted in a pretax charge of $13 million for facility closures in the quarter. Countervailing and anti-dumping duties associated with Canadian softwood lumber shipments were $22 million in the quarter. Weyerhaeuser duties for the full year 2003 amounted to $97 million.

Pulp and paper: The closure of a paper machine at Long View, Washington, resulted in a pretax charge of $30 million in the fourth quarter. Paper markets were seasonally weak but displayed improvement over the fourth quarter last year. Uncoated free sheet prices declined approximately $10 per ton from third quarter levels. Paper volumes declined 3% and paper mills took 96,000 tons of market related downtime during the fourth quarter. Consequently, margins were lower in the fourth quarter.

Market pulp prices averaged $18 per ton more than in the fourth quarter than in the third quarter. Pulp volumes were slightly lower due to the late departure of vessels which made that fall into the first quarter. Pulp manufacturing costs rose during the quarter partially offsetting the higher earnings.

Container board packaging and recycling: Container board and box prices declined in the 4th quarter. Container board prices fell $12 per ton from the third quarter average and container board mills took 71,000 tons of downtime in the fourth quarter. Box prices declined 2% and volumes decreased 4%. Across all categories, costs rose modestly in the fourth quarter from third quarter levels. OTC prices increased $2 per ton.

Real estate related assets: Record fourth quarter real estate earnings were driven by continuous strong housing markets. A record for single-family closings was set in the fourth quarter and margins remained strong. I will now turn the call over to Dick Taggart.

Thank you, Kathy. As we enter the first quarter of 2004, we continue to experience a very strong U.S. housing market. Wood products prices continue to be very volatile, particularly oriented strand board and improving U.S. economy, though, is beginning to improve business conditions in our pulp, paper and corrugated packaging businesses.

In timberlands, prices are stable in the U.S. market and improving modestly in Japan. Our volumes will be higher in the first quarter, resulting in slightly higher earnings from our ongoing business than we experienced in Q4. We have not announced any major timber sales at this time but the portfolio is still under review.

In wood products, lumber and oriented strand board prices have been increasing recently, oriented strand board particularly sharply, as customers begin accumulating inventories in anticipation of the strong building season. Lumber and OSB prices are expected to continue to be very volatile and we'll be sensitive to any weather related disruptions to home building here in the first quarter.

The review of wood products facilities portfolio that we have been conducting for a number of quarters is ongoing. We had announced the closure of a saw mill in the fourth quarter and in the last few days, we announced the sale of an oriented strand board plant in Alberta.

In pulp and paper we expect losses to narrow as pulp prices continue to improve in the United States and Europe where we have recently announced price increases in the U.S. of $20 a ton and $30 a ton in Europe. The paper prices there are stabilizing and we expect to begin to increase following our recently announced $60 a ton price increase which will be effective February 22. Margins are expected to improve as we are able to operate our system more efficiently following the closure of two paper machines, one in Long View, Washington and one in Rothschild.

Even though market conditions are improving in container board packaging, earnings are expected to be relatively flat. First quarter, relative to the first quarter, there will be little change. Container board prices are expected to improve following the $40 a ton March 1 price increase that we recently communicated to our customers and box prices will begin to improve shortly thereafter. Box prices are expected to be modestly lower in the first quarter than in the fourth following the decline in container board prices that occurred in the fourth quarter of last year. They are expected to stabilize in January, as I mentioned, it will begin to improve if the second quarter following the increase of container board.

Volumes in the first quarter are expected to improve as we see improved demand both over last quarter and over the first quarter of last year. Our real estate subsidiary, following a record year, is entering the first quarter with a very strong backlog and a closing schedule that should produce earning in the first quarter similar to the fourth quarter of last year and slightly better than years ago levels.

Our capital expenditure budget for 2004 remains at $750 million. Even though our spending in 2003 totaled only $626 million. Some projects from 2003 will carry over to 2004 but many projects were simply completed well below budget. Our pension fund had an outstanding year both in an absolute sense and relative to its benchmark. Our U.S. qualified plan remains fully funded and will not require any cash contributions in 2004. We will make a contribution of approximately $42 million to our Canadian fund.

Our GAAP non-cash pension expense will increase approximately $40 million this year, or $10 million per quarter. As reported in our release, we reduced debt by $1.1 billion in 2003. Cash flow debt reduction of approximately $650 million came from ongoing operations, $350 million from nonstrategic asset sales and $100 million from working capital reduction. We expect to exceed that level of debt reduction in 2004 and remain committed to maintaining our investment grade credit rating. We continue to a meet the debt reduction targets we made with the ratings agents at the time of the accident of the Willamette acquisition and we expect to continued to so.

Finally, for your planning our tax rate in 2004 is expected to remain at 34%. Steve Rogel will now make a few closing comments before we take your questions.

Thanks, Dick. I'd like to close our remarks today by stepping back a little and giving you my perspective of 2003. I want to talk about the progress we are making at Weyerhaeuser and I also want to talk a little bit about 2004.

I don't have to tell you that 2003 was a difficult year. Not only for us but also for the economy in general. Yet despite this challenge, our people made sure that we delivered on our promises to you. They did it through determination and innovation and hard work. The best way for me to thank them is to list their accomplishments. That list starts with their efforts to create the new Weyerhaeuser.

When we acquired Willamette we laid out a three-step program. First, to successfully integrate the Willamette operations into Weyerhaeuser. Second, we said we'd capture $300 million in synergies by the end of the first quarter of 2005 and third, we wanted to return us to our historic financial ratios in three to five years by focusing on debt reduction.

In 2003, we declared victory on the first two items and made great progress on the third. I knew that the Willamette people and assets were a "hand in glove" fit with wasn't that the integration would go smoothly. Our employees have proved me right. Those of you who participated in our Portland seminar and field trip saw that firsthand. You saw the enthusiasm of our people as they worked side by side to create a global leader out of two great companies. They also helped us deliver on our commitment to achieve our synergy goal. But they did more than just that, they did it nearly twice as fast as we projected and they are not stopping there.

They continue to find opportunities to reduce costs and deliver additional returns to our shareholders. My only regret is that the tough economic conditions and the costs of combining two companies and reducing our head count by 3,400 have obscured their work this year. But with promising economic signs, I'm confident that 2004 is the year that these efforts become more visible in our results.

While we can't declare victory on our third goal, returning to our historic financial ratios, we did make significant progress last year year. Reducing a company's debt by $1.1 billion in these economic times isn't easy but that's what we did. As a result, our debt is now $11.6 billion and on track with our debt reduction goals. We still have a lot of work to do to reach our historic financial ratios but we are committed to maintaining our investment grade rating. That means that the number one priority is still paying down our debt.

A few days ago, we announced our intent to sell the oriented strand board mill in Slave Lake, Alberta. This is just the latest in a series of sales we've undertaken to balance our portfolio and maximize returns. Last year, for example, we sold approximately 432,000 acres of nonstrategic timberlands in Washington, Tennessee and the Carolinas. While we used the proceeds to pay down debt that wasn't the main reason why we sold these lands. We sold them because the MacMillan Bloedel and Willamette acquisitions added 1.7 million acres of timberland.

Since we manage our timberlands by carefully combining the right mix of species and geographic locations these acquisitions changed the balance. Divesting selected pieces of timberlands helps us achieve the mix that maximizes our returns. Sales of other assets such as those in wood products achieve a similar purpose by ensuring that we operate in areas that are most profitable for us.

Such decisions are never easy. They affect dedicated employees and the communities in which we operate but they are necessary to create an efficient and competitive Weyerhaeuser. The steps we've taken are already producing results. For example, we projected capital spending would be about $700 million in 2003. Our projection was too high. Capital spending was actually $626 million, or 35% less than 2002.

Equally important though, we didn't jeopardize the integrity of our mills in this process. Well, how? A lot of credit goes to our engineers and to the excellent condition of our plant and equipment but it's also because we are more efficient. Productivity gains in our paper and container board operations, for example, have been in the high single digits.

This also means we can rationalize inefficient capacity. In 2003, we closed 12 facilities but there is still more to come. 2003 was a great year of progress. I am proud of our efforts but our journey is not complete. Our industry is undergoing tremendous change and with change come challenges as well as opportunities.

At Weyerhaeuser, we intend to more than just simply meet those challenges. We intend to capitalize on the opportunities before us. To do that, you will see us become more productive. You will see us become more efficient and, yes, you will see us continue to successfully pay down our debt. Weyerhaeuser is poised to take advantage of the improving economic conditions and I look forward to reporting on our progress in the coming year.

Thank you and now we will open it up to questions. Kathy?

Angela, could you please open the floor to questions at this time?

At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Rick Schneider with UBS.

I had a couple of questions on wood products area. The numbers were a little short of what I was expecting and I was wondering if you could comment on what the impact is if you can roughly quantify the decline in their distribution business? And also I think, Kathy, you said OSB prices, if I heard you right, were down $22. Others have been reporting prices, on average, up and I was just wanted if you can shed some light on how your shipments may have proceeded in the quarter, whether there was any backlog of shipments carried over from the third quarter?

I will take the second part of the question with the OSB price and then Dick will talk about the first part of it. Rich, the $22 was as you recall, OSB prices went up very, very sharply in the quarter and they rose very quickly in the beginning of the quarter and then turned around and started sliding down very rapidly so when you look at it on an average price basis, and what I was quoting was the average price of the third quarter versus the fourth quarter, we see that 22-dollar swing.

But you didn't have any real carry over of shipments that you had to make from the third quarter levels?

Rich, when we report, we are reporting the average realization that we received at the time that we shipped the product and the third party sell for us occurs at the distribution center, not at the mill. So is there will be a lag for us and others who may be reporting, we don't know whether they are reporting the price that they realized at the time they made the sale, the price they realized at the time they made the shipment or the price they realized at the time it was shipped from the distribution center. So it's very hard to compare our results to others who may be shipping from mills rather than distribution centers. Regarding the impact on the distribution business, as you know we don't disclose the distribution business separately but given that unprecedented volatility in wood products prices the swing in earnings in the distribution business was very material; approaching on a pretax basis $40 million.

Okay and just a comment that you made about pulp costs being up in the quarter, was there anything that really impacted you to that have that occur in the quarter? .

On the pulp side it was a little bit higher foreign exchange cost currency had an impact.

As you know, all of our paper grade pulp is made in Canada so it had a different currency effect and was affected by energy as well.

Okay and just last question. What are your views on direction of OCC here? Is that going to start to have some impact on your container board business first quarter or beyond?

As we were, as I believe Dick commented, we are expecting OCC prices to rise in the first quarter.

Okay, thank you.

Next question.

Your next question comes from Mark Wilde with Deutsche Bank.

I wondered if we could just follow up on energy first and you could talk a little bit about what energy costs might have done on a quarter by quarter basis, and then just looking forward, how you are hedged or not hedged particularly with reference to natural gas?

Mark, I don't have the quarter to quarter track with me. The largest outside exposure that we have, as you know, is natural gas. We reported many times in terms of total energy we are about 65% self sufficient. We purchased about 1 percent, just over 1% of our cost of sales is natural gas.

We hedge, we have a hedging program that is in place through the winter months on natural gas. It goes in place in December and then carries us through the winter months so that we are hedged about 30 percent, about a third of our natural gas purchases through the winter months and then that hedge rolls off during the summer months. We had, the natural gas prices while they have been rising, did not rise to the point where the hedge had an effect in December. It is having a very positive effect in January but there was actually a modest negative effect from the hedging program in the month of December. But we will be hedged now, going forward, for a third of our natural gas purchases.

It's a third through the winter months or a third for the year as a whole, Dick?

A third through the winter months. We have about 30 some percent through March, then it drops to 20 then it will drop lower and then we will start laying the hedge on again as we approach the winter next year.

Okay. Do you have any sense for, if prices were to stay where they are at right now, just how much of a quarter to quarter impact that would be for you, as we try to think about how the first quarter is going to shape up?

I don't have an estimate at this time.

Okay.

But it's, our natural gas purchases are about $90 million a quarter.

Right, right. Then secondly, Dick, I just wondered if you could give us any figures on the impact of that quarter to quarter Canadian dollar move, maybe also weather that's forcing you, or leading you to reallocate on production between the U.S. and Canada?

Well, I can't speak for how the businesses are dealing with the reallocation of production because they are sometimes very different products than all of our paper grade pulp in Canada all of our fluff pulp in the U.S. so, you can't really reallocate there. The other products that are significantly affected are orient strand board, lumber and some uncoated free sheet. Certainly, when we make decisions to take downtime on free coated free sheet we take downtime in the highest cost facilities. So there is some effect there.

The Canadian dollar effect, overall, was about neutral for the company as a whole. There is positive foreign exchange translation that appeared in corporate and other of about $19 billion but we had some similar negative effects as a result of higher cost in wood products and in pulp and paper particularly.

Then finally, Dick, we seem to be going hyperbolic again in terms of OSB prices and I was wondering if you could share with us about how you are playing that in your distribution business right now. It's pretty unusual to have OSB pushing $400 in the middle of January?

Well, it is and as many of you who participated in our calls and discussions know we anticipated the sharp drop and we anticipated an early, earlier than normal recovery, mainly because as we reported we have a six-month backlog of unsold homes, that have not closed in our real estate business and many of the public builders report similar backlogs. What that means is that dealers are talking to customers who have a six-month order file in front of them and in the fourth quarter of last year experienced some stock outs in some of the key OSB and lumber items. So, we anticipated that any time that there was any weakness in price or an ability to accumulate inventory going into the spring building season that that would happen and that is indeed what appears what will happen.

As I mentioned in our prepared comments, Mark, any disruption to production of homes that may be weather related, we think they are, related could impact the prices in from for OSB because there is an inventory accumulation going on right now at the dealer level.

Thank you, Dick.

Next question?

Next question comes from Chip Dillon with Smith Barney.

Hi Chip. Angela, could you please check Chip's line?

Yes, ma'am, hold one moment. We are experiencing technical difficulties.

Hello? Can you hear me now?

Yes.

Oh, great. Hi, okay. I actually wanted to up follow up just quickly on that one question. When you actually look at the panels business you all recently are converting a plant somewhere away from plywood and we've seen Roseberg shut down and so, a lot of people were looking at what's being built but forgetting about what's being taken off-line I was wondering when you look at what is being built, you really only have, I guess, Huber, GP and LP and 06 and there is really no one else to build. Is there a chance, given your big size in OSB, that either, A., you will be building something before '06, '07 and, B., that you may have some other plywood plants that you obviously wouldn't want to identify that might not be worth keeping around some time in the next few years that we could see more reduction on that side?

Steve should probably comment on that.

All right, Chip. First your question about building new OSB capacity. I can't comment on a new plant. The first thing I have to say is reiterate that we are paying down debt these days but nevertheless, we intend to stay in OSB and we are committed to that business and ultimately, we intend to grow.

With regard to the plywood comment you made, we are busily converting our capacity to veneer production for LVL. that meets with our engineered wood business. That plants still lay up plywood from the downfall of the high-graded veneer that goes out to LVL and would stay in that business but we have been taking some capacity and diverting it into that because it's a higher yield to us.

Could there be more of those type of conversions in the next couple of years?

Basically, we are working to try and balance off the growth we've seen in our engineered wood products business and I can't comment on individual plants going into the future but it is something that I could say is very good strategic move for us.

In terms of your growth in OSB, I guess it's fair to say in your capital budget you certainly, at 750, I guess you don't have any construction of OSB plants anticipated in that number for this year?

The budget that we have is for maintaining and optimizing our facilities. There is relatively little money in there for either new facility construction or acquisitions. Those would, as they come along, I would say, would tends to be on the smaller side.

Okay. Looking at the issue of the late pulp shipments that you mentioned that some of the vessels took off after the first of the year in pulp, can you give us an idea of how many tons we could be talking about there?

About 10,000 tons, Chip.

Okay and that's sort of above and beyond what's normal? I know you had an accounting shift about four, five years ago that had a similar impact but since then, I guess, this is sort of unusual?

Well, not really. I mean it's just that the ships didn't sale in time for the end of the quarter. It really wasn't anything extraordinary or unusual, just wanted to note that in the volume area.

Okay and then the last question, because I know Steve is probably in a great position to, given your involvement with all the trade negotiations, we saw Timbech yesterday once again if you back out OSB, clearly report a negative EBITDA number in lumber and it seems like most producers up there are at negative EBITDA with the strong Canadian dollar and the tariff and given the WTO's determination a week ago, do you see any movement to the see some kind of a quote at a system put in place in the next two or three months or some other way to kind of ramp down the production up there?

Well, Chip, it's been kind of like a tennis match. First we get a decision one way out of NAFTA that proposes lower duties that sets us up for lower duties out of Canada and then we get the W. T. O. rulings that seem to go against the Canadian side. What we say is this ultimately has to be a negotiated settlement and indeed there still are communications going on between the countries. There is nothing really substantive that I know of at the moment going on but still, I think the governments understand that there is no out right win for either side here, that ultimately we've got to get a negotiated settlement.

Meanwhile, some of the provinces in Canada, particularly British Columbia, is moving toward a market pricing system and we applaud that. They know that's coming and they are getting it in place and hopefully at least in the province where the most lumber production is, it will be when it does come, the negotiated settlement will be a bump less transfer.

Thank you.

Next question?

Your next question comes from Peter Ruschmeier with Lehman Brothers.

Thank you and good morning. Steve, I have a question on a comment you made in the press release about the changing customer base driving significant changes within the forest products industry. Just curious if you could elaborate on that and perhaps what Weyerhaeuser is doing kind of to respond to that?

I think you are referring to, Peter, the issue of the change in the pathway to the retail market. As the first big boxes grew supplying the repair and remodel market, that changed the way we do business. Now as we see the builders begin to or they have been consolidating but becoming very much larger, and the intermediary distributors, analyzers and the like are consolidating as well, we see changes going on in that pathway to our markets and the company is adapting to meet those changing conditions.

Fair enough. Another question I had was, again back in the press release you indicate that the guidance for wood products is expected to be lower in the first quarter than the fourth quarter. I just was puzzled by that, citing decreases in lumber prices and panel prices. Shouldn't we be expected the opposite of that with what's been going on recently with OSB, plywood and even to a lesser degree, the lumber side?

Pete, this is Dick Taggart as you know, I've been forecasting the earning in our wood products businesses for now almost 30 years and I have never seen the kind of volatility that we've seen in oriented strand board prices and I don't believe there's a personal alive that can predict the earnings quarter to quarter given the degree of volatility we're experiencing in OSB right now. The time that we wrote this outlook, we were concerned about the fact that we had inventory accumulation going on there may, in fact, become price weakness before the end of the quarter depending on how construction ramps here in the first quarter. And so we gave the best guidance we had at the time but clearly, OSB prices and lumber prices continue up at the rate they've gone up in the last week, then it's very difficult to predict whether it would be up or down.

It's fair enough. But there's nothing related to, say, contractual situation that would prevent you from realizing some of the market prices that we are seeing published in greater lengths, for example?

No, this is simply our comment reflecting what is still uncertainty in the recent price rise for this quarter.

If I could ask some related questions on the timber side of the business; I know that you don't give specific guidance but is it possible to give us some rough guidance o on your expectation for harvest volumes full year '04 versus '03 and whether there is much of a mix shift or not of saw timber and pulp wood and then I guess as relates to that, your expectation for your purchase of logs from external sources, whether that percentage is expected to go up, down or remain constant with '03?

Well, that's, there are always the trend numbers which we talked about which are based on our longer term harvest plans which would lead to an expectation that harvest would be up in the south but down in the west as a result of the lands that we have sold in the last year in the west. Our southern harvest grew about 2000 8ths growing about 7% a year and we are transitioning now more into saw logs the higher percentage of the mix rather than thinning, but the actual year to year is so influenced by weather conditions that it's very hard to predict exactly what the actual year to year change will be. But that's something, you should see some continued improvement or increase in southern harvest, a slight decline in the west and a gradual shift to more pruned soft timber. Steve?

I think there's just one more point to add, Pete, to that and that is in the acquired lands over the last 18 months we've shifted the regime of management and in the south, we've been doing an increasing amount of thinning to release those lands to produce more saw logs. So in 2003 and I think through 2004, at least, our pulp wood increased as well.

Just lastly if I could, any comment, Dick, perhaps on working capital, whether you think it's the appropriate level for the company at the moment and any seasonal guidance you can offer as we go through the early, part, one 1Q, 2Q, just a seasonal pattern of what you expect working capital to do?

Well, working capital at the end of the year was in very good shape. I'm always one that tries to drive to lower inventories but our receivables were very current and in very good shape. So, I think it was about where it should have been at the end of the year. The inventories in many businesses were quite low, actually, by our historical standards.

As we go through the first quarter, we will typically have a three to $400 million build in working capital. That comes from two sources. The first is the increase in sales rate that occurs, particularly in wood products as the sales rate increases through the quarter receivable balances will build. That will be compounded as a result of price increases that are occurring and particularly those that are accelerating in wood products. I would expect we would have significant increases in our receivable balances between the end of the year and the first quarter.

In addition, there's some seasonal inventory building that occurs because of the logging systems, particularly in Canada where you have to log heavily in the winter months to build inventories to take you through the spring breakup when you are not able to log at all. And some seasonal inventory building in our building materials distribution business as the sales rates pick up. And in our corrugated packaging business as we build inventories in anticipation of the needs of our produce customers that begin harvesting late in the first quarter.

Thanks very much.

Next question?

Your next question comes from Steve Chercover with D.A. Davidson and Company.

Good morning, just a couple quick questions. First, on the container board business that $50 million swing certainly seems quite Large is there anything else that's having an impact beyond the slide in prices and the declining volumes, any operational issues whatsoever?

We also have a little bit higher prices, costs, excuse me, in the quarter and those were pretty much across the board. We did see a little edging up of OCC costs in the quarter.

I think that we had some downtime as well.

Yes, we did, we had downtime.

So the problem with the mills is that they are running too well.

Two much product, not enough orders. You don't really see any change in that, at least in the first quarter?

The downtime will be less. The operating rate will be better because we do expect better volumes in the first quarter than in the fourth.

And also, I'm not sure if you'll be able to comment on this, I was wondering are there any new developments in those older lawsuits are you willing to comment on?

There are no new developments. As you know the damage hearing has occurred in the month and will be completed, it's underway and we have not yet had that completed. The judge has not ruled. So that process continues and there really are no new developments to report.

But you remain optimistic that you have a fairly good case here?

We are confident in our position but there are a second round of cases that are at trial and we really can't comment on those.

The second round, the copycat suits or the similar suits will be tried in March. But the, we do expect some assessment of damages we do expect to then proceed through the appeals process as we said many times.

Okay and finally, just for modeling purposes the revenue and expenses at the corporate level will they be pretty much the same run rate going forward or do you see any change in those items?

The revenue at the corporate level is made up of revenue from our Westwood shipping line and from our international joint ventures and I would expect that they would be relatively flat to increasing gradually.

On the expense side, do you see a similar?

The expense side in corporate and other could be very volatile because it is where you accumulate all of the other expenses that that don't occur periodically and so it will be very lumpy over in expense and it will also be affected by foreign exchange.

Okay. Thanks very much.

Next question.

Your next question comes from Eddings Siebel with Morgan Stanley.

Thanks very much. Quick question on late bit of divergence on packaging business on some of your items on the container board side, some of your packaging volumes on the box side. I was wondering if you could comment on what you are seeing in that business. Is that a little bit our light weighting are you seeing a greater degree of integration, how should we think about those two in relation to one another?

The container board volumes, the production volumes will continue to improve as a result of productivity improvements in our facilities, Eddings. We continue to try to grow the packaging business at a greater rate than our container board production to improve our integration over time but I wouldn't expect any significant changes in that in the next few months. Steve, would you comment?

We are on a track of as we said in the prepared remarks of high single-digit year over year production rate increases. So we have been idling both temporarily and permanently capacity at the mill left to balance out our own internal needs in what we market to the open market. As that continues, our corrugated packaging side has been working to try to both maintain and increase business in a very difficult market situation. So, what we have been doing is taking temporary downtime to help balance and that's very costly when we do that.

Now, downtime, the next question you'll have is what about permanent shutdowns. That comes as, you have what I would call building blocks of production. We are caught in between where we have an efficient set of machines now but, as we go into the future and build capacity, we will have to make decisions and I think we indicated that.

Great. Then, Steve, perhaps a little bit of a longer term question. Given a little bit of the run in OCC I guess not entirely unexpected and I know the company has its own collection business. Is there a price point there or a volatility level there that would make you concerned and really make you try and seek out perhaps ways to better balance your container board business in terms of its OCC or recovered fiber versus craft raw material sources?

Yes, OCC has always been volatile as you know and as capacity is built overseas to make liner board and medium out of U.S. OCC, that makes for an interesting long-range picture. We have a large collection system so it's not a matter of access to it, it's a matter of price and it's a matter of price in comparison to virgin fiber production. So, we have had some active projects to give us the flexibility at some of our mills on varying the production so that we can offset some of the volatility.

Right, thank you and one final question. You guys have been pretty adamant about your view on your ability to keep cap ex at kind of that $750 million level or at least a focus on capital discipline going forward, what should we expect in terms of depreciation, a little bit of a modeling question here? When should we expect to begin to see depreciation tipping down, you know, assuming that the company is not going to be making acquisitions?

Eddings if you look at just depreciation it is already tipping down, I believe, it is the DD&A. number that is going up is going up because higher timber harvest adds to the depletion and the timber sales adds to depletion. The depreciation will be at about $1.2 million, the remainder is the amortization and the depletion. That is up slightly from a years ago and a year ago you will recall we only had Willamette from February 12th on, in our books.

The $1.2 billion should begin to gradually decline although not precipitously, beginning next year if you exclude the effect of any asset sales or increase in harvest that might increase the depletion but I wouldn't expect it to change too dramatically from where it is today.

Given it's leveled off and should be heading slightly down.

Slightly down, yes.

Great, thanks very much and good luck in the quarter.

Thank you.

Your next question comes from Rick Skidmore with Goldman Sachs.

Good morning. Just a couple quick question one for Dick and one for Steve. Dick, just clarifying the corporate and other that you mentioned you had previously given guidance of 65 to 70 million a quarter, sort of assuming exchange rates don't change much. Given your change in pension expense, would you expect that to be up 10 million a quarter and is that still a reasonable assumption to use?

The pension expense, the $10 million increase will actual will be spread through the segments and will impact the segments who's employment is heaviest in Canada which will be pulp and paper and wood products next year and it won't affect the corporate and other by more than $1 or $2 million, Rick.

Okay. Then, Steve, could you, you haven't talked yet about the uncoated free sheet business and in your press release you mentioned that perhaps demand was starting to improve yet, industry data sort of suggests that it's been flattish at best and your downtime in the fourth quarter was much larger than the third. Can you talk about what you are seeing on the paper side and then as well as thinking about if that business is right-sized at this point?

Well, the good news and this is pretty fresh, is from late December on, our fine paper people have seen a bit of an uptick in the marketplace. So that gives us some encouragement going into the spring and I think that's particularly so in the offset side of the business. With regard to capacity rationalization, that's been ongoing for us the latest, of course, was the shut down of the machine in Long View, Washington, and, of course absorbing the costs of that. We are pretty confident that with regard to the more commodity side of our business, the cut size business, for example, we have a fleet of very efficient paper machines and we are in good shape there. On the higher grade side the specialty side, that's one where we continue to work to improve the efficiency of our production.

Okay and just one other follow up. Can you quantify if you were selling, how much volume you were selling to Office Max in the cut size business?

No, I'm sorry, we can't quantify that for you, Rick.

Thank you.

Your next question comes from Mark Pauper with Lehman Brothers.

Following up on the Paragon Trade Brands lawsuit if you could give some context as to when we may be hearing about the next round of rulings and just from a cash flow perspective what your strategy would be dealing, for dealing with that, whether it would be an immediate cash need or something that can be taken out over time when you are faced with the first ruling?

We have a situation where we have a bankruptcy judge who is going to make a ruling on damages and we don't know quite when. We will get the result back from her and, of course, we don't know what size the damages might be. So we believe that the decision in any event that has been made by the judge is wrong as as a matter of law and we are going to take all steps necessary to get the decision reversed. And I suppose that we will have to ask Dick this question about if and when damages are assessed, I think you have to accrue for those immediately.

When damages are assessed we will have to post bond which we are prepared to do. We have reviewed the accounting of this carefully with our auditors and at this time we do not believe that the probability of having to pay is sufficiently high nor the amount predictable enough that we have a charge to earnings but that is something well have to review at the time that the judge makes her ruling.

Great. Just in terms of away from any kind of potential charge to earnings from actual cost of posting bond and so forth, a way from. If you take any hypothetical amount would it be some percentage of cash you would have to apply against the bonds or is it the full amount?

At this time we have sufficient capacity in place to post bond and secure those bonds with letters of credit so we would not expect any significant cash out lay from this decision. That is as noted in our disclosure the plaintiff's are throwing around a very wide range of numbers.

Very good. Thank you very much.

Your final question comes from Sue Goodman with A. B. P. Investments.

Great. Thank you. Dick, that pay down debt, I think a few hundred million dollars more than most of us were thinking and you've given some guidance that you expect further cash flow or debt recollections in excess of $1 billion this year. When you made the Weyerhaeuser acquisition earlier two years ago, I think you said it was a four-year process to get your balance sheet back in order. If we kind of do that math we are getting to total debt numbers maybe of $9 billion.

Is that the number where you want to be, could you give a little more clarity looking out at another year now with the rating agencies where you think they expect you to be and are we looking at a dollar number or is there a ratio that's kind of the magic number for you?

Sue, as you know our target is 35% debt to total cap at the Weyerhaeuser Company level including deferred taxes in the form of permanent capital. At the end of this, '03 we were at about 52%. And so our target remains 35. As I said we expect to exceed the $1.1 billion in debt reduction this year. I would not expect us to achieve the 35% ratio by the ends of '04 but, and the target time period that we've stated at the time of the acquisition was between 35 to five years which would, three to five years which I would say the outside range of that would be the at the end of '06 and that's still the time frame in which we are operating.

Dick, when you look maybe at a normalized EBITDA, is that a number, too, that you try to work with the rating agencies to get to and, you know, they are focusing I think more on debt to EBITDA, what is the number that you all think is reasonable, to, is it either maintaining amid Triple B or do you want to get back to a strong Triple B or A. rated level and is that number like a 3.5 times multiple from a normalized basis or do you think you need to be even a little bit lower than that?

We do have some cash flow to debt ratios that are appropriate for the ratings but those we look at relative to our economic outlook that we share with the rating agencies. We are, our goal is to maintain a strong investment grade rating. We don't target a rating, we target certain ratios and then we argue with rating agencies what the rating should be given those ratios and we will continue to operate that way. Our debt to total cap ratio is historically resulted in a single A. rating but our cash flow ratios have not warranted a single A. rating and unless the economic conditions in our industry improve, I would be skeptical that the rating agencies would award us a single A. rating in the kinds of market conditions we've been experiencing.

But clearly they have indicated and we expect to continue to be a strong Triple B and our first step is to become a Triple B plus and then we will worry about get to go single A.

Switching gears looking at your did it schedule going forward, you have fixed out a lot of debt and if I look really at maturities of mid '05 and beyond, you are looking maybe at about $9 billion of debt there. Is there something you are going to do if you do start generating cash flow and then beyond 18 months that you would look to reduce that term debt or how are you going to manage your maturities going forward?

We have this whole year as you know, we have no short term debt outstanding right now and we have no debt maturing until March of next year. So, our treasurer right now is working with our bankers on what kind of debt reduction strategies we should pursue this year as we continue to generate cash flow for debt reduction. Our cash balances are already beginning to build and so we are just in the process of developing those strategies for this year.

Great. Thank you so much.

Thank you everyone for listening to the call and I will be available for questions. My telephone number is (253)924-2058. Thank you and have a good day.

Thank you for participating in today's Weyerhaeuser fourth quarter 2003 earnings conference call. This call will be available for replay beginning at 1:00 p.m. Eastern Time today through 11:59 p.m. Eastern Time on January 30, 2004. The conference I.D. number for the replay is 486-1240. Again the conference I.D. number for the replay is 486-1240. The number to dial for the replay is 1-800-642-1687 or 706-645-9291. Thank you.