威爾豪瑟 (WY) 2004 Q1 法說會逐字稿

Good morning. My name is Chastity and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Weyerhaeuser first quarter 2004 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's 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 1 on your telephone keypad. If you would like to withdraw your question, press star, then the number 2. Thank you.

I will now turn the conference over to Ms. Katherine McAuley, Vice President of Investor Relations.

Good morning, welcome to the Weyerhaeuser first quarter 2004 earnings conference call. I'm 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; Dan Fulton, President and Chief Executive Officer of Weyerhaeuser Real Estate Company; and Steve Hillyard (ph), 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 website. If you need any material, please contact April Mire at 253-924-2937.

Please read the warnings statement in our press release and on our presentation slides concerning the risks associated with forward-looking statements. We will be making forward-looking statements during this conference call.

I will review the first quarter followed by comments by Steve Rogel and Dan Fulton. Dick Taggart will discuss the outlook for the second quarter of 2004.

This morning Weyerhaeuser reported first quarter 2004 net earnings of $121 million, or 54 cents per share. The first quarter includes the following after-tax items. A charge of $32 million, or 14 cents per share associated with the settlement of litigation; a charge of $10 million, or 4 cents per share for integration and restructuring activities; a gain of $22 million, or 10 cents per share on the sale of the Slave Lake, Alberta OSC Mill. These items total 8 cents per share.

A quarter by quarter GAAP recognition of special items for 2003 and first quarter 2004 are available on our website, where you will also find the chart comparing Q4 2003 earnings to Q1 2004 earnings. Fourth quarter 2003 earnings before special items were 47 cents per share. Modestly higher prices contributed 1 cent per share. There was little change in volume. While material costs increased 1 cent, higher OCC costs were offset by lower costs for outside log purchases. Higher productivity and lower manufacturing costs contributed 24 cents per share. This is one of the topics that Steve Rogel will address on this call.

Other, which is primarily foreign exchange, had an adverse impact of 10 cents per share. Debt reduction at the end of 2003 has reduced our interest expense by 1 cent per share. These were the major changes that drove earnings in the first quarter from the fourth quarter of 47 cents to the first quarter of 62 cents per share.

Also on our website is a chart that shows the change quarter to quarter on a cash basis. Debt at year end 2003 was $11 billion 597 million. Sources of cash in the first quarter were net earnings of $121 million, ED&A of $325 million, and other sources which includes reductions from our year end cash balance of $219 million.

Uses of cash in the quarter were working capital of $498 million, working capital rises seasonally in the first quarter as we have discussed before. Capital spending was $90 million. Dividends were also $90 million, and other uses of cash were $21 million. Debt at the end of first quarter was $11 billion 631 million, essentially flat with year end.

I will now review the key drivers in the various business segments. Timber lands earnings up $159 million increased from the fourth quarter level. Log export prices rose 8%. Export volumes declined 10%. January and February were seasonally low, however March volumes were very strong and rose 23% over February and were increasing as we left the first quarter. Domestic log prices rose 13% in the West and 6% in the South. Domestic volumes rose 1-2% in the quarter.

Wood products earnings of $173 million included EDD and anti dumping duties of $26 million; a charge of $49 million for the settlement of litigation; and a credit of $2 million for the reversal of closure costs. First quarter earnings were higher than fourth quarter. Palet (ph) prices were strong in both quarters, however, the earnings improvement in lumber and distribution significantly contributed to the increase. Soft wood lumber prices rose on average $25 per thousand board feet and shipments increased 3% in the quarter. OSB prices bottomed out in January and then rose steadily into March. The price of OSB in March was $166 per thousand square feet above the January price, and realizations in March were $75 per thousand square feet above the average of the quarter. OSB shipments were flat Q4 to Q1.

Plywood prices declined 7%; however shipment volumes increased 4%. Pulp and Paper narrowed its loss in the first quarter to $25 million. Market pulp prices rose $23 per metric ton from January to March. Shipment volumes were flat. Pulp prices increased again April 1st.

Uncoated free sheet paper prices declined $19 per ton in the first quarter, but began improving in March. Price increases have been announced for all grades for the second quarter. Paper shipment volumes increased dramatically for first quarter, they were up 15% over fourth quarter levels. Container board packaging and recycling earnings of $24 million include converting plant closure costs of $3 million. Container board prices decreased $15 per ton in the first quarter from fourth quarter. Prices began to rise during March following a $40 per ton price increase effective March 1st and a $10 per ton price increase went into effect April 1st. A $50 per ton price increase has been announced for June 1st. Packaging prices declined in the quarter as volumes rose 2%. Box customers have his been notified of price increases for the second quarter. OCC prices increased $11 per ton in the first quarter.

I will now turn the call over to Steve Rogel.

Thanks, Kathy.

Before turning the call over to Dan Fulton, President of our Real Estate business, I would like to spend a few minutes expanding on some of the highlights Kathy just provided.

Let me start by directing your attention to something we're going to stop reporting on in future quarters. Costs associated with integrating will Willamette Industries. There are two reasons for this change. First, from an accounting standpoint this, this is the last quarter where we'll have significant amounts of costs to report. But more importantly, we are no longer integrating another company. There is no longer a distinction between Willamette and Weyerhaeuser assets, people or methods. We are operating as one company, a new Weyerhaeuser that is stronger, more focused and performing better because of our acquisitions and the changes we've made. The best example of that is the 24 cents per share that was contributed by our reduced manufacturing costs.

For the past several quarters, we have commented on the improvements we've made in our operations. We have closed or sold less productive and non-strategic facilities. We're operating with greater safety and more efficiency. And we're making further improvements in our operations, many of which are already world class.

As a result, we are now in the low cost free sheet producer and boast the youngest and widest machines in the industry. Our machines average 20 years in age and are 293 inches wide. The closest competitors have machines that are more than 35 years old and are less than 243 inches wide. We have an efficient and low cost Container board mill system that is highly integrated with our box business.

In wood products, we continue to aggressively pursue our fixed, sell, close strategy to enhance the returns of our manufacturing portfolio that is aligned to our timber base. As you saw in today's earnings, this strategy combined with higher prices, resulted in significantly higher earnings compared with first quarter last year. Although internally we've been able to see the benefits of these efforts for several quarters, outside observers have had a tough time seeing them due to the tough economic conditions. With improving conditions that we're seeing for our products, and a stronger outlook for the economy in general, we believe these contributions to our bottom line will become more apparent.

There is another benefit from these efforts. Better and more efficient use of our capex budget. As Kathy mentioned, capital spending for the first quarter was $90 million. We still expect our capital spending to be approximately $750 million this year, but the first quarter number reflects our improved operations. Through our rationalization efforts, we have eliminated facilities that require significant capital just to maintain them. Instead, we have operations that are modern and running efficiently. This has allowed us to invest in higher value projects such as those designed to reduce energy consumption. It also speaks to our engineering capabilities which were significantly enhanced by the Willamette acquisition.

This doesn't mean we're changing our capital spending approach. We're still focused on retaining our capital spending discipline, but today, we have more flexibility in how we deploy that capital and we're looking at significantly higher value projects than we could in the past.

In Timber lands, we're engaged in a very deliberate and focused effort to sell non-strategic acreage. A good example is the 300,000 acres we put up for sale in mid Georgia. While we're not in a position to announce a buyer, there is significant interest in that timber land.

In closing, I think it's save to say that we're encouraged by our first quarter results. They demonstrate that we're seeing the benefits of all of our hard work. Weyerhaeuser today is a large, but lean company, serving customers of all sizes. We're also buoyed by the improving prices for all of our businesses. This is especially true in the Container board and paper markets, which have struggled recently.

As we continue to operate more efficiently and benefit from stronger market conditions, we are still focused on three goals: The first is operating safely. The second is meeting our customer needs. The third is to pay down debt.

Now, with that, I'd like to turn the call over to Dan Fulton, President and Chief Executive Officer of Weyerhaeuser Real Estate Company. Dan?

Thanks, Steve.

Real estate and related assets reported quarterly earnings of $120 million for the first quarter of 2004, compared to $109 million last quarter, and $95 million for the first quarter last year. Compared to the first quarter of last year, our earnings performance was driven by both favorable home building margins as well as volume. Our home building margins on closed homes increased to 26.5% in the first quarter of 2004, compared to 24.8% at this time one year ago, and we closed 1 ,065 homes during the first quarter of 2004, which is 5%-- 5.4% greater than the same quarter one year ago.

In the normal course of business, we routinely sell land and lots to other home builders as part of the market segmentation strategy in our larger master plan communities. In addition to this routine land and lot sale activity, our first quarter pretax earnings benefited $22 million from the sale of acreage to other developers. In comparison, fourth quarter earnings include a $7 million pretax gain on an acreage sale, while during the first quarter of 2003, earnings included a pretax gain of $18 million on the sale of an apartment complex and two office buildings.

Total revenues in the first quarter of $469 million compare favorably to the $445 million generated in the same quarter one year ago. Total revenues in the first quarter of 2004 did reflect the decline from the fourth quarter of 2003 when we generated $618 million on a record 1,431 single family homes closings.

In general, our markets remain very strong. The leading performance indicators of traffic and sales increased 33% and 17% respectively during the first quarter of 2004, compared to the same quarter of 2003. Compared to the fourth quarter of 2003, both sales and traffic increased 30% during the first quarter.

On an aggrate basis, our average sales prices on homes closed in the first quarter declined to $380,000 from $385,000 in the fourth quarter of 2003. This decline is attributable to both geographic, as well as product mix, as we experienced an increase in relative closing activity at our Trend Maker subsidiary in Houston, where our average home price is less than the overall RECo average. Plus Trend Makers' home sales include an increased percentage of town home product.

On a year over year basis, our average sales price in the first quarter represents a 2.4% increase over the same quarter one year ago. We'll expect to see average prices to move up throughout the re - throughout the balance of the year as our geographic mix shifts back to reflect a higher relative share of closings from California, Maryland and Virginia.

Our experience during the first quarter shows that our markets in Southern California, Las Vegas and the suburbs of Washington, DC are remarkably strong with unfulfilled customer demand. Our value oriented product in the Puget Sound region is also fairing well despite a sluggish local economy and we continue to increase our sales in the luxury production segment of the very competitive Houston market.

On a year to date - our year to date sales pace is greater this year than last in nearly every individual market in which we operate. Our sales backlog is seasonally building from strong sales and now stands at 2 ,702 homes sold, but not closed, which is 25% greater than this time one year ago. Our current backlog of sold, but unclosed homes is equivalent to 6.3 months of sales as compared to 5.6 months of sales at the same time last year.

On a cautionary note, we are beginning to experience the impacts of cost increases in commodity products, particularly wood, steel, drywall and insulation. Although order lead time for certain products is lengthened, we have not yet experienced stock outs or other disruptions to our operations. On a per house basis, our costs on new homes starts have increased between $3 ,700 to as much as $20,000 per house depending on the size and complexity of the home. Very little of these cost increases are reflected in our operating results in the first quarter because these in process homes are not scheduled to be completed until the second half of the year. Nevertheless, so far, the market momentum for new home sales has been so strong that our price increases on new homes sales contracts have exceeded those identified cost increases. Therefore, we do not anticipate any near-term deterioration in gross margin dollars generated on single family sales.

Consistent with the notion of unfulfilled customer demand mentioned previously, our contract cancellation rate is a very low 9% on a year to date basis, compared to 11% in the year 2003 at this time. The interest rate environment has been very accommodative to our single family operations for some time, and we do not yet sense significant urgency by our buyers as it relates to interest rates.

In the higher priced product ranges, we believe that the buyers are not particularly interest rate sensitive at today's relative levels. Since most home buyers are in higher income brackets. To limit the impact of rising rates, however, a very high percentage of our customers lock in on their mortgage rate commitments. They have also observed a gradual increase in the percentage of adjustable rate loans used by home buyers as interest rates have begun to increase.

Our outlook for the second quarter indicates that earnings for new home sales will be comparable to the first quarter. With the strong housing sales pattern, supportive interest rate environment, and low rates of standing inventory by historic standards, the possibility of a housing bubble, as occasionally mentioned in the media, seems remote at least for the balance of the year. We actually experienced frequent occurences of unfulfilled demand in many of our markets, due in part to the slow pace of land entitlement processing. While it's very possible that isolated markets may transition through some level of market adjustment, we believe that a wholesale housing market correction is unlikely, given pent up demand in major markets, coupled with a highly restrictive land development environment. We continue to believe that increasingly favorable demographics created by population growth, migratory and immigration patterns, and growth in home ownership rates will support continued demand for new housing. We also believe that the fundamentals of our specific markets position us to take advantage of these favorable trends.

I will now pass the microphone to our Chief Financial Officer, Dick Taggart.

Thank you, Dan.

As we enter the second quarter, as you can tell from the comments that Kathy, Steve, and Dan, we are expecting higher earnings in all businesses with the possible exception of real estate and related assets. As Dan mentioned, the earnings in the first quarter in real estate and related had included a $22 million gain on the land sale, which might not be repeated in the second quarter, but as Dan said, housing earnings are expected to remain very strong.

In our wood products businesses, prices were strengthening through the quarter and today are well above the first quarter averages. Kathy mentioned, average OSB realizations at the end of the quarter were approximately $75 above the average for the quarter and lumber was $25. Volumes will be modestly higher, if we can overcome transportation bottlenecks which have become significant in some regions. Even if we are constrained by transportation problems, we expect earnings in this segment to be significantly higher in the second quarter than in the first.

In Timberland, seasonally higher timber harvest and slightly higher prices in all markets will result in modestly higher earnings in this segment as well in the second quarter when compared to the first.

Our Pulp and Paper segment is expected to return to profitability in the second quarter. Price increases for both Pulp and Paper have been going into a place - into effect in the first quarter and we expect further improvement in the second quarter as well. As most of the price increases that were announced in the second quarter will not have any material, or-- that were announced in the first quarter will not have any material effect on earnings until the second quarter. Our order files are strong and volumes are expected to remain relatively steady with transportation continuing to be a challenge in virtually every business.

Our Container board packaging business is also expected to see improvements in both average realization and volumes. Box prices will begin increasing through the quarter as the first Container board price increase is passed through to our box customers. Our inventories are very, very low with some box plants at risk of running out of paper. We have all export customers on allocation and have told domestic customers for Container board that it is unlikely we will be able to supply any increase in volume. Conditions remain very tight for us in this business, and in spite of our facilities running at full capacity, we're having difficulty meeting our paper requirements.

We plan to implement a second $50 a ton price increase that we have told our customers to expect in June. As Kathy noted, our debt remained relatively flat in the first quarter as our operating cash flow was used to finance our normal seasonal increase in working capital. With anticipated strong cash flow from operations, and the likely closing of the sales of the Georgia timber lands, which as Steve mentioned, is receiving considerable interest, we expect to achieve significant cash flow reduction - cash flow increases in the second quarter and, and the potential to reduce debt. As you know, we have largely fixed rate debt at this point, so we will likely be accumulating significant cash in the second quarter.

Capital spending was an unusually low rate, as Steve mentioned, of $90 million in the first quarter, as a number of projects were getting under way, so capital spending will be increasing in the second quarter and through the remainder of the year.

With that brief overview, Kathy would be happy to take questions. We recognize that you are on a tight timetable today in between conference calls and so we will be disciplined in our Q&A session.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster .

Your first question comes from the line of George Staphos with Banc of American Securities.

Question on paper and packaging. Could you give us some flavor where your order backlogs stand right now in number of weeks and how would you compare this to the last upturn? Thanks.

Thanks, George for the question.

Business conditions are very strong in both our paper and our packaging businesses. In both businesses, we're running full. You may recall that we had taken some downtime in the fourth quarter; however, in the first quarter we've had no market related downtime because our orders have been strengthening as we've gone through the quarter. In certain markets and for certain grades, we are on various forms of allocation.

Right.

And we continue to just see a very strong flow of orders coming in.

Sure. Would you be able to quantify that, though, in backlog, Kathy, at this time, on is that not be possible?

No, we don't quantify in those terms.

Okay. Fair enough.

Next question?

Thank you. Your next question is from the line of Eddings T. Bolt with Morgan Stanley.

Thank you and good morning. Question if you could clarify some of these transportation issues. You sort of mentioned in passing, and it was had your press release. Steve or Dick, I would appreciate it if you could spend more time talking about where you're seeing these bottlenecks and just how serious the potential implications could be.

Eddings, this is Steve. Primarily, our problems are on the west coast and also primarily north/south, we're having - with the congestion on the rail lines trouble getting our flow of materials into California. I just looked at those numbers this morning. A normal 6-7 day run takes between 9 and 10 days. Everybody's having this problem, and therefore that's put a big demand on truck shipping, which is also running short of capacity because I understand that there is a shortage of drivers out there. So we have shipping delays in all forms of transportation, but primarily on the west coast.

And is there a sense of-- I know some of those problems are more structural than temporary, but is there a sense that this actually impacted some of your shipment volumes in the first quarter?

In some product lines, Eddings, we have not quantified it, but we did accumulate some inventory in Canada that was sold and we were not able to ship it. We hope that will, that that will be corrected in the, the second quarter, but as Steve mentioned, the-- with the core problem is capacity and the new work rules for drivers and limitations on their driving day has caused more traffic to ship to rail and delayed the return of ocean containers, which was complicated the logistics of the whole system.

Great. So it sounds like you don't, you know, feel like you want to quantify those impacts or it's very difficult to? How would you--

It's difficult too. I think our shipment volumes, which are in our release speak for themselves, and so they have not had huge impacts, but I think they will impact our ability to increase volumes going forward.

Great. Thanks very much.

Thank you. Your next question comes from the line of Mark Wilde with Deutsche Banc.

Good morning.

Steve, we heard you on those three priorities, but I just wondered, as things start to look a little bit better here, what's your thinking about with some of these offshore positions that you've staked out over the years? You've got the forestry down in New Zealand, you've got the forestry operations down in Uruguay. I'm just curious about what you're thinking about doing to build position in those offshore markets over the next two or three years.

Well, thanks for the question, Mark, and good morning.

Your question with regard to offshore and the particularly in the southern hemisphere is right on. That is an area in the future we intend to focus on. Right now, we're planting trees and looking forward to the first thinnings from those plantings in Uruguay in the next couple of three years, so our capital investments will be relatively small as the forest component builds down there.

With regard to our other assets, our capital needs at present look to be pretty much normal in places like New Zealand and Australia. We're focus order getting the debt paid down before we think of anything of size, Mark.

And what about over in Europe, Steve, I think on the Willamette side there were a couple of panel facilities that they had invested in and I think in Ireland and France, any thoughts over there?

Well, that, that's a market that's just beginning to show recovery. Those are MDF and particle board plants. And it's too early to tell how well they are going to do because those markets were in very poor shape during the last year.

What we do have to report on, particularly our Ireland operation had undergone some renovation and it's doing very well on a performance basis. The plants in France, the MDF plant is doing relatively better than particle board because of the market conditions there.

In terms of what we might do in Europe in the future, I think it's too early to tell. These plants are a toe hold in Europe and I think we're going to watch them for a while and see how they do.

If I could come back to Uruguay for a second. If you thin that stuff, what do you do with it?

Well, it's pretty big stuff when you thin it. That's loblolly pine, southern pine, and the first thinnings are going to be up to 8 inches diameter, DBH, and you can make some pretty good stuff out of it. You can cut it to lumber, you can peel it. There's also more mature wood available in the area that you can intermix with it. Ours isn't that old, but there is a developing market down there.

This is not necessarily like stuff you got to feed into a pulp mill at some point?

No, no.

Okay.

We're on a saw lumber location.

Okay. Thanks.

Thank you. Your next question comes from the line of Peter Rushmire with Lehman Brothers.

Thanks. Good morning.

The timber profits were a little stronger than I expected and I was curious if you could provide a bit of an update on your harvest plans? You know, going forward relative to the harvest volumes you had in the first quarter?

And then maybe also your expectations for saw timber and pulp wood prices going forward given the very big margins in the wood products business, I would think that the demand for saw timber is starting to go up.

Pete, this is Dick Taggart. Well, as you know from presentations we've made over the years that our saw timber harvest has been increasing for a number of years, particularly in the Southern United States. It has not in the West, as we have been divesting of lands in the West. However, there are some seasonal increase in both seasonality and in these numbers as well, quarter to quarter. The, the first quarter was driven by improvement in the export log market in Japan as well as the domestic log markets in the U.S.

The pricing, price improvements we expect in the second quarter, as I mentioned, we expect to be relatively modest. Certainly the continuation of strong demand for wood products has-- will likely continue to result in improvement in timber prices. Timber prices, though, have held up very well through the last couple of years, even with a surplus of lumber capacity because of the demand on the resource, and soft wood saw timber is not in oversupply, which has resulted in the very poor earnings to these, to the saw mill industry in 2002 and 2003, which is now behind us as the lumber capacity is rationalized and we're seeing now much better performance in the lumber business. But as long as the demand for saw timber remains strong as a result of the demand for wood products, we do expect prices to improve as saw timber, soft wood saw timber supply in the United States is not increasing.

Okay. One more, if I could, on priorities for free cash flow.

I know you're looking to pay down debt, but perhaps is it possible, Steve, to comment on, you know, the priorities for free cash flow, you know, beyond debt repayment? And perhaps, related to that your dividend policy and whether, you know, we don't see the potential going forward for a little stronger dividend.

Well, Peter, we have always indicated our first priority is to get the debt back down. Once we have that in order, we'll be looking at all the opportunities to give a return to our investor, whether it's through dividends, investing it on their behalf in new projects, or even stock repurchases at some time. So we don't rule any of those things out. Right now, on our capital projects, as I indicated, our emphasis is on improving efficiencies, and particularly energy efficiency, in some of our major facilities.

Thanks very much.

Thank you. Your next question comes from the line of Greg Ransom with J.P. Morgan.

Hi, Dick.

Just a quick question here on debt reduction within the context of the ratings. You're looking at your next sort of large maturity isn't really till March of next year. Can you discuss the timing on pay down? You said you're going be accumulate ago lot of cash in 2 Q, but would expect that you're going to see working cap unwind in 3 and 4 Q, as well.

That's correct. We will see working capital come down particularly in the fourth quarter. It sometimes comes down modestly in the third.

Right.

We have-- we are working on those strategies right now. We have some IRB's that we can call at par. We have some IRB's that are floaters that we can choose to retire rather than remarket. And we have a number of strategies that we're considering relative to all of the maturities that we have in the next 3-5 years, and so particularly between now and 2008. So we don't have a specific strategy that we have landed on yet, and so we-- that will be a work in process and will really not be announced until the time that we have made those decisions or executed whatever strategy we choose to pursue.

Okay. Thanks.

Thank you. Your next question comes from the line of Rich Schneider with UBS.

Dan, I was wondering if you could comment on your ability to get wood for the completion of your homes? Are you having difficulties because of transportation, et cetera, and has that caused you to have to pay up for some of the wood that you're getting? And could you give us an idea, and we've been estimating wood represents maybe close to 10% of the cost of a home. What would your estimate be?

As I mentioned, Rich, we've seen wood prices starting to move up across all of our markets. We've got some near-term protection with existing contracts in our various operations, but we expect to see prices continue to move this year.

We have not had availability problems as yet, and with respect to availability, as markets tighten up, we would expect that, you know, we would prevail on, you know, both the long-term relationships that we've established with our suppliers and our contractors, as well as our overall size in our markets. So we feel like we should be okay with respect to availability. You know, in terms of per house move on lumber prices, you know, first to second quarter, we're seeing prices move, just for lumber 3,000 to $3 ,500 a home. As we said, we've been able to pass through those in our sales prices. We're certainly concerned, but it seems to be manageable and we've got relationships that should allow us to manage that throughout the balance of the year.

Could you estimate what wood panels and lumber represent in the cost of the home? Average?

It will vary by market because of the kinds of products we're delivering, and I would rather answer that one off line, Mark, just to give you a better answer on a market by market basis.

Okay. And how long do your contracts usually go for for wood?

As short as three months to as long as nine months.

Okay.

And then just Steve staying on wood, could you talk about where you are in your restructuring process, particularly in wood? And I guess in particular lumber and do you have much more to do? You've been going through a lot of closures over the last 18 months. Are we pretty much through it, and do you believe that the oversupply in lumber is now behind us because of about, I don't know, six or nine months ago, you had been talking about at least a 10% oversupply in lumber. Could you go through that?

Sure, Rich.

We're well along in our process of fixed seller close and the majority, the vast majority, is either completed or has been announced. So I think you can count on us being nearly through with that.

With regard to the balance between the capacity to produce lumber and the demand in the marketplace, the demand has been up so high that it is driven capacity utilization rates up quite nicely. So we're running most of our industry at flat out rates. Now, there may be some specialty products that aren't being pushed as hard as the -- commodity product, particularly those that have a duty assigned to them out of Canada, but the commodity mills are all running flat out.

Okay. And-- and just last question. Could you give us your views on the pulp outlook, we've gotten three quick succession price increases. Inventories still are a bit on the high side. What is your outlook there?

Well, of course in North America particularly, the U.S. mills have been helped a great deal by the euro / dollar relationship. We have profited from that as buyers in Europe shift to what they see as lower priced materials. We think that for the intermediate term, we've got pretty strong markets. Our look at the dollar versus the euro says we're going to stay fairly weak for some period of time.

You mean fairly strong, right?

Yeah, well, the euro being strong.

Okay. Great. Thanks.

Thank you. Your next question comes from itself line of Tip Dillon with Smith Barney.

Yes, good morning.

You know, getting back to the lumber situation and sort of throwing in the forecast that you all see for housing near term, and perhaps longer term. Are we starting to see the Canadian trade dispute become a mute point? In other words, could politicians say, " look, we're going to get thrown out of office if we run out of lumber, and we therefore should be embracing whatever lumber we can get wherever we can get it from"?

I hope so. We've been working the soft wood lumber issue for, it seems, forever, and I think that we're closer to getting a settlement on the issue.

As you well know, the U.S. side has tabled a proposal and they're waiting a Canadian response. But has that impacted the flow of wood from Canada? Yes, definitely, but with the perverseness of the trade laws, mills that are strictly commodity, dimension lumber, producing fewer grades, get the better break on the duties. Those mills that produce a variety of products, particularly high value, and I'm put cedar in that category, pay the highest duties.

So in the end, what's happened in Canada is the mills producing structural lumber have the lowest duties and they have improved their competitive position quite nicely, and they are shipping at record rates into the U.S..

You know, I saw one of the trade associations published a number that hs indicated over 100 saw mills in the South, about a fifth of them have shut down permanently since 1999. And again, I wonder if we're, you know, waking up to a situation where, again, there could be not enough lumber in North America for the consumption.

I think that ultimately there will be enough lumber in North America. I think it's in the U.S. South we're running at the capacity of the forests to produce logs into the saw mills. And what you saw is a rebalancing of saw milling capacity against the supply of logs. But there is still plenty of capacity to meet needs at current rates, and we're at all time highs in consumption.

Thank you.

I would add to Steve's comment, though, that a larger percentage of that must now come from Canada as a result of the mills closing in the U.S., given the strong demand.

Canada or other suppliers.

Canada or other regions.

Gotcha. Thank you.

Thank you. Once again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from the line of Mark Pomper (ph) with Lehman Brothers.

Yes, hi. Just wanted to follow up on your comments with regard to capital spending.

Since you had indicated the run rate, don't extrapolate from this quarter to a run rate. Did you say 750 for the full year? And if you could give us a sense of a kind of a broad ramp up on a quarterly basis as to how that might develop?

I think both Dick and I will take a crack at answering. First I'll talk about the projects.

In the first quarter, we saw a dip in our capital spending because we were completing a number of major projects in the last quarter of last year, and getting geared up for some other fairly significant projects that we've got going on in the company. For example, we finished off a recovery boiler up in Dreiden, Ontario late last year . And now we're engaging in other energy and boiler activity. So we expect that we're going to be back on course of spending the $750 million per annum. Dick, do you have any forecast?

I don't have. The only thing I would add is, that because we don't have any real large projects, like new facilities or major boiler rebuilds, they tend to be projects that are done within a one-year planning period which results in capital spending increasing each quarter during the year as things are finished and wrapped up in the first quarter, or they occur during our scheduled down periods in our major Pulp and Paper facilities.

We have some of those periods scheduled in the second quarter and we have a lot of projects that will just build through the year in the normal course of planning and execution. So I would expect capital spending to increase each quarter through the year probably with the fourth quarter being nearly the strongest.

Great. I very much appreciate the insight.

Thank you. Your next question comes from the line of John Tumazos with Prudential.

Congratulations on the results.

Could you talk about your marketing strategy for the Georgia lands? And given that other companies are in the market selling big parcels of land, Boise, Palm Creek, other paper companies, what differentiates your land, the portions of it that are being sold for higher uses versus timber, et cetera?

Well, that's a good question, John. This is Steve.

Our marketing strategy for the land, first to describe it, it's about 330,000 acres and it lies in the vicinity of Atlanta. And that means that there is a significant portion of the land somewhere around 30% of it that has HBU, higher and better use values, and will bring, and should command fairly high prices. With regard to our strategy for selling. We market that to a known group of investors, and of course it's a public process. So any investing group can qualify to put a bid in. When we do put it up, we put it to auction by identified tractor as a whole so that we can achieve the maximum returns when we sit down to analyze the sum total of all the bids. As we indicated in our discussion, there has been a high level of interest in these particular lands because of the proximity to Atlanta and the HBU values.

Steve, could you describe proximity, whether from downtown it's a one hour drive - two hour drive?

John, this is Dick Taggart. These lands are not in a single block and so they are scattered between - a lot of them between Macon and Atlanta. We don't have the data on how close they are to the Atlanta region. And they are being sold I think in 14 different, described in 14 different blocks. But in addition to what Steve said about the high percentage of higher and better use land in this particular sale, that will result in, we expect better than average values for southern Timberland, significantly better averages, better than average values.

Buyers tell us that there is more interest in Weyerhaeuser timber lands because they know they are well managed and they are managed for saw timber and the value that is there is generally higher than some of the other lands that are being sold and have been managed for pulp wood over there during their life. Most of this land was either acquired from Proctor & Gamble when we acquired the pulp mills back in the early '90s, and other transactions over the years. And so, we have never found a lack of interest in quality timberlands when we've put them up for sale.

Thank you.

Thank you. Your next question comes from the line of Joe Lacursey (ph) with BMO Nesbitt Burns.

Thank you very much, operator. I just had a general question on your packaging. I would like to know what is the percentage of integration again?

Our percentage--

Our percentage of integration is just over 85%.

Okay. Okay. And I had a general question.

In packaging, we hear a loft things about RFID, like in particularly with Wal-Mart . And I'd like to know how this would impact your packaging division and like what progress has your division been doing on this?

The radio frequency identifiers that can go on corrugated packaging is an active area of research in the company. We're working with a number of our corrugated container customers on the proper application of it. And by application meaning, the design of the devices, where they fit on the corrugated packaging so they can be recognized. How this can be done in an efficient manner between the box supplier and the customer. The technology itself is being developed by a number of people, a number of systems. We're not in that area. We think our expertise will come from how we use it on the packaging itself and working with the customers, seeing that everything fits in their systems.

So-- sir, go ahead.

I think that it's still a work in progress for everyone. I've seen a number of demonstrations both internally and externally recently. And I think the technology is coming, but it's going to take some time to work out a lot of kinks in the operation, particularly on the radio frequency end of it.

All right. Thank you very much.

Thank you. Your next question comes from the line of Mark Winetrop with Buckingham.

Thank you.

I believe that in the fourth quarter you mentioned building products distribution had roughly a negative $40 million swing on that quarter. Did you get a fair portion of that back in the first quarter?

Yes. Most of it.

Okay. Great.

Also, just curious, on OSB, there was a pretty big restatement on the shipment volume. I think it went down by about 25% or so for the fourth quarter.

Yes.

What happened there?

That was the result of a translation error from a new computer system that was launched to our ledger that we didn't pick up at the time of the report. That didn't effect any of the financials at all, but when you divided that volume number into our sales, you ended up with a distorted average realization, and so it was correct indeed our 10-Q. The numbers in our 10-Q are correct.

Okay, and so what was - I remember you had said that OSB had been down 22 in the fourth quarter versus third quarter. Was that still accurate or was that different?

It was up, Mark, but we'll have to follow up with you with those exact numbers. I don't have them right now and Kathy will follow up and get them to you.

Okay.

Shifting gears to pulp, there didn't seem to-- if I took the sales and divided by shipments, didn't seem to be much movement first quarter versus fourth quarter, and I know you have a lot of fluff. Is that why that was the case? And are we having catch-up in that, or perhaps maybe most helpful, could you give us a sense of where prices are now versus the first quarter average for your mix of business?

Mark, the price increase began to go-- the first round of price increases for paper grade for MBFK began to go into effect in the first quarter. So as you were looking, you were looking at pulp in a sense bottoming out in January and then beginning to increase. We have a price increase in the fluff market of essentially $30 per ton, but as I believe you know, the fluff market price increase tends to go through slower than paper grade, but we did see prices picking up on paper grade pulp.

The other factor to consider when you look at those numbers is, that because of the way the accounting works with pulp shipment, we actually are about a delay, delayed a month in pricing from the time the price increase goes into effect until we actually book it through to ocean shipping. So the price increases are going through. The market is very good. It's very strong, and we feel very good about the pulp market.

I'd just like to emphasize the point that Kathy made. Last year when we announced a change in the timing of revenue recognition, due to a change in accounting principals, we used to recognize revenue from pulp when it was, when it was loaded on the ship, and we reported it at the mill. We now recognize revenue when it arrives at the customer. And that-- for export shipments and export prices were going up faster than domestic prices can be four to six weeks.

Okay so. Is that now also what you're doing in building products? You had mentioned how there has been some product that has-- where it was sold, but it wasn't actually shipped yet. So would those have been recognized yet or not?

No, they would not have been. If we have a transportation delay and we cannot ship the product, we don't recognize the revenue even though it's sold.

Okay. And lastly, there is surely some concern on the OCC side that prices could be going up. What type of protection might you have in place to mitigate that, and in particular, do you link any of your box price contracts to OCC prices to help mitigate potential pressure from there?

We have a few contracts that have some relationship to the OCC price, but it's a very, very small number of contracts. We actually had experienced some increase in OCC prices, but actually an offset in some of the wood costs at our facility from outside purchases. So, you know, we are not at this time, we are not experiencing any difficulties with rising OCC prices. We don't see them going up at a precipitous level, it's a steady market.

Okay. Thank you.

Thank you. Your next question comes from the line of Mark Wilde with Deutsche Banc.

Yes, Dick, just a follow-up. In building products distribution, can you talk about any inventory gains that you might have seen there?

We don't count for gains as inventory gains, Mark. It's just the normal course of the timing of buying and selling of a product like OSB, when prices are moving rapidly and the ability to catch up when prices are falling. And you're trying to replenish inventories and you're making a lot of many just in the normal turning of inventory. But we don't mark to market the inventory each quarter and separate inventory gains and losses from, from just normal transaction actions.

Okay. And just a second follow-up on this pulp market issue. I've been hearing some things that suggest maybe there is inventory of a lot of commodities over in China, and that we might be seeing a little pause or maybe even a little weakening in the short-term in some pricing over there. Are you seeing any of that?

No. We've-- our pulp business noted that there are some small traders that are off the market and essentially selling - selling inventory that they have bought previously, but we don't see it on a large scale.

Okay.

And our business to China is still quite good.

Yeah. All right. Thanks, Dick.

We're mindful that you have another conference call, probably starting now. And thank you for taking the time to ask your questions and I'm available after the call at 253-924-2058. Thank you.

Thank you. Ladies and gentlemen, today's conference call, Weyerhaeuser first quarter 2004 earnings conference call will be available for replay beginning at 1:00 p.m. eastern time today through 11:59 p.m. Eastern time on Friday, April 30th, 2004. The conference ID number for the replay is 6409071. Again, the conference ID number for the replay is 6409071. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. Thank you for joining. You may now disconnect.