威爾豪瑟 (WY) 2004 Q2 法說會逐字稿

Good morning. My name an Amanda and I will be your conference facilitator. At this time I would like to welcome everyone to the Weyerhaeuser second quarter 2004 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 and the number 1 on your telephone key pad. If you would like to withdraw your question press start then the number 2. Thank you. Ms. McAuley you may begin your conference.

Thank you Amanda. Good morning and welcome to the Weyerhaeuser second quarter 2004 earnings conference call. I am Kathryn McAuley Vice President of Investor Relations. Commenting this morning on earnings will be Steve Rogel, Chairman, President and Chief Executive Officer; Rich Hanson, Executive Vice President and Chief Operating Officer; Dick Taggart, Executive Vice President and Chief Financial Officer. Also joining us in the room today are Dan Fulton, President and Chief Executive Officer Weyerhaeuser Real Estate Company; And Steve Hillard Vice President and Chief Accounting Officer.

This call is being webcast at www.weyerhaeuser.com. A copy of today's earnings release and presentation slides can be found on our website. If you need any material, please contact my associate April Myer at 253-924-293. Please read the warning 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.

This morning Weyerhaeuser reported record second quarter 2004 net earnings of 369 million or $1.57 per share. On record sales of 5.9 billion. The second quarter includes the following after tax item. A charge of 14 million or 6 cents per share for the early extinguishment of debt.

A charge of 10 million or 4 cents per share for an adverse judgment in a lawsuit. These total items total 10 cents per share. A quarter by quarter GAAP reconciliation of special of special items for 2003 and the first half of 2004 are available on our website. Where you will also find a chart comparing Q1, 2004 earnings to Q2 2004 earning as well as other presentation materials. I will now turn the call over to Steve Rogel. Who will discuss these charges.

Thank you Kathy and good morning to everyone. As you might guess there are a lot of smiling faces at Weyerhaeuser today. Record earnings will certainly do that. But we are mainly smiling because we are seeing the validation of many years of hard work by our employees.

The work of acquiring and integrating 3 companies, streamlining our operations to improve our efficiencies and reduce costs. Making the tough decisions to close facilities and balance our portfolio. All of these actions were necessary to create the new Weyerhaeuser. But they also resulted in charges and costs which obscured our progress.

Although we still have challenges and more work to do. Much of the heavy lifting is done and the costs associated with that work are behind us. The results are now visible on our bottom line.

In a moment I'm going to ask Rich Hanson our Chief Operating Officer to discuss the performance of our individual sectors and to provide you with additional information on our record setting performance this quarter. Before I do that, however, I want to thank our employees, for their hard work. Granted today's results are a reflection of higher prices and increased volume driven by the stronger market conditions we are beginning to see.

But that is only part of the story. The other part is the additional 45 cents per share we have generated during the first 6 months of this year through cost and productivity improvements. You can see a break down of that improvement in chart 8 in the presentation we've posted to our website.

Approximately 27 cents of that per share increase comes from reductions in our manufacturing costs. This includes lower raw material costs and more efficient use of our manufacturing system to meet customer demands. As we've discussed before, the addition of Willamette, MacMillan Bloedel and Trus Joist to our Company has allowed us to source our mills more efficiently and create greater flexibility in serving customers efficiently.

The other 18-cent per share comes from productivity improvements. Across our manufacturing system we are operating with greater safety and more efficiency. In fine paper we are running the youngest and widest machines in industry.

We have an efficient and low cost container board mill system that is highly integrated with our box business. In wood products, we are able to meet the increased demand for product with fewer facilities. And I must commend our WRECO group for their continued outstanding performance in residential home building.

It's a tribute to our employees that we are seeing this contribution to our bottom line. And I know they aren't dumb. Every day our employees are finding new ways of improving our efficiencies. So, at this time I would like to turn the call over to Richard Hanson who will provide you with additional information on the performance of our businesses. Congratulations Rich on a great quarter from our operations.

Thanks Steve and let me add my thanks also to the employees for helping us produce this strong earnings that we reported this morning. As Steve pointed out, prices did play a big role in our second quarter results. But he also emphasized that our cost and productivity improvements have contributed 45 cents to our earnings per share this year. This is a direct result of the work of employees to create a Weyerhaeuser that is based on speed, simplicity and decisiveness.

While the improvement position has to take advantage of the strong market conditions that we expect to continue into the third quarter. There are benefits that we take to the bank even if we have weaker market conditions. We've said for many years that we want to create a Weyerhaeuser capable of producing strong results regardless of the market conditions.

And I think that today you can see that our employees have done just that. I want to spend a few minutes reviewing some of the specifics that led to the record second quarter performance.

I will talk about timberlands, wood products, pulp and paper and container board operations. And then pass it over to Dick Taggart who will discuss real estate and the overall performance. Dick will also provide you with an outlook then on the third quarter. First timberlands, the earnings in that sector increased to $201 million. The Japanese market has been stronger than expected during the first half of the year and that led to a 13% increase in log exports and a 3% increase in the prices.

Our domestic log volumes increased also 3% overall but southern log volumes declined 2% to wet weather conditions. This resulted in prices overall being flat as an unfavorable mix of business in the South offset some of the higher prices that we saw in the West. Our harvest of our own timber increased 6% from the first quarter. And we utilized much of this increase internally in our manufacturing system which led to fewer outside purchases and sales. But wood products was the story this quarter as the sector produced record earnings of $448 million as we saw finally the higher praises translate into earnings.

As we've mentioned before prices in our wood products business lagged the reporter by about 10 days. And if you get a cut off at the quarter that will impact how we look relative to those reporter prices. Due to the volatility of the current cycle and the timing of the close of the quarters, the effect on this lag has been amplified in our earnings. And we talked about that quarter. Causing many of you to say where's the beef.

Well we think you see the beef this quarter. This record performance is a result of very strong markets for wood products that were fueled by a 2 million housing start level that led to higher prices and increased volume for virtually the entire product line in wood products. Softwood lumber prices increased $60 per thousand board feet and volume rose 17%. Prices for our oriented strand board were up $54 per thousand square feet while the volume also increased 17%.

Prices for our engineered lumber and our hard wood lumber and particle board and medium density fiber board all increased during the quarter. We also saw plywood prices increase $50 per thousand square feet but volumes there remained flat. The segment incurred $34 million in counter veiling and anti-dumping duties and related costs Canadian on the Canadian softwood lumber that the Company sold in the United States during the second quarter.

Now, moving on to pulp and paper. We earned $14 million after losing $25 million in the first quarter as we saw positive signs of improvement in all our product lines. Higher prices from this sector accounted for 12 of the 98 that added to our earnings per share. In pulp we benefited from improving world economies and a weaker dollar.

During the quarter market pulp prices rose an average of $35 per ton on flat volumes. In paper demand improved and supply tightened as our volume was down 2% due to a fairly heavy schedule of maintenance and down time and some transportation problems. Fine paper prices in this sector increased $25 per ton on average and we have announced an additional $50 a ton increase on the cut size grade effective September 1st. Finally stronger demand increased earnings from our container board packaging and recycling segment to $62 million up from $24 million in the first quarter.

The average caper board prices increased $32 a ton and volume rose 6%. Box prices began reflecting some of this increase rising 3%. And I should point out that increased box prices were the main reason that this sector contributed 10 cents per share of earnings from pricing.

Box shipments were up 4% and the OCC prices the recycled fiber prices increased $13 a ton in the second quarter. So now at this time I would like to turn it over to Dick Taggart Our Chief Financial Officer and he will review real estate performance and give you the outlook for the third quarter. Dick?

Thank you, Rich. Our real estate business, in our real estate business pretax earnings of $118 million in the second quarter were driven by single family closings there were no unusual items in the quarter. Our Real Estate Company has extended its backlog of homes that have have been sold that will take us well into next year to deliver. Those rates remain strong in all of our markets with the possible exception of Huston.

As noted in our earnings release the third quarter earnings will be higher than the second quarter due to the sale of a multifamily home site that we have already sold and closed with an $18 million profit. With earnings from our single family home building staying at about the current levels. In our other businesses as we enter the third quarter, prices are steady or improving in all of our product lines, except oriented, strand board and lumber. timberlands's earnings before the gain on the sale of our Georgia timberlands will be lower in the third quarter than in the second due to our normal seasonal decline of 10% to 15% in the harvest that comes from closures during the fire season.

Prices in timberlands remain steady in the South and are improving modestly in the West. We expect to close the Georgia timberland sale that we previously announced in the third quarter with the proceeds targeted for further debt reduction. In wood products, oriented strand board and lumber prices have dropped sharply from their highs in the second quarter. Lumber prices however have been improving recently following a common seasonal pattern. But we expect at this time that third quarter average lumber prices will be 20$ to $30 per thousand below the second quarter.

Demand remains good for OSB. While there is the possibility of a third quarter rally in OSB prices we expect them to remain well below the second quarter levels. Prices for engineered lumber however were increased about 7% late in the second quarter and are expected to hold at that level through the third quarter. Prices for particle board and MDS have improved 3% to 5% over second quarter levels as industrial markets for wood products improve along with the economy.

Even though earnings for wood products are expected to be substantially lower in the third quarter than the second; they will remain well above the earnings of the third quarter of last year. In our pulp and paper segments earnings are expected to improve as we continue to implement price increases in our paper business and volumes improve.

Average realizations for paper are expected increase $30 to $40 a ton across our product line. Transportation bottlenecks are beginning to abate. And as Rick mentioned our mills are now producing at normal rates following their normal rates following their recent maintenance down time. All prices are expected to remain steady through the quarter with only modest increases in fluff in selected markets very little change in price or volume during the third quarter.

Our container board packaging business is completing the implementation of the first box price increase and will begin working on the second increase in the third quarter. Average box prices are expected to increase in the third quarter about $25 a ton. Similar to the increase in the second quarter with improvement further in the fourth quarter of the year.

OCC cost increases are expected to moderate. Increasing only a modest $5 a ton in the quarter with shipments remaining relatively flat. Our interest expense in the third quarter will be approximately $185 million reflecting our lower debt level.

While total earnings for the Company before the gain on the Georgia timberland sale are expected to be lower in the third quarter than the second, third quarter will still be substantially higher than last year's third quarter. Cash flow from operations is expected to be down somewhat in the quarter as earnings slow and capital spending picks up.

We will be reducing debt further before year-end as we apply the proceeds from the current Georgia timber sale. Our current cash balance and a future cash flows from operations for the remainder of the year. With that, outlook, I would like to turn the call now back to Steve.

Okay. Thank you, Dick. As we move forward into the third quarter you see that we believe that market conditions will remain strong. We will have some challenges but we will continue to focus on making Weyerhaeuser even stronger.

The work we have done combined with favorable market conditions will allow us to further reduce our debt to take us closer to our financial targets. We are committed to returning to our historical debt levels of 30 to 40% debt to total cap and we made great progress toward that goal in the second quarter. We are also committed to maintaining our capital discipline. Although you will see our capital spending increase in the third quarter this spending will be for high return projects that will improve our manufacturing efficiency and energy reduce costs.

For the year, we still expect our capital spending to be approximately $750 million. As we reduce our debt and improve our efficiency we are preparing for the journey ahead. It as journey which we believe will sustain the type of earnings performance you see today. With that, let's open the lines to your questions, Kathy?

Thank you, Steve. Amanda could you please open the line for questions?

At this time I would like to remind everyone, if you would like to ask a question, press star and the number 1 on your key pad. We will pause for just a moment to compile the Q&A roster. Your first question is from Eddings [Tibault] with Morgan Stanley.

Good morning gentlemen and congratulations on a very strong quarter there. It is nice to see that coming through. A question however, on the wood products profits. I was wondering if there is any impact on inventory trends or some of the inventory pricing mechanisms that might have impacted the profit number on the wood product sides or write up of inventories I should put it?

Eddings , there was no impact, material impact in the second quarter from earnings from write offs to inventory or adjustments to inventory. There was however the normal flow of inventory through our distribution business and from oriented strand board that flows through distribution and our Trus Joist operations that may have been somewhat of a negative in the first second that came through in the second quarter but there no significant inventory adjustments to that number.

When you talk about that normal flow of inventory through the distribution network is that one of the key drivers why as you mentioned in your introductory comments Weyerhaeuser profits tend to lag? I realize prices tend to lag the you know, the industry indexes?

That's correct as Rich mentioned that's one of the reasons, one of the main reasons for that lag.

Okay. Just a second question, if you will. On the transportation impact. Rich mentioned it had a material impact on the paper business in the second quarter. I was wondering if you could talk about theat impact in some more detail and give us an update on where it stands today?

That impact was largely in the East with the CSX Railroad. We built something between 10 and 20 million tons of inventory of paper that we were unable to ship because of transportation delays. That seems to be abating and we expect that to be one of the contributing factors to improve volume in the third quarter.

But there no recurring issues? On the first quarter call you highlighted problems on the West Coast.

Those seem to get a bit better.

It is improving now and while it has been somewhat frustrating it has taken a lot of effort on balance our on time shipments performance has been really pretty good.

Great. Well, thanks very much. Good luck in the quarter.

Thank you.

Next question.

Your next question, is from Rick Schneider from UBS.

Again, that was quite a quarter. On a positive side for a change. The situation with the productivity and cost improvement, I was wondering if you could talk about how the second quarter improved over the first quarter? I mean you look at these numbers of 45 cents gain versus a year ago in the first half. Could we boil it down to what improved in the second versus first?

You want me to comment?

Sure.

Rich, I think a part of that of course was operating rates were higher as we had come on through still some down time associated with maintenance and a little bit of market. And then these mills are really running very well as we talked in May At the analysts' conference. As we look down through the mills and look at their operating rates and their performance.

Most of our mills are at record operating rates on the pulp and paper side of the business. In lumber, some of this came from the portfolio changes and some came from operating improvements. But there again, we look at our lumber operations and those productivity levels are at record levels as well. So it is very broad. I think you heard me comment about it in the oriented strand board business - - thank goodness they are operating extraordinarily well in the strand market, And the gains in that group of mills amounts to between 9% and 10% which is equivalent to having added another mill in terms of the operating improvement.

So if you look at the second quarter, could you give us a per share number as to what maybe the improvement over the first quarter in this productivity improvement?

Yes. In the second quarter, Rich, it was more in the volume, in the take away where we had a total of volume in the cost reduction in the range of 20 cents a share. And of that 17 cents was in volume. Higher operating rates and better take away and just 3 cents in the second quarter compared to the first quarter in reduction in cost and productivity improvements.

And if you apply it to this fantastic number you reported on the wood side of the business, in the same quarter, was it really focused on the wood products area or the majority of it?

It is actually spread throughout the businesses in the break down here I am just looking at the break down and it is spread pretty broadly.

Okay. If I go through and look at your price improvement was substantially more than I expected on wood for the same quarter and part of that is that delay factor. You know, I still fall way short of the numbers that you reported. I know your volume was up nicely. Could you go through the key factors of changes? You see it going from the first to the second quarter. And maybe in ballpark terms of what contributed to this big rise which was you know, on the order of like $280 million from the first quarter levels.

Yeah, I will have Dick do some of that reconciliation for you here.

Well, I think, Rich, as Rich mentioned the improvement was not only across the board, across the sectors but within wood products and what you begin to see was the contribution of a number of businesses that had not been contributing to earnings in the first quarter and last year. If we look at the price impacts for the quarter, the second quarter compared to the first, of about 98 cents, the largest impact came from lumber.

Some of that is that our lumber mix doesn't necessarily track exactly with the mix that is, that random lengths uses as a composite indicator. It as bit more valuable. OSB contributed 17 cents, plywood contributed 9 cents, Trus Joist 7 cents, Our composite products cents a share. So these are all price the increases.

Wood products in total in volume, 7% - - or 7 cents and that includes, the industrial wood products Trus Joist as well as the big sector. The big product lines of plywood that tend to be the major focus. Overall, wood products pricing improvements contributed 79 cents a share. And wood products volume improvement contributed 7 cents a share quarter over quarter to our improvement.

And as we mentioned of that, a little over 20 cents a share came from products other than lumber and plywood. Now, it is going forward, we talked about where we think the changes will occur largely in lumber and plywood with the improvement in Trus Joist and our composite products being enduring as those prices continue to be above second quarter levels.

If you look at OSB, could you give us an idea of where your prices are in July versus what you saw in the quarter? How far down are they?

In July, they are down around $50. I'll have to look that up. They are down around $50 to $60 a thousand, from the average for the quarter.

Okay. And just last question, on timberlands the 6% increase in harvest levels that you did in the quarter, could you go through what, why you decided to do it? Was it because log prices were rising and it was better to access your own timberland and then you still earn sustained cut doing?

Well, Rick some of it is seasonal. Particularly in the West as you come out of the winter months. We typically have a higher production rate off of our own timberlands coming through the second quarter. And of course we had strong demands, and strong take away. And so, that's probably the main factor as I said in the South we were some what constrained by the wet weather conditions there. So it was mostly a Western timberlands and strong markets and seasonal.

Okay. Thank you.

I might add that this timberland's performance is all operating performance it does not reflect any unusual divestures and we would show those separately anyway Rich.

You next question is from Mark Connelly with Credit Suisse First Boston.

Just a couple of things. You talked about record operating rates. I wondered could you give us a sense of what your own could appreciate and what your container operating rates were? We are also hearing that some container board producers are feeling some pressure because their inventories are too low. I was wondering if you are having that problem. You did mention transportation issues, is that costing you money? That was 1 question.

It was? Well, starting with the transportation question, as I said although it is frustrating and it's caused a lot of additional time and effort to work through those, we are working through those in fact. So it is not a major factor here in terms of constraining earnings or causing inventory builds in the system. And it is fairly spotty.

Actually the inventories are quite low in our system. In container board.

Okay. So you are hoping to rebuild those over the summer? I mean not a lot but.

We tend to run hard through in the summer and then you build in the fourth quarter and early Spring. So our container board cycle would come a little later.

Okay, so they are not too low, they are just low?

No.

Okay. Got it. And then on the operating rates?

Let's see here, our operating rates we are talking here about in the 97% range or so. I'm talking about container board.

Okay and white paper?

I don't have that one right in front of me. That's such a mixture of product. So.

But basically.

Certainly in the 90%.

Every one was running wide open Mark.

Thank you.

We did have extensive maintenance down time in the second quarter, so our operating would be a little higher in third in white paper.

Right that is was trying to get to. Okay. That's helpful, thank you.

Next question is from Karen Gilsenan from Merrill Lynch.

Thank you. A couple of questions. First of all on interest expense, if you could give us some thoughts of how that might look in the second half of the year. Second of all if could you give us some indication on how this second round of box price increases are doing at this point in time? It is still early I realize. And then finally the 76-cent incremental increase in pricing in wood products and the 7 cent increase in volume, 7 cents per share, can you give us any better insight into what Q3 might look on those 2 figures versus Q2?

Let me make sure we get all of your questions. There was about 3 of them there. First the interest expense. Interest expense in the third quarter will be about $185 million. The interest expense in the second quarter of course included the charge for the early extinguishment of debt. The fourth quarter will be a function of the timing of our next round of debt reduction, But the 185 million will be the third quarter number. Regarding the third quarter question then your question then regarding wood products?

Yes, wood products.

Right. As I mentioned we expect the price of the average prices for lumber to be $20 to $30 a thousand lower in the third quarter than in the second. Off the top of my head I can't convert that to earnings per share.

Okay.

But we can follow up with you and do that with you later. Oriented strand board, if it does not improve from current levels will be $50 to $60 per thousand below the second quarter level which it will go down a little more than it went up. So it will, it will be something like 17 cents, or over 17 cents a share negative. 17 to 20 cents. The other product lines, engineered wood, MDF and composite products will contribute probably as much as to the increase - - will increase as much in the third quarter as they did in the second quarter. Because those, the pricing dynamic there is quite a bit different than in lumber and OSB. And your question on box prices?

Right. But, before we switch to box prices, volume? Do you think in the third quarter?

Volumes will stay relatively flat. We were running pretty much flat out. And to the extent there is any and we were as Rich mentioned able to maintain a pretty high percentage of on time shipments. And so I would suspect that our volumes will stay relatively flat. To be able to produce more.

Okay. Then the box price?

Right. Second round of box pricing increases as we mentioned, will begin implementing in the third quarter following the June price increase for container board. That we expect will take you will see the impact for the next 2 quarters. And so we will see a similar kind of increase in container board and box prices this quarter as last quarter. And likely a similar amount in the fourth quarter.

Okay. That's great. Thank you.

Next question.

Your next question is from Chip Dillon with Smith Barney.

Yes. Good morning. When I saw your earnings I thought it was a typo this morning congratulations. I wanted to I think what we are struggling with is how much of this blowout we saw in wood in the second quarter is really sustainable. And if you do the math with your assumptions on pricing a billion feet of OSB times 50 bucks and sort of 25-30 bucks on your 2+ billion feet of lumber more or less. You are getting down about 100 million from that. But moving back the other direction though you mentioned that a lot of your other wood products such as engineered, wood and MFD etc. would be up. So, I guess what I am getting at is if things stayed the way they were now and forgetting the fact that lumber took off this week according to Crowe's, which was in my inbox, that you are probably going to see a number in the 300 million or higher range in this segment if we make that - - again assume everything stays frozen as it is right now?

This is Dick Taggart, Chip I think if everything stayed where it is today. We would be a little lower than that. Certainly as I said it would be well above the third quarter of last year. Which I believe before any special items was 165 million. That would be a number with a 2 in front of it but if prices stayed where they were today, I think we would be up from '03.

Gotcha. But probably above 2.5?

That's your job to get that precise.

I try not to work too hard, guys. Then looking at the real estate business, you mentioned that you had seen a little bit of softness in Houston. Is that something that has been building for months or does it look like it's more of a blip?

We'll have Dan Fulton can comment on that.

We have seen some softness in Houston all year long although we've actually maintained year to year volume. It seems to be a situation related to employment. And the good news is that we have gotten a couple of recent new announcements of relocations of oil businesses into the Houston market. We would hope to see some firming. But we have adjusted our starts in Houston to reflect the little bit slower pace that we have seen in the first half.

Got you. Okay. And then lastly on the CapEx guidance, actually 2 last ones, what should we assume average shares to be in the third quarter assuming nothing changes from what it looks like today?

The average share should be about 241.6.

Okay and the third quarter?

Third quarter was 234.5.

Second quarter was.

I'm sorry second quarter was 234.5. Third quarter will be 231.6.

Okay and then lastly you mentioned CapEx at 750. If things stay quite good, what would next year range be as sort of a preliminary look?

Chip, this is Steve. We are booking 850 for next year. We have layered on about 100 million in large scale investments for energy efficiency back of the mill investments in aging recovery and the like. So, we he think that we will be running at about 850 next year and possibly for the next several years.

Gotcha. Again, congratulations.

Next question.

Your next question is from Mark Wilde with Deutsche Bank.

Good morning. I would like to add my congratulations impressive quarter. I had some questions about first price and to go back to boxes 1 more time. It sounds like you were up about $20 to $25 in the second quarter . And Dick, I thought I heard you say you'd expect about 25 more on each of the 2 subsequent quarters; is that correct?

As we measure the averages quarter to quarter. That's correct, Mark. Point to point they would be more than that.

I guess what I am trying to figure out is how much of this $95 in container board pricing do you think you actually rolled through in the box prices at the end of the day?

At the end of the day we expect at the end of this month to have the first price increase pretty much full implemented. On a roll through basis and we'll begin working on on the second. So we will achieve the first $50 a ton.

Do you expect then that Dick, that you will pretty much get dollar for dollar container board in the boxes?

That's our intent.

Then I wondered can you talk briefly about pulp prices because it seems like while the North American market and MBS shay market it is pretty firm that hardwood particularly in some of the offshore markets seems a little bit softer.

Well, yes, indeed but recall we have very little hardwood production in our system. Anything for a market other than a small smattering out of [Haseo] Kentucky is softwood. The other thing that impacts us differently than the most of the producers is well over half of our production is nonpaper grade pulp which is strengthening as well.

Steve, if we can turn over to imports and wood products, I'm just curious, there's been kind of talk in some of the trade press about plywood coming in from Brazil and other places. At the price levels we have had over the last year, what do you guys think we will see in imports over time?

Well, there are several answers to that question depending on the product. First thing I would comment on is we through our distribution import and sell high grades of industrial grade plywood from such locations as Chile. So that is something that is going on continually. They make grades that are in rather short supply. But with regard to other imports and pricing so much depends on relative currencies from other countries. That with the high Euro, I have not heard of a great deal of importation of forest products from Europe. And of course we don't have any moving from the Asian countries our way. The other suppliers would be Australia, New Zealand, Chile. Perhaps Brazil some. But those aren't going to be in great quantities. Rich, do you have anything that you've heard?

No, it's the high end specialty type products but we don't see any significant quantity in the near term.

Is this kind of strength we've seen over the last couple of year, is this kind of fast forwarding any of your plans down in Uruguay Steve?

Our tract down there is very shortly we have to begin putting hardware in the ground because we are coming up on the first thinnings. And we have our plans underway to take that into solid wood products. It won't be a huge capacity. But we are near to the time that we will be facilitizing that. These are growing fast.

Okay. And then just finally, Steve, could you give us a couple of thoughts this quarter on away from wood products and timberland on how you see the progress in pulp and paper? Because we are just kind of starting the recovery there.

Well, we are optimistic. Of course you have to look at it in separate markets. Container board packaging as the economy continues to improve we see our corrugated container business following right along with that. And that would be an industry statement. As far as the Company is concerned we have been very effective in first improving our liner board and corrugated medium production. And we have been working very hard in the corrugated plants too on the mix of business. And concentrating on making sure the price increases flow through to our customers to help off set the increased cost of raw materials and the like.

Okay. Very good. Thanks.

Next question.

Next question is from Peter Ruschmeier with Lehman Brothers.

Thanks and congratulations on a great quarter. Just had a couple of short questions. Do you have a figure for the cumulative countervailing duties you have paid to date?

We don't have, we don't know that we have a precise number, it is now, it probably approaching or exceeding $200 million.

Okay. And perhaps Steve, you have an update on your thoughts on negotiations as they continue. Any light at the end of the tunnel on where we're heading with the trade dispute?

I am not sure I can add any enlightening material to at what is out there in the public. It seems that negotiations are dormant at the moment. I think the silly season - -the political season is upon us. And that's taken the administration and eye off of our particular problems. Essentially the same condition was existent in Canada through their elections. What I do hear is a lot of people talking about wanting to get back to the table and getting this thing resolved. At industry meetings, I hear that continuously from everyone. So of there is any hope out there it has to be driven by the industry itself and getting the 2 sides together to negotiate this thing out.

Lastly, if I could maybe for Steve. Given the very strong results in the outlook I guess for continued good results going forward, you know your balance sheet is getting better as you focused on. But can you update us on our strategic priorities especially if we are willing to look forward a little bit? 12 months out certainly seems conceivable that you could you be ready to engage in acquisitions sooner than later. I know it hasn't been a priority. But maybe help us move a year down the road. What is your thought process?

Yes. Well, certainly we are getting our balance sheet back in shape. We have indicated that over time we did intend to grow the Company. We have also indicated that there are a billion opportunities for us in North America. But more and more because of the size of the Company and its businesses in North America.

We have to look at other opportunities for us. That's why we are focusing so heavily on getting our investments in Uruguay off the ground and places like Australia. So we are trying to walk before we run in the global marketplace. To learn how to participate effectively there and profitably. But we would not be in a position today to share with you any specific plans we have.

How about if you could share your financial hurdles or strategic hurdles? I guess if you could call it that in terms of the types of things in terms of what has to happen for it to be attractive to you.

On domestic investments of course, when you are looking at infrastructure investments we try to see to it that our hurdle rates are well above the cost of capital in the neighborhoods of say 15%. Add on projects, we always look to hurdle rates above 20. Because that's where the cream is on getting your profitability. When we look at foreign investments we put always put market country risk into those numbers I just shared with you.

Okay. Fair enough. Thanks very much.

Next question.

Your next question is from Mark Weintraub with Buckingham Research.

Thank you. I just wanted to delve into the wood products performance and then also the guidance you are giving on the third quarter. First, just, was there much of a swing from distribution? I think that you said there wasn't much and that building distribution; is that right relative to first quarter?

There was very little change in building materials distribution quarter to quarter. About a $10 million improvement.

Okay. And then I guess just coming back to the question before where you kind of you run through the price changes that you had talked about. 20 to 30 on lumber. If we even used that kind of 60 on OSB and assume that for plywood too. If you run those through and don't take into account some of the upside from some of the engineered wood etc., it still does seem to come out to like a 350, 360 just mathematically. Is something else that I should be focused on to understand the delta expectations 3Q v. 2Q?

Rich talked about higher log prices in timberlands which do translate in higher purchase price per log in wood products. In the quarters in which we are reducing our fee harvest. We are increasing our purchases. So there will be an increase in raw material costs to our wood product businesses in th third quarter we would expect.

Okay.

But the biggest impact is price.

But the biggest impact is price.

Okay. And is there volume guidance, do you expect it similar or down meaningfully?

This time as I mentioned I think we are expecting similar volumes because we are just running so flat out.

And we know that with housing backlogs we are going to have a strong fall building season.

Shifting gears quickly then. Could get a quick outlook for pulp and also on the cut size price increase. Are you making announcements on any of the other grades? And maybe just give us some color on the markets and why the cut size increase and not on the other grades? Is it catch up in cut size or again some color please?

Well, you know, seasonally on the cut size increase we thought it was tight. And we will just have to see how these markets go. And again on pulp we already had seen the price increases and those have held well. On the price increases in July that we have announced maybe we should break that down a little bit. But we have announced in July on cut size offset of $40 increase. And then envelope stock 50. And then dilutive ground wood $60. So those have yet to work through. And we just think marketwise the timing is now good for those increases. Those follow other increases earlier in the year.

So is this cut size catching up to the July increases? Or is this the lead of what could eventually be a new series of increase on the other grades.

Well, we will see how strong the markets go.

Cut size has not been - - prices increases in cut size have lagged envelope and other grades.

I would say that our order books in the cut size arena has been very strong and we have been operating flat out. That would indicate that we should be able to sustain the same kind of price increases that we have in other grades.

Thank you.

Next question?

Next question is from Steve Chercover with D.A. Davidson.

Good morning. Just wanted to kind of follow on the theme of backlog. Steve just said you have good backlogs in uncoded free sheet. Could can you describe where you stand on the container board side? Then maybe I would like to ask a question on real estate.

You are talking about board files or container board or in packaging?

Both please.

Okay. The inventory levels as I indicated earlier are quite low in our system and I understand that is a pretty general condition out there. So the expectation in the third quarter is for high running rates. We have experienced substantial improvement in the output from our container board system, and we expect that to continue.

We have gotten through most of our maintenance shuts I think, Rich, so that we don't see any down times for maintenance that would impact the third quarter. On the box prices, we have been working very hard to get the box price increases through. I think you see in the numbers that there is improvement quarter over quarter. Yet at the same time, the absolute volume of corrugated containers was up nicely quarter over quarter. If business in general continues as strongly in the U.S., we would expect to continue to improve our margins there.

Great. And on the residential side, there is a 7 month backlog that you already have. I mean that sounds quite long. Is that abnormally long and what is your view for 2005? Is it going to be another good year on residential housing?

I think Dan is the best one to answer that. Dan?

Our backlog has been steadily building really for the last year. So we are up above 7 months at this point. That's an average across our system. In some markets that's a lower number and in other markets it as greater number. It is reflective of the continuing high demand and we would expect that backlog level to start to drift back a little bit more towards a 6 month number which is more consistent. But at this point we have got continued strong traffic and we are scrambling to deliver homes against orders.

Okay. So as a last question, do you Dan or perhaps [Len Michaels] have a forecast for housing starts in 2005? For the industry.

[Len] isn't here with us this morning. Dan?

I think that [Len] has his numbers, the homebuilders association has theirs. And at this point the view is that this should be likely a record year. And that next year should not be quite as strong. But still, you know, total housing starts level with 1.8 million to 1.9 million.

Great thank you, guys.

Your next question is from John Tumazos with Prudential.

Congratulations on the great results and the leading position and debt repayment in the forest products industry. Could you explain in the context of the great earnings land sales, etc. why the April 28 or 29 stock offering was completed when it was in 72 hours with a $8.5 down draft in the stock price? it would seem seeing these great earnings you could have waited 90 days or maybe not done it given if the stock fell so much that week?

John, this is Dick Taggart, hind sight is always 20/20. We felt at the time that we weren't trying to time the market. We said at the time of the offering our goal was to accelerate our deleveraging which we have done to eliminate the credit risk from the rating agencies in terms of our debt ratings. And to come to the market at a time when we felt that our stocks still had not reflected the earnings power that we felt was in the Company which I think we demonstrated in this quarter.

We happened to pick a tough week in the market and that's, that is history and is well known. But, the rational was was just I said to accelerate the debt deduction which we have done. And do it at a time when we felt it was still up side in our stock that has not been reflected in the marketplace from the earnings power that we believe is here.

Thank you.

Next question?

The next question is from Rick Skidmore with Goldman Sachs.

Good morning. Just 2 quick questions, Kathy or Dick, can you just elaborate on the excuse me, the asset charges that were, that seem to be in the foot notes but not listed up above in the charges? So it looks like your number on a go forward basis would be sort of a 169 instead of 167 which is what it's implied in terms of the earnings? Can you elaborate as to why those are down below as footnotes and brought forward?

It as materiality issue, Rick. We had an adjustment on the - - we had an adjustment on the sale of our OSB plant, little adjustment to the goodwill account that had a small negative. It was not material and so one could have said yes that the ongoing was 169 instead of 167. It was simply a materiality choice on our part. Because it related to a loss of the sale of a small facility. And adjustments to the closing price of the OSB plant that occurred in the prior quarter.

Okay. And my second question is with regards to capital spending. It looks like you spent about 160 million so far year-to-date if I'm looking at the right number. And your budget is 750. Can you talk about those projects that are going to be the next 600 million roughly that are going to happen in the back half of the year? What are they? Does it lead to any capacity creep in the system, just elaborate a little bit more?

Sure, capital spending is always lumpy. We have finished a number of projects and going through what we call our gate process for authorization, are several projects that are large in nature that will have some up front spending to acquire the equipment with them. Virtually all of the large scale projects have to do with energy efficiency, replacement of aged and worn out equipment such as boilers and the like. Almost none of it has anything to do with with it productive capacity at this point.

Thank you.

I believe we have time for 1 more question.

Your final question is from Josh Zaret with Oppenheimer & Co.

Thank you, I have 2 quick questions. Dick when you were talking about outlook for timberlands for the third quarter. You talked about the normal I guess seasonal fire season. Decline of 10% to 15% in volume. So my question does this look likely to be a normal fire season in the West?

Well, Rich should comment on that. It's been pretty dry and this is the range in which we have typically experience. But we are not there yet. Rich, you want to comment?

Well it's very dry. But you know when these conditions are as they are. We take shut downs or log short days. And we plan that in and that's what is anticipated. But, the set downs that we plan should be consistent with what we are looking at here.

Okay. Fair enough.

We have been very fortunate by the way in terms of the impact on our lands even spite of these kinds of conditions due to the our fire preparedness.

Okay. And the second question concerns the Georgia timberland sale. If one looks at the average value per acre which was about 1,300 in that area and the nature of the buyer. It seems like there was real estate elements in these sales. And my question is, is this something as a major timberland owner, and a Company that does sell timberland; you are starting to see this real estate speculation coming into process more than we've seen in the past? And does this make you feel that maybe there are more opportunities at these kind of prices to you know, increase some divestiture program?

Josh, the value was quite high on those timberland. And you are right. Certain parcels of them were higher and better use., Beachview lands lying in the region between Atlanta and Macon. It has always that if you have lands lying in urban areas, they have higher values than for timber production. So everything is dependant on location, location, location, location, just like in other real estate. In this case there was a significant proportion that were beachview lands.

You think it was specific to the property and there hasn't been an increase over all around the country in terms of timberlands for real estate speculation? That we haven't seen before.

No I don't think there is any shift in that. I've not heard that from our people. We do try to maximize the value of our lands.

Okay, well thank you very much.

Thank you for joining us this morning for our second quarter earnings conference call. I will be available shortly for any follow up questions you may have. My telephone number is 253-924-2058. Thank you very much. Have a good day.

This concludes the conference call and you may disconnect.