威爾豪瑟 (WY) 2004 Q3 法說會逐字稿

Good morning. My name is Wes and I will be your conference facilitator today. At this time I would like to welcome everyone to the Weyerhaeuser third quarter 2004 earnings conference call. All lines have been placed on mute prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number 1 on our telephone keypad. If you would withdraw your question press star then the number 2 on your telephone keypad. Thank you. I would now like to turn the conference over to Miss Kathy McAuley. Please go ahead.

Thank you, Wes. Good morning and welcome to the Weyerhaeuser third quarter 2004 earnings conference call. I'm Kathy McAuley, Vice President of Investor Relations. Commenting today on earnings will be Steve Rogel, Chairman, President and Chief Executive Office, Dick Taggart, Executive Vice President and Chief Financial Officer, and Jim Keller, Senior Vice President, Containerboard Packaging and Recycling. Also joining us in the room is Steve Hilliard, Vice President and Chief Accounting Officer. This call is being webcast at www.weyerhaeuser.com. A copy of the earnings release and presentation slides can be found on our website. If you need any materials or have any difficulties please contact my associate, April Mier(ph), at 253-924-2937. Please read the warning statement in our press release and on our presentation slides concerning the risks associated with forward-looking statements, as we'll be making forward-looking statements during this call. This morning Weyerhaeuser reported third quarter 2004 net earnings of $2.45 per diluted share on net sales of 5.8 billion. The third quarter includes the following after tax items. A gain of 179 million or 74 cents per diluted share on the sale of timberland in Georgia. A gain of 16 million or 7 cents per diluted share from a 10 year reallocation agreement with British Columbia. A gain of 13 million or 5 cents per diluted share due to the reduction in the hard board siding reserve. A charge of 7 million or 3 cents per diluted share related to the sale or closure of facilities. These items total 83 cents per diluted share. Quarter-by-quarter GAAP reconciliation of special items for 2003 and the first 3 quarters of 2004 is available on our website with presentation materials we are using today on this conference call. I will now review the third quarter performance versus the second quarter of 2004. Timber lands. Log volumes were down 5% from the second quarter.

Third quarter log harvest in the west were seasonally weak and due to wet weather down slightly in the south. The hurricane had no material impact on Weyerhaeuser timberlands. Export log volumes were negatively impacted by the late sailing of two vessels in the third quarter. These shipments will be recorded in the Q4. Domestic log prices were up due to high product prices. However, due to mix, overall realizations were flat to slightly down. Export log prices increased 2%. Wood products. Lumber prices increased $12 per thousand board feet and lumber volume decreased 4% in Q3 versus Q2. Plywood prices decreased $42 per thousand square feet on flat volume. OSB prices dropped $83 per thousand square feet and OSB volume declined 6%. Pulp and paper. Pulp prices increased $24 per ton on average plus pulp prices have been stable, however the price of paper grade pulp in September was about $15 per ton below the average price of the third quarter. Pulp shipment volumes were down slightly. White paper prices averaged $42 per ton higher in Q3 than in Q2. September prices were $17 per ton above the third quarter average. Paper shipments rose 3% in the quarter. Containerboard, packaging and recycling will be covered by Jim Keller after I complete my remarks. Rico. Home closings in the third quarter increased 11% over the second quarter and the average home price rose 3%. New homes sold were down 16% from the second quarter due to a combination of seasonal factors and a moderating pace of new home sales in the industry The backlog of homes sold but not closed is running about 7 months. I will now turn the call over to Jim Keller who will discuss containerboard, packaging and recycling.

Thanks, Kathy. In my brief remarks this morning I will cover the current market conditions in the containerboard, corrugated packaging and OSS markets. And then I'll turn to some changing trends in the dynamics of the industry that maybe different from past wisdom and finish with comments related to our positioning this sector for the future. Starting with the industry conditions. Corrugated demand in the US has now experienced 4 quarters of year-over-year improvements. After 4 years of falling demand, from the end of 1999 to the end of 2003 and during this period the market declined 6%, the industry shipments for the 9 month period ending September '04 in the U.S. are up 3.6% over prior year levels. While admittedly this is from a significantly lower base, we are finally in a growth environment. This improvement is fundamentally coming from the growing non durable sector and the weakening dollar which will eventually affect a slowdown in imported consumer goods. During the period of slowing demand, 1998 through 2003, 6 million tons of containerboard capacity was closed. Weyerhaeuser, in this period, dismantled 5 board machines totaling 1 million tons or 16% of our current capacity. And we rationalized 14 packaging facilities or 9% of our capacity. We positioned ourselves for the future by focusing our attention towards scale, cost-effective containerboard machines, and plants that can service their local markets and customers in a cost effective way. Today we are well positioned to take advantage of the improving market conditions. The improving demand in corrugated packaging coupled with fairly stable export demand for containerboard, about 9% of U.S. containerboard is exported, has led to improving operating rates in the containerboard industry.

Operating rates hit a high for this year this September at 98% and year-to-date the operating rate is approaching 96%. This compares to last year's year-to-date operating rate of about 91%. Board inventories remain at relatively low levels, about 2.5 million tons or 4.2 weeks of supply, and with tightening market conditions prices have begun to rebound. Last year we experienced containerboard and packaging price weakness throughout the full year. This weakness actually carried into the first quarter of 2004. In January, Weyerhaeuser announced a $50 per ton increase on containerboard followed by a general box price increase. In June with our tightening supply and demand situation, we followed with a second $50 increase on containerboard and a second box increase as well. Let's look at the data and see how all these increases have been progressing. Our data shows that our quarter-quarter moves for packaging have been as follows: From Q4 to first quarter our average prices fell 1%. As reported in our second quarter's earnings call from first quarter to second quarter, our packaging prices moved up 3.3% and from second to third quarter they moved up 3.2% Sometimes you lose the real impact of how a price increase is progressing if you only look at quarter-to-quarter averages. For our packaging business our pricing bottomed in February of 2004 and from that low point we started the box price increase. By the end of the second quarter we had recovered $31 per ton and through September our packaging business has recovered $84 per ton. We focus on packaging recover and pricing because such a high percentage of our containerboard production goes through our integrated packaging system. So pricing moves hit our bottom line primarily when packaging prices move. Our expectation is that the full $100 containerboard increase will be recovered in our packaging business in the fourth quarter.

I would like to make a comment here about the changing dynamics in the pricing environment compared to conventional wisdom about our industry. There used to be a quote, rule of thumb that it took 30-60 days to pass a containerboard increase fully to the packaging customers. That's not the case in today's market. It's really is taking more like 3 - 6 months to totally move the price dial. Why is this? I believe it stems from the affects of the consolidation and increased buying power on the part of our customers. You can move certain accounts in the traditional 30 to 60 day lag, but the larger national or international customers, after enjoying declining prices for over 1 to 2 years, have built a certain cost structure into their product pricing. Some customers, to protect their margins, have built in certain protections into their contracts with their suppliers. We can be restricted to quarterly or semi-annual or in very rare cases, annual pricing changes. Internet bidding with price ceilings was a popular tactic of some customers over the last few years. Another area of changing dynamics hits in our agricultural markets. Once they were local or regional, but now our customers have crop supply that is longer in duration and across a much broader geography, so they are locking down pricing for a particular season, rather than just a month or two. What this mean is that we have to work through the timings of these delays to fully recover an increase. So the conventional wisdom of 30 to 60 days doesn't hold for the average increase may more. Let me turn to how our system is positioned for future earnings growths. Our priorities have turned from the rationalization of facilities as described earlier to production optimization, product and service expansion, and customer market selection that allows us to improve our financial returns.

I will briefly touch on each, but begin with the last point. The customer focus has been to align with customers who understand that the low returns that packaging producers have experienced cannot continue indefinitely. Pricing relief has to occur for this to remain a viable industry that will attract capital. We will not align with customers where prices won't move or where unrealistic terms or caps are put in place. To this end we have been willing to give up share rather than pricing flexibility. We have lost market share, but I believe our pricing improvements have outstripped the industriaI average in the business and improved our total financial return. According to data tracked by the Fiber Box Association third quarter industry box prices increased 5.9% year-to-date, while our increases are 6.6% during this period. However, losing share has not hurt our financial position. We have been able to continue to run our system in balance and at full production. We have not taken any downtime as a result of losing box market share. Relative to production optimization in the mills we have standardized grades and widths and focused our mix at each mill to be the product line that hits their machines' sweet spots. Our mill productivity is up. We pretty much have covered this in past discussions of our acquisition synergies. Our box plant system is re-organizing into areas or plant groupings to serve our customers from the right plant relative to machine capabilities versus the closest plant. And our recycle system is focused on bringing the lowest cost recovered fiber increments into our system and selling the higher cost increments to the open market at a profit. Finally in the areas of customer focus and re-positioning around new products and services, we are investing in our retail experienced network, opening 2 new sites this year, one in the Midwest and one in California to compliment our Charlotte operations where customers can come together with our structural and graphic design teams to work directly with retailers on supply chain solutions that get their products to market at the quote "Speed of retail" which is one of our trademark descriptors. In summary, demand is on a growth path, prices are moving up through our integrated system and we have the people, facilities and strategies in place to produce the better financial returns for the future. Now I'll turn the mic over to Dick Taggart, our CFO.

Thank you, Jim. Before discussing the outlook for the fourth quarter, I want to make a couple of comments on the announcement we made simultaneously with our earnings release regarding our partial tender offer to purchase up to $700 million in principal amount of our outstanding debt. We ended the quarter with approximately $1.2 billion in cash and even with this tender offer, we'll end the year with a significant cash balance. This cash will be used to pay off debt which will mature early next year and fund our normal seasonal increase in working capital in the first quarter of next year. This tender will focus on the maturities in '0,7 '08 and '09 and will save us approximately $42 million a year for each of the next two years in interest expense. We expect a charge of approximately 15 cents a share associated with this purchase which will only be trued up when final pricing is determined for this offering and that will occur in the fourth quarter. As we enter the fourth quarter we were experiencing the normal slow down in a number of our product lines, but earnings are continuing to -- will continue to improve in a number of our businesses. As Jim said, we continue to increase box prices following the liner board price increases which occurred earlier in the year. While seasonally volumes will be lower in the fourth quarter, our average box prices we'll expect it to increase 20 to $25 a share and will stay below CC costs, our earnings will increase in our containerboard packaging business. In our pulp and paper segment, continued improvement in our average unquoted free sheet realizations are expected to improve by approximately $20 in the fourth quarter, but they will be more than offset by the weaker prices we have recently experienced in paper grade market pulp and costs associated with maintenance related downtime that had scheduled early in the fourth quarter. There are signs that paper grade pulp prices may improve beginning in the fourth quarter but average realizations for pulp are expected to be 20 to 25 -- 25 to $30 a ton lower in the fourth quarter compared to the third.

With cost associated with the combined downtime of 31,000 tons of scheduled maintenance tor pulp and paper, earnings are expected to be slightly lower in the fourth quarter than in the third. In the home building business, as Kathy mentioned, our backlog remains very strong. Timberland earnings, excluding the gain on the Georgia timberland sale, will remain steady at that level while our wood products earnings will drop in line with the seasonal decline for wood products. Single-family closings are expected to actually increase in the fourth quarter resulting in slightly higher earnings for our real estate business in the fourth quarter than the third. Our sales rate in most markets has slowed from the second quarter levels, but that will not have an impact until late next year. As builders focus on finishing and closing homes in the fourth quarter, wood products demand is expected to follow the normal seasonal decline. Wood products prices have fallen significantly from their third quarter highs, as most of you know, and our lumber realizations are expected to be 35 - $40 per thousand board feet lower in the fourth quarter than in the third with OSB realizations down 75 to $80 per thousand square feet. Engineered product prices, on the other hand, are expected to remain stable through the quarter and earnings in the wood -- for the wood products businesses are expected to be similar to first quarter levels. Our timberlands business remains stable, harvest levels and log prices are expected to remain similar to the third quarter, fourth quarter earnings are expected to be close to modestly better than the third quarter. While overall earnings before special items will be down from the third quarter, they will remain well above fourth quarter levels of last year. And with that brief overview of the outlook I would like to turn the call over to Steve Rogel for some closing comments before we take you're questions.

Thanks, Dick. You have just heard the details behind our strong third quarter performance and the steps we are taking to further reduce our debt. There is a lot of information here, but what I hope you take away from these presentations is all businesses contributed to our third quarter results. We have created meaningful, permanent changes that have made us more efficient. And we continue to make progress on paying down our debt to our historical financial targets. Results like these don't happen by accident. It took a lot of hard work by our dedicated employees and our entire management team thanks them for their efforts. What I would like to do now is to build on the presentations given by Kathy, Jim and Dick by discussion the earnings per share comparison posted on our website. Then I'll turn our attention to the future in my discussions about our Capitol spending plans. As you can see on the earnings per share waterfall chart on our website, prices had the biggest positive effect on our third quarter earnings. Stronger prices, especially for containerboard, fine paper and real estate contributed 24 cents per share of earnings. This was offset by lower volume and higher costs associated with material for resale, that is products we buy and then sell through our distribution system. We buy and resell about $2.5 billion of building materials a year. These products have been in high demand this summer and the variance is due to higher market prices for these products. As you can see we also experienced some higher manufacturing costs this quarter. About three-quarters of that change is due to the weaker U.S. dollar, which has negatively effected reporting of Canadian costs. We also experienced higher manufacturing costs due to overtime in our wood products businesses to meet demand and due to higher resin costs in that business. Although we did experience higher energy costs, our energy self-sufficiency helped us blunt some of this affect.

Kathy McAuley will be available throughout the day if you would like more information on the earnings per share comparison. I would now like to turn our attention to capital spending. I think this is appropriate for 3 reasons. First, it will help you better understand our discipline around capital spending. Second, it will give you some insight as to why our capital spending is at the level it is so far this year. And third, it will give you an idea of some of the benefits we project you will see in future quarters. Let's start with our discipline. First and foremost, we are committed to paying down our debt. We said that since we acquired Williamette and you heard Dick say it again here today. Nothing we do will jeopardize our commitment to return to our historical financial targets in the timeframe that we have outlined, but at the same time we will never allow that commitment to jeopardize the future of our manufacturing operations. As I mentioned last quarter, we're operating with greater safety and more efficiency than ever before. In recent years we have invested significantly in maintaining, upgrading and modernizing our facilities. This has decreased the level of our short-term capital needs. Another reason for lower expenditures is that we look at the most efficient and effective solution. Sometimes this results in non-capital solutions or projects that come in significantly low, where we originally thought they would. Finally, we have delayed some projects due to high customer demand. This is delayed some of our capital projects by a quarter or more. Let me give you some examples of some real life projects where these factors have played out. In in our mills we always look for ways to efficiently upgrade our operations.

At our Pine Hill containerboard facility, for example, we started a project to upgrade a boiler air system. Originally we thought this would cost several million dollars, but through engineering studies it was determine that a simple change of the fan wheel would accomplish the same thing and cost less than a half a million dollars. Our wood products business provides a lot of examples where we've delayed projects due to high market demand. At our engineered lumber mill in Kentucky, for example, a dryer project was shifted from this year to 2005 due to high demand. Meanwhile, our southern plywood mills have also deferred capital projects due to market conditions. Examples like this are found throughout our system and result in lower than expected capital expenditures, but this does not mean we are neglecting the future. In fact, we are more focused than ever on high return projects that will improve our manufacturing efficiency and reduce energy costs. Such projects will have a meaningful impact on future earnings and enhance our ability to compete globally. In closing, let me just say that Weyerhaeuser is a stronger, more efficient company than ever before and we are taking the steps necessary to make it even stronger. At this time I would like to turn the call back over to Kathy McAuley, who will moderate our question and answer session. Kathy?

Thank you, Steve. Wes, could you please open the floor up for questions.

Yes, ma'am. at this time I would like to remind everyone in order to ask a question, please press star then the number 1 on our telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your fist question comes from Eading Stavol of Morgan Stanley.

Thank you very much and good morning, gentlemen. Steve, I was hoping that you could comment on, you mentioned discipline capital spending, but some delays. You know, are you prepared to give some numbers around next year's capital spending plans?

I sure am. We are planning to up our capital spending to the range of $850 million . We have identified a series of high return energy projects, particularly in our paper mills, and we have some boiler replacement projects that are getting underway that will kick us up to that level, but we do expect to spend about $850 million next year

Is there a portion of that that you would have expected to have been in this year's budget or are you hoping to catch up on some of the deferred projects in the fourth quarter?

We'll be spending somewhat more in the fourth quarter than previous quarters, but I really don't expect us to hit the $750 mark that we have targeted at this stage. We have deferred some projects, as we said, into next year. The 850 I mentioned is really against a listing of new projects beyond what we have got scheduled this year.

Okay and perhaps along that sort of same vein Jim, one of the things I've noticed, you know, you guys are running very full on the containerboard system, in fact the last two quarters, at least according to your published statistics, you're running above 100% on the production side. Number 1, I suspect you would agree with me. Number 2, does that mean, you know, some of this new capital may go towards expansions or increased optimization projects on the containerboard side in order to handle your expectations for continued board growth?

Well, we have seen a very good trend in the containerboard mill system improving their productivity with the asset-base we have and that hasn't slowed since the time of the acquisition. We also believe we still have some optimization to do in the mills that is non-capital related. Our focus right now for one of the projects that we have moving forward in 2005, as Steve mentioned, is one of the energy projects, which is a boiler rebuild at Valiant. That will give us some slight incremental capacity, but our strategy is not to go build any new major projects into our mill system until we fully capture the non-capital opportunities that exist for us.

Okay and do you think are some of these energy projects aimed, you guys have one of higher recycled content on your mill system side, any thoughts there about, you know, your total cost and your ability to perhaps address those costs given the high natural gas costs?

Well, no. There is a series of projects that are across the whole mill system as well. It's box plants, we consume quite a bit natural gas in the box linch, too and each facility has its own unique opportunities and so we look across the business and allocate to the highest returns that we have. But we do have natural gas projects across the board looked at, including the recycle mills. But also in the box plants as well.

I think it's fair to say, Jim, that some of these projects on boilers will give us incremental virgin fiber capacity that in the future will help alleviate any pressures we might have on recycle.

Right. A little more flexibility on the virgin side is one of the things we are looking for.

Right. Steve, is there a target as you look at your energy on terms of shifting, perhaps, natural gas to other sources, or any sort of fossil fuels to other sources that you would be willing to share with us?

First of all, our natural gas cost as a percentage of total costs is very low already. So it's not a significant impact on us, but we do have the ability and the knowledge, we acquired this with Williamette, to fuel shift to some fairly, well, I hesitate to use the word exotic, but different fuels, things like petroleum and coal can be utilized. Coal is utilized. Of course waste wood in the energy projects is of high interest to us.

Next questioner, please. Thank you, Eading.

Your next question comes from Chip Dillion of Smith Barney.

Yes, good morning and I wanted to explore a little bit about what you think might be going -- well 2 things, one in the real estate business. You mentioned that, you know, the traffic level or seems to be coming down a bit, but I have gotten the feeling that you and others have not been able to , you know, have a chance to keep up with demand and I was wondering if the level has fallen below a point where you think you can keep a 7 month backlog because you seem to intimate that for next year. And then separately if you could talk a little bit about wood market in the Southeast, in particular given the impact of the hurricanes, first delaying activity and then maybe allowing it to come back maybe even stronger because of the need to make up for lost time plus repair all the structures down there?

Okay. Chip, this is Steve. I will try to tackle your two questions. First in real estate, with regards to -- I think your getting at one of our competitors announced some cancellations in early part of this month. Through September, we were running at very low cancellation rates and in the market of concern to the public, I think, was Las Vegas and our cancellations through September were something like a 5% level. We did see what I would call a sympathy falloff or cancellation rate that rose in the first two weeks of October and it's now settled back down again and any cancellations we have had we have been able to find a resale of that contract. So for the moment, things looks like we went through that one bump and we're getting back to normal. The other thing that you asked about, Chip, was the wood markets. First, on a product side, we have shipped product into the devastated areas and that is a panel and a lumber statement. But it hasn't resulted yet in extraordinary shipments. I would expect it going to take a while for Florida and the other hurricane struck areas to spool up to take that product. On the one hand, on the raw material input side the southern states that have had the most damage and we had very little, but the states that have have gone to such lengths as raising the limits of weight on the roads so that they can move log trucks more quickly and address the downed timber, so at moment there is a lot of wood flowing in the south as they attempt to recover from the devastated areas. In our case we had very little damage so we don't expect any high costs. What we do expect is to be able to wood up our mills to high levels over the winter.

But in that vein it's not really so much the damage seen in Florida, but you had this tremendous flooding in other parts of the Southeast and pretty busy home building states like Georgia, North Carolina, Texas. Did you notice that because of the weather and the lingering impacts of flooding that the building activity itself was at a lower pace and as the weather dries out, you think you will see some makeup for lost time?

I see. Our experience in home building from our own direct real estate group is up in the D.C. area and we have not had any tail offs in that area, but if you move further south most of the flood damage was along the coast. And I really don't have any direct input yet on what is going to entail, rebuild or the timing of it.

Thank you very much.

Next question.

Your next question comes from George Staphos of Banc of America Securities.

Hi, guys, good morning. Congratulations on the quarter. Just a couple of housekeeping things. Dick, did I hear you say that EBIT in wood for the fourth quarter will be comparable to the first quarter or did I miss -- not hear you correctly?

That's what I said, yes.

Okay. Could you give us a feel for what might have been the distribution gains in the quarter, Dick? I don't know if you had provided that in the quarter.

I don't have that in front of me, George. I will have Kathy followup with you.

Okay. Last -- .

But they would not have been -- there probably would have been more like losses than gains because of the falling product prices during the period.

That is what I was getting at. In terms of, again, last housekeeping item, Rico, the guidance that you have for the fourth quarter, should we be looking at the reported number or the number adjusted for the small gain that you had from the multi-family sale?

The underlaying number, George.

The underlaying number would be the one that we would suggest represents ongoing operations.

Okay. A couple of questions for Jim and then I'll turn it over. Jim, you know, earlier in the year you had a number of your customers, I guess, on allocation and board, you know, obviously you have stayed at a pretty high production rates and operating rates . Have those come off as we enter, you know, the fourth quarter now and then the followup question was on box prices, given that we are now in a seasonally weaker period, what makes you confident about being able to implement the last of the $100 per ton? Thanks.

Okay, George, we did talk in the early part of the year about it being on allocation, that's pretty much been lifted at this time. We are active in all markets and we've actually increased our third-party containerboard shipments into the third quarter as our third quarter box volume was slightly less than what we anticipated. Relative to moving the prices, what is occurring are the increases that were earlier in the year are now rolling into the contracts that had quarterly adjustments that weren't in place until the third and fourth quarters. So, we are confident that because of the contractual arrangements with these packaging customers, these prices will move because it's in contract.

Okay. Thanks, guys, good luck.

Thank you.

Next question.

Your next question comes from Steve Chercover of D.A. Davidson. Good morning.

A couple of my questions are already answered. But, could you quantify for us the impact of the rise in Canadian dollar and maybe a, you know, per penny move leverage type of number?

Well I -- you know how much it moved during the quarter, Steve. There are 2 effects. There is the cost effect that Steve mentioned in his discussion and review of the cost impact in the quarter, which was around 9 cents a share of higher costs. And then there is the positive impact of the foreign exchange translation that flows through the balance sheet of about 4 cents. So the net impact of currency for the quarter was about a nickel a share in terms of lower earnings. The cost impact is calculated on the average exchange rate through the quarter and the foreign exchange translation is calculated based on the spot rate at the -- on the last day of the quarter. So, the currency impact can fluctuate quarter to quarter based on a penny share -- per penny share in the change of the dollar based on the timing of that change during the quarter. So, with those figures you could probably develop your own rules of thumb.

And that helps. Do you folks have a view on where the Canadian dollar might trade in '05 in your internal budgeting?

We have, as you all know, we have expected the U.S. dollar to continue to be weak and that would include weakness against the currency, the Canadian dollar, but we don't have a specific exchange rate forecast that we are using at this point.

Okay. Thanks and congratulations.

Thank you

Next question.

Your next question comes from Mark Wilde of Deutsche Bank.

Morning. Steve, I wondered if you could give us just a little more color on kind of use of cash flow over the next couple of years, particularly if we continue to see that pick up in the pulp and paper business?

Well, I will do the best I can, Mark. The -- of course, the first thing is to get our debt down into that debt-to-cap range of 30 to 40% that we have talked about. So, you can -- from our results you can pretty well see a projection on that. Then we get down to the uses of the free cash we have. We'll be continuing to reinvest in our businesses, probably at not too much of a different rate than we are indicating for next year to maintain and optimize our plant and equipment. Then we have such things as the dividend to consider. We have after that to look at the growth opportunities for the Company. We do intend to continue to grow. We think that we are positioning the company very well for that growth in the economic cycle as we look at it going forward. We do have investments that we'll have to make to put facilities in to utilize the wood that we are growing in South America and some of the other regions where we are going to be generating high volumes of new wood. Then I can't speculate at this point on other new growth activities of the company, except that given the size of the company, we have to expand our geographic view of it.

Okay and Steve, can you just give us some sense of what the -- the Latin American projects might be? It sounded to me like we would probably hear something about this over the next 2 or 3 quarters and it sounded like it was going to be mostly solid wood stuff?

Well, I think that is an accurate assessment, Mark. And the first thing you start to hit from these timberlands are thinnings and those at the volume you get initially, you have to look at something smaller in the area of solid wood. And I have to remind everybody that the rotation we have got on our forest down there is a saw-log rotation, not a fiber rotation. So don't look for any huge investments in those timberlands to facilitize against a fiber plan in the near near term.

Okay. Just one other question around that. I was in a Home Depot a few weeks ago getting some shelving and there was a lot of Chilean shelving being stocked there. I just wondered do you think in your wood markets we're going to be looking at more imported wood products from that region over the next ten year?

Well, I think that you are going to see flows globally on wood products. But you are talking mainly about the high-end clear materials. We're developing clear lumber here in the U.S. out of our forests in the south that are pruned. We are doing pruning in Uruguay. We are importing from others products made from pruned and clear wood. So I would say that you will see our markets well supplied from a global base but in part offsets the loss of some of the clear wood materials that we have enjoyed over the years in the U.S. The Ponderosa Pine Forest, for example, are in a regeneration stage and they're years out.

Okay. Thanks, Steve.

Next question.

Your next question comes from Rich Schneider of UBS.

Hi, Steve, I was wondering if you could talk about the trends you alluded to in the pulp markets, some underlying possible positive trends and how you see things possibly developing in the pulp market with the volatility that we have had very recently?

Rich, this is Dick Taggart. The volatility has largely been in paper grade pulps, as you know, and tends to be driven by the volatility of purchasing in Asia. That -- those buyers seem to be coming back. You had the volatility of purchasing in Asia, along with the start up of the new softwood pulp mill in Europe and those two things impacted the fourth quarter. The price weakness in paper grade and the strength in the Canadian dollar has already caused the industry price squeeze and profit squeeze that is resulted in some producers having to curtail production because of their cost position. Along with what appears to be increase in buying activity from Asia that we think will lead to price improvement in paper-grade pricing in the near future. The fluff pricing remains very stable. Now that market is very well-balanced and overall we believe long-term, the pulp markets will stay reasonably well-balanced in terms of a supply-demand standpoint. There will be these seasonal fluctuations in inventories that may result in this short-term price weakness, but we believe that it will, particularly with continued weakness in the U.S. dollar, we'll continue to see improvement in pulp prices going forward.

Just switching to another topic on financial activities. If you look at your cash flow statement, your abbreviated one, it looks like you generated something -- almost $500 million of free cash flow subtracting out the capital spending yet in your release you indicate that you paid down about $270 million of debt and you increased your cash as you see on your balance sheet by $500 million. What is the difference between the two? Was the abbreviated cash flow statement not including the -- totally the Georgia timberland deal and I know it doesn't include real estate cash flow. Could you reconcile that?

Kathy, actually has a reconciliation she can take you through off the call, but you hit -- the main reason is that the numbers you were looking don't include the cash flow from the Georgia timberland sale.

Okay Great and with the SEC coming down on issues of pension accounting, what is your view on your assumptions, preliminary assumptions for next year. I know your returns have been higher than a lot of pension funds, could you go through how you are looking at this thing now?

Well, our returns have been higher than any pension fund over the last 20 years as the corporation's over a $1 billion. We review that every year, Rich, at year end. Our return assumptions are still conservative relative to our actual performance and we have a very systematic logic for how we arrive at it. We assume that the average pension fund or the benchmark return is going to average about 6.5% and that is where we believe most large corporate pension funds will probably average over the longer term at today's financial market and that our portable office strategy, which has historically added about 600 basis points that because of increased interest in this kind of a strategy that those returns will likely shrink to closer to 3% and so that is how we arrive at the 9.5% assumed rate of return. Our returns over the last 2 years and over the last 5 years, over the last 10 years, over the last 20 years have been above that.

Okay.

So we are very comfortable with the assumptions we use. We are very conservative on our discount rates and other assumptions in terms of calculating our liabilities and assume the increases in salary and wages and the other important assumptions that drive pension fund accounting.

So as we look at 2005 it's possible the return assumptions may stay the same, but because of long rates having come down, your discount rate may come down for 2005? Is that possible -- ?

I wouldn't want to speculate right now, Rich. We haven't gone through that and we don't know where interest rates will be at the end of the year yet so I wouldn't want to speculate on that.

Okay. Okay, thank you.

Your next question comes from Mark Alintraub(ph) of Buckingham Research.

Thank you. First, I was just hoping to get an update on the softwood lumber situation and also a little clarification on how -- what happens to the duties at the end of this year? Do they essentially get cut in half or do we have to wait for the extraordinary challenge to play through?

This is Steve. I will try to take that one on Mark. Things on softwood lumber are kind of at a standstill right now. I think everybody is waiting for the election to be completed and they are focused in D.C. on the election so not much is happening, at least as far as we can tell on a negotiating stance. But you are referring to the Department of Commerce's determination that the duties going forward would be roughly half of what they have been over the past year. There is an extraordinary challenge and the Department of Commerce has indicated that they might try to, in order to maintain leverage, find ways to hold on to the money that has been collected for a time and we don't know what the final rates will be and won't until December. So we can't count our chickens here.

Okay and also just on the capital spending, through the first 3 quarters, if I'm reading it right, even including reforestation you were at 275 so that even if --are we to expect a 400 million plus type of fourth quarter or we we going to be well below the $700 million type mark?

Who did you ask that of?

Whoever has the right answer.

Okay. I think you have some fairly accurate predictions there, given where we stand through the third quarter, I think that it would be unrealistic to say that we'll achieve the 750, but be somewhere below that.

I think it will be in that 4 to $500 million range.

Okay, great. And just lastly, not wanting to get too picky, but, on the wood you referenced the fourth quarter initial guidance being somewhere in line with first quarter for wood products?

That is correct.

Is that -- it was kind of 170ish including a few non recurring items it was more like 190ish it you took them out. Which number should I be thinking of.

I don't know how can you get anymore precise then that. That's a pretty good range.

Great, that's perfect.

Your next question comes from Mark Connelly of Credit Suisse First Boston.

Thanks. I wanted to just re-visit two things. First on Chip's question earlier about the real estate side. Can you give us some perimeters on what kind of risk actually exist in that, you know, sold but not closed category. I mean, obviously, it hasn't been an issue so far, but if we were to see, you know, another one of these. I mean, how much of a range have you seen in the past, or how much of a range do you think is reasonable of those sold homes that become unsold?

Mark, this is Dick Taggart. The biggest fluctuation we have seen in that cancellation rate occurred immediately after 9-11 and the cancellation rate went from the normal range of 9 to 12% for across all of our system to about 20% for about a month before it came back to a more normal level after that shock. And so that was a pretty severe shock to the system. Most of these markets, these buyers, we have not been selling to buyers who we believe are speculators. Most of our buyers have already qualified for a mortgage. Many of the prices that they have committed to are lower than current market prices and so we don't see a lot of risk in that backlog of orders of any magnitude any greater than we have seen historically.

Okay. No, that is very helpful. And I wanted to come back to this question of the lag in box prices that you mentioned before. When I think about this it all sounds very logical, but it also sounds like it may be a little bit asymmetrical, too that you are locked into longer periods when prices are low than you are when prices are high. Do you have any sense that these longer contract periods are actually going to be helpful when the market weakens or are we going to go back to the usual customer is not honoring a contract which, you know, historically on paper hasn't been all that infrequent. I'm just trying to figure out whether we have lost something here or gained it.

Mark, this is Jim Keller. Based on what we saw in the falling markets of 2003 into early part of 2004, people did honor their contracts. As the market fell they realized it would go the other way and the delays in the falls were just as prevalent as the delays and the increases that we have seen in the last 3 quarters So I don't think we have lost anything, I think we are probably seeing a little bit of more of a smoothing effect of some of these contracts and less sharp increases as prices move because they're spread out. Or same thing on decrease. I think if you look at the decreases by quarter through 2003, you'll see it was pretty smooth rather than real bumpy like the containerboard price.

No, that's -- that's right. And it really does look like a positive development, I'm just trying to made sure that we don't have it wrong because some of the people -- some people in the industry attributed the slower decline to, you know, extraordinary inventory management on the industry's part. So I am just trying to figure out which is which. It sounds like you are saying we really have stretched out the length of the average commitment?

Correct.

Okay, it's helpful. Thank you. Thank you.

Next question.

Our next question comes from Peter Ruschmeier of Lehman Brothers.

Thanks and good morning. I had a question for Steve. When he visited New York back during the summer with your presentation you were fairly adamant about, you know, your priorities were 3 and all 3 involved paying down debt and that any kind of strategic growth initiatives would be significantly out in the future. Given your debt-to-cap targets it would seem that that is still the right guidance. But I was curious if you could just update us with that?

Well, you are absolutely right, Pete. It's pay down debt, pay down debt, pay down debt, but given the business conditions we have had this year, we have been able to accelerate that pay down and our hope is we reach nirvana earlier than later. Then Dick will take the shackles off me.

Okay.

But basically we're still on that trajectory and frankly you should be able see sometime next year of getting down into that range.

Okay. And as related to selling assets, timberlands in particular, should we assume that the Georgia sale was really getting toward the tail-end of your non-strategic timber sales or is that something you still can envision?

I think that there are potential opportunities for us in our portfolio, although I think you are right, we are nearing the end of that phase.

Okay. Getting into some of the businesses, you mentioned, I think Kathy mentioned, plywood volumes were down I believe 6%. Just curious if you could elaborate is that market conditions, is that internalizing the consumption of plywood and the engineered wood products business?

Pete, it was flat volumes for plywood and OSB was down 6%.

Okay. And that OSB is that engineered wood products related or is that simply, you know, lower volume because of the market conditions?

It would be lower volume because of the market conditions. You know, we do buy for re-sale some OSB and it's gotten more difficulty for us to buy additional OSB plus we are consuming more internally in your truss joist operation at the present time.

And we did have, Steve reminds me, we did have an operating problem at one of our large mill in Seton, West Virginia where they -- where we had a press cylinder that failed that required some down time to repair.

Okay. Can you comment or elaborate on your engineered wood products business, I thinks is over a billion dollars of revenues, think you've had some pricing power there and raw material cost, at least on the wood products side going down, presumably doing well, do you still have idle capacity there, are you still able to supply the kind of volume to the market that the market is demanding?

We are maxed out in that business, we're on allocation, we're really -- they're just scrambling like mad to meet customer orders and you are right, there the pricing is more stable and the fourth quarter will be the best quarter of the year for that business.

It would not require presumably a lot of capital, but presumably is that an area of opportunity for growth that you need to spend more money to bring on more capacity for that area?

Pete, we have the opportunity over the near-term to invest in the existing facilities to up the output and accommodate the market needs. Over the long-term the growth of that business will dictate additional capital investment for some of -- particularly the products we make that no one else makes.

Okay, and just --

Pete, do you have just one more?

Last question for Jim Keller. One of your competitors described the weak September box shipment numbers in the west coast, blaming a big drop in San Francisco. I was curious if you could elaborate on your view of why those volumes were weak on the west coast.

San Francisco did account for the complete west coast decline and that came from two areas. Number 1, there was a very large plant closed at the end of the second quarter in the San Francisco market. And the second was that the northern California crop season ended a little earlier than what we had seen last year. Last year the season went into September/October and this year we saw it shut down a little earlier. So, I don't think there's any structural issue there. One plant out and the crops closed down a little early. That is what happened in San Francisco.

Thanks very much.

Thanks, Pete. I believe we have time for one more question.

Your last question comes from Rick Skidmore of Goldman Sachs.

Good morning Just 2 quick clarifications. Steve, on the capital spending budget for '05 does that include plans for that South American facility that you were talking about and if so, what is the order of magnitude?

Yes, it does include anything we would do in South America and we have not announced a project yet. So it would be too early to talk about the price.

And then just Dick, on the lumber duties, what are you currently accruing at and what -- if the administrative review is finalized, what would Weyerhaeuser rate be going forward?

We are accruing at the old rate, which is about $30 million a quarter.

25-$30.

25-$30 million a quarter .

31 this past quarter.

31 this past quarter.

And it would roughly be half.

And it would roughly be half which I would assume would be the rate at least going forward. Steve talked about the uncertainty around any rebates.

So on the administrative review if it's finalized in December does that - have you factored that into your budget or no -- or into your expectations or no? Not the refunding, just the change in the duties going forward?

Going forward? We will make that determination at the end of the year. We haven't determined that yet.

Okay. Great thank you.

Thank you everyone for joining us this morning. I will be available today to take anymore questions. And please give me a call at 253-924-2058. Thank you very much and have a good weekend.

Ladies and gentlemen, that concludes the Weyerhaeuser third quarter 2004 earnings release conference call. We thank you for your participation. You may now disconnect.