威爾豪瑟 (WY) 2005 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Weyerhaeuser second quarter 2005 earnings 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. [Operator Instructions] Thank you. Ms. McAuley, you may begin your conference.

Thank you, Angela. Good morning. Welcome to Weyerhaeuser's second quarter 2005 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations. Commenting today on the call will be Steve Rogel, Chairman, President and Chief Executive Officer, and Dick Taggart, Executive Vice President and Chief Financial Officer. This call is being webcast at www.weyerhaeuser.com. A copy of our earnings release and presentation slides can be found at our website. If you need any additional information or material, please contact April Meyer at 253-924-2937. Please read the warning statement in our press release and on our presentation slides concerning the risks associated with forward-looking statements, as we will be making forward-looking statements during this conference call.

This morning, Weyerhaeuser reported second quarter 2005 net earnings of $420 million, or $1.71 per fully diluted share on net sales of 5.8 billion. Second quarter earnings included the following after tax items: A gain of $110 million or $0.45 per share related to the share of BC Coastal operations; a charge of $44 million or $0.18 per share related to the planned repatriation of $1.1 billion of eligible Canadian earnings under the provision of the American Jobs Creation Act of 2004; a net gain of $37 million or $0.15 per share related to the recognition of deferred gains from previous Timberland sales; a charge of $12 million or $0.05 per share related to litigation. These items totalled to $0.37 per share. A GAAP reconciliation of special items is available on our website.

I will now review sequential quarterly business trends second quarter 2005 versus first quarter 2005, starting with Timberland. Export log prices were flat and log volume rose 7% from Q1 due to good lumber demand in Japan. Domestic log prices rose in both the south and west, with the biggest increase of 3% in the west. Log volume increased 12%. The increase was in the west reflecting strong demand. The southern sea harvest was modestly lower.

Wood Products. Wood Products' earnings were driven by the strong demand for wood products, resulting in very high shipment volumes. Soft wood lumber prices increased modestly, $5.00 per 1000 boards, due it to the mix of lumber sold. Lumber shipments, however, increased 14%. Plywood prices declined $15 per thousand square feet. Volumes rose 12%. OSB dropped $23 per thousand square feet. Volumes increased 15%. Engineered wood products prices increased 4% and shipments rose 28%. The increase in engineered wood products prices was offset by the decline in structural panel prices.

Cellulose fiber and white paper: Average pulp prices increased $5 per ton. Fluff pulp prices rose, whereas paper grade prices declined. Pulp shipment fell 7% due to a combination of scheduled maintenance downtime and weak demand for paper grade pulp. Uncoated freesheet prices increased $7 per ton in the quarter and shipments were flat to modestly higher. Container board packaging and recycling: Container board prices declined $8 per ton in Q2, and third party shipments fell 12% as we consumed more of our production internally.

Box volumes were up 7% from Q1. Shipments in the first quarter were adversely affected by weather conditions in California and in the southwest, which impacted the demand for agricultural boxes. We had expected the demand would be pushed into the second quarter, which is what occurred. Box prices were flat to slightly up. OCC prices declined $2 per ton. RECO: Single family home closings increased 8%. Average home prices rose 4% to $467,500, and margins were modestly lower at 31% versus 32% in the first quarter. The backlog of homes closed but not sold remains at six months.

Please refer to the waterfall chart at our website for the following comments. This chart describes the major factors impacting our second quarter. Starting with Q1 earnings of $1.03 per share before special items, price had a negative impact of $0.02 on the quarter. Price improvement in Timberland, pulp and paper and single family houses, along with modest price improvement in container board packaging, were offset by lower wood product prices and the absence of RECO's first quarter [school lot] sales.

If we remove the effect of the RECO school lot sales in the first quarter, there would be a slight positive increase in this category. Volume increases contributed $0.22 to earnings and were the biggest positive driver in the quarter. The volume increase came from our wood products and packaging businesses. More favorable raw material costs, largely lower resin cost, contributed $0.01 per share. More efficient manufacturing in container board and wood products contributed $0.12 per share. Other miscellaneous items impacted earnings by a negative $0.02 per share. The combined effect of these impacts resulted in a non-GAAP earnings of $1.34 per share. I would like to turn the call over to Steve Rogel.

Thank you, Kathy. This year's overall results are good, despite conditions that were more difficult than the second quarter of last year. We are pleased with the short-term performance, but we also recognize that many of our businesses face significant long-term challenges. So we can't be satisfied with our current performance, nor can we be content with the knowledge that all producers face similar industry conditions. Our approach has always been to work to minimize the effect market conditions have on our performance. In the past, you have seen us make some tough decisions to optimize our business and asset portfolio to achieve that goal. Today is no different.

As we follow our strategic priorities, we are targeting actions on underperforming businesses and mills. While I am not in a position to forecast what action we may take, we are considering all options and will take action to improve performance and shareholder returns. Parallel with this effort, we will continue to build on our momentum to improve these businesses. Our paper business, for example, has completely changed the way it goes to market, evolving from four channels to seven. This change has enhanced our knowledge of the market, of changing dynamics and of our changing customer needs. They've also made us more nimble and better able to match supply to demand.

We believe that our paper business will benefit from this new model and we're pleased that we've started seeing results from these changes during the second quarter. On the packaging side, we are aggressively driving new product development to provide economic solutions for our customers to help them sell more product and reduce their costs. For example, those of you who joined us in New York in May heard about our Clima series set of product solutions. It's an alternative to traditional wax coated boxes which are not [recycleable]. The innovative Clima series product line performs well in all wet and humid conditions and allows grocery chains to recycle the packaging.

By fully meeting customer needs, we can profitably grow in this very important segment of our packaging business. This, too, is a new approach. We are just beginning to see the benefits of our efforts to truly satisfy customer needs rather than just selling brown boxes. We have other equally promising opportunities under development. In addition, we are looking to make whatever adjustments are necessary to match container board production with market demand. We're rolling out new approaches to meet the needs of the changing market place for wood products, too. Builders are consolidating. Building practices are shifting, and technology is enabling more efficient approaches to home building. This means we, too, must change; and we are. We're taking the steps necessary to create value from our size, our position in the markets, and our integration to link this value chain more efficiently.

We're also looking at ways to enhance the earnings performance of our Timberland's business. We're already operate some of the industry's most profitable timberlands, and the market recognizes this. When we took our nonstrategic Georgia timberlands to market in 2004, we were able to obtain optimum value for the lands. Part of this was because we packaged these lands into blocks to extract maximum higher and best use value; but the market also recognized the value we added through our management practices and simple cultural expertise on those blocks that were intended to remain in Timberland's operations. We leverage 100 plus years of tree growing experience, and we're continually improving our performance on the ground and through research and development.

By combining a long term focus and a genuine commitment to using better science, we have a unique ability to extract the value from the market back and the seedling forward. In the process, we are able to capture the maximum available returns. We also extract additional value when we mill our logs. In the south, for example, early trials show that our pruning regime can improve mill realizations by $20 per thousand board feet by yielding more wood as higher grade lumber, and it gives a nice return on the investment. As we further refine and optimize our pruning regimes, we are confident there is potential for even greater uplift. Our management team and Board of Directors are evaluating new possibilities of extracting more value from our timberlands operations.

While we believe that our integrated approach has demonstrably benefited investors, we are committed to further enhancing shareholder value, and we are now exploring strategies to unlock the unique value of the portfolio. We will be deliberating this process to ensure that any decision is in the best interest of our shareholders today and in the future. I am confident we'll succeed at finding such an approach. As you heard this morning, our real estate business produced another strong quarter. This is a business that is well positioned to grow. Operating in four of the top ten growth markets in the United States, the earnings of our real estate business have increased steadily to the point where they are now a significant contributor to our overall performance.

We'll look to enhance the ability of this business to deliver shareholder value through strategic growth opportunities. These could range from organic growth, where we expand our current position in the market, to targeted acquisitions in new markets. Our approach to growing our real estate business will mirror the steps we have taken to grow our forest products company. We'll start with smaller acquisitions to ensure that we can integrate those operations into our existing structure. Our vision is to be the best forest products company in the world and a global leader among all industries. I've just highlighted some of our strategies for achieving that goal.

Our senior management team and our Board of Directors are working on other strategies. Whether those strategies involve growing or rationalizing, we will always weigh the value of those investment opportunities against other opportunities to enhance shareholder returns. At this time, I'd like to turn the call over to Dick Taggart, our Chief Financial Officer, who will be more specific in our outlook for the coming quarter. Dick?

Thank you, Steve. In our Timberlands business, as we're looking forward, prices are improving in the export markets, weakening modestly in the domestic markets in the west, and remain steady in the south. Our volumes will seasonally be lower due to the normal planned harvest reductions during fire season, and that will result in slightly lower earnings in our Timberlands business in the third quarter compared to the second. In wood products, lower lumber and oriented strand board realizations will continue we expect with volumes similar to second quarter levels, which would result in earnings that will be closer to the first quarter levels in the second.

In the cellulose fiber and white paper businesses, pulp prices are expectant to weaken modestly, while fluff prices are remaining firm. Uncoated freesheet prices have been somewhat weaker in some grades, and we expect our average paper realization to be two to three percent lower in the third quarter than in the second. Shipments are expected to remain relatively flat to modestly higher on a seasonal basis. Earnings in this segment are expected to improve modestly, however, as we expect lower maintenance downtime, which should result in lower costs. Paperboard packaging, corrugated container board prices are weakening, and will be lower in the third quarter than in the second. This will result in dour pressure on box prices, which we expect to decline approximately 3%.

Volumes are expected to be flat, and the produce business will remain good through the quarter. Costs will be flat to lower, resulting in lower earnings in the third quarter, however, than in the second. In the real estate company, the backlog remains at about six months, with closings in the third quarter similar to the second. Earnings will remain relatively flat -- could be slightly higher or lower depending on the timing of lot sales that have been planned for the second half of the year. In the third quarter, we will be recognizing the gain on the sale of our interests in the joint venture with Morgan Stanley Asset Management. That gain will approximately be $100 million on a pre-tax basis and will be reported in our third quarter earnings.

We also expect to repatriate the funds from the sale of the BC Coastal assets in the third quarter, at which time we will begin retiring debt, which will result in a charge to earnings in the third quarter as well. We'd like to now turn the call back to Kathy to initiate our Q&A period.

Angela, if you could please open the floor for questions.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from Edings Thibault from Morgan Stanley.

Thanks very much, and good morning, gentlemen. Steve, I was wondering, you mentioned that you were evaluating all opportunities for creating value. Just wondering if you could perhaps update us on to where you stand relative to the paper businesses. These businesses continue to underperform. Do you view them today as core? Would you -- potentially looking to divest these businesses? Or are you remaining focused on perhaps the internal improvements you have underway?

Well, I think, Edings, the first thing I have to say is that I can't really speak to strategies the Board has under review. And therefore, I'm limited in what I can say about the future of any specific business in the company. But I can tell you that each of the businesses you mentioned are large businesses in the company, therefore, we have to consider them a core. But we're continually looking at ways to either improve their efficiency or find a way to deliver value to our shareholders.

And what -- you know, not sounding some of the two obvious points -- but can you talk about perhaps the catalyst for these discussions, perhaps when these evaluations started, or are they part of sort of an ongoing and sort of continuous review of the company's operations and portfolio?

Well, I can assure you that the strategic review of our portfolio has not just started in the last few weeks. It's been underway for sometime in deliberations within management with our own Board.

Steve, if you don't mind, I would just add, Eding, the catalyst for the discussions in the -- in these businesses has been the poor performance and the challenges that they face in the marketplace, which really create the need to explore other strategic options for them.

Next question.

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

Thank you. First, I just wanted to get some better understanding of the corporate expense line during the quarter. Could you just run through the puts and takes? It looked like it was a very low corporate expense.

Mark, this is Dick Taggart. The largest item -- and assuming you're referring to the corporate and other line in the segment -- there are two very large gains in there. The first is the gain on the sale of the BC Coastal assets, and that is just a gain -- it would be -- which was about $64 million. As you recall, earlier in the year when we were required to consolidate under the new 1047, the [SPEs] that were set up to -- in conjunction with the installment sales of our private timber sales, we mentioned we had deferred gain in there that would be recognized in the second quarter. That was $57 million. And those were the two largest components in that corporate and other. The others were relatively small adjustments. There was also $10 million in interest expense associated with those SPEs, and then there were a number of other puts and takes that were not that large that were adjustments for accruals for our variable compensation and payroll and so on.

I think if I take the $99 million and I back out that 64 and the 57, it gets me to a $22 million expense. And then if I were to actually take into account the interest expense you talked about, and in addition the foreign exchange, it would go even lower.

If you take out all of the others, the FX -- there was an FX gain of I think about a $13 million of Worker's Comp before. If you take out all of the puts and takes to normalize, the normalized should be about $26 million.

Okay. Is that the type of number we should use on a go-forward basis?

It will vary depending on a four or five week quarter at between 25 and $35 million.

Okay. Thank you.

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

Thanks, operator. Good morning, everybody. Dick, I guess a quick question on the guidance for wood products in the third quarter, realizing, you know, you can't be too precise. Is there anything else in your guidance other than just reflecting market prices in wood products that's behind Q3 EBIT being close to 1Q? And then I have a follow on.

No, George. It's virtually all price, as we expect our volumes to be relatively flat. We have very good volumes in the second quarter and we expect that to continue. There is a normal seasonal slow down in wood products markets -- or a weakness in pricing that occurs around the Fourth of July holiday season. And then you couldn't -- can get a recovery in the end of the third quarter depending on what happens, which is why we expect it to be relatively stable. And the housing market that continues to be relatively consistent, as is represented by our own real estate company.

Right. Could you remind us, is there a normally higher than seasonal average maintenance impacting the quarter [two] with the third quarter or not really?

No, not in wood products, and not in the third quarter, and not from maintenance.

Piggy backing from Eding's questions earlier, you know, as you look at some of the businesses that aren't performing perhaps as well as you'd like them to perform -- and I realize you're still in the midst of evaluating these and all your businesses -- do you think that those businesses are -- if they were left in the portfolio -- could be brought up to level the profitability or return that would be acceptable to you and, you know, what ways would you be able to get to that level of performance? Would it be purely capacity shut down? Or would there be other ways that you could get that done? Thanks.

Well, I think there are two parts to that answer. The first is, our own efficiencies in the operation of the business. And as you know from discussing this with us in the past, we have created many of those efficiencies through the work that we've done here and through the acquisitions that we've made. I think that the answer really lies in the larger marketplace. In those businesses, obviously, the total size of the market has shrunk in the last several years, and we're all in a process of catching up to balance supply with demand.

[INAUDIBLE]. And I would offer that obviously with the efficiencies that you've gained, there's probably somewhat of an offset if the market isn't shrinking -- is shrinking -- then you then contribute to the overall market problem, you know, through your own efficiencies. Would that be one way to think about it? Or would you disagree?

I would disagree in this sense. We have shuttered about a million tons of capacity in the corrugated business, for example. At about the same time, we've added back through efficiencies nearly that amount, which leads us to serve the customer base that we have and balance up with outside sales for rationalization with the rest.

Okay, thanks, guys. Good luck in the quarter.

Thank you.

Your next question comes from the line of Richard Skidmore with Goldman Sachs.

Good morning, two questions. First, can you clarify on that waterfall chart the 134 -- did that include any -- the $0.04 or so from the BC Coastal operations?

No. No, the BC Coastal operations on our P&L that's attached that you would have received with our release, is reported on a discontinued operation on an after tax basis.

Right. And that number on that P&L is $121 million, but the footnote says it's 110 from the gains? So is there 11 million that's from -- just trying to make sure I understand that the continuing operations number is really 134 -- or is it a different number?

The continuing operations number is 134. The discontinued operations report is both the gain on the sale as well as the earnings from operations during that period that we owned it.

Okay.

And 134 -- let me also, while you're asking about that, there's - because there's -- this transaction also creates a little noise in our tax rate. The after tax gain, because only 50% of the gain on BC Coast is taxable under Canadian regulation, and the fact that the result is in deferred taxes being recognized at a lower rate than which they were accrued, there was actually a tax credit from the sale of the BC Coast. And so the after tax gain exceeded the pre-tax gain. And the -- what is reported in discontinued operations is the after tax gain. What Mark was referring to, the amount that is quartered in the Corporate and Other segments when we do this segment break down, is only the pre-tax gain.

Okay. Thank you. And then just shifting, Steve, can you talk about -- you've talked about the the underperforming businesses of paper and container board. In terms of timing, what is it that would -- in terms of the speed with which you will make a decision with regards to need for capacity rationalization, and is that a separate decision than the businesses staying in the portfolio? Thanks.

The -- I think that the decisions ultimately are intertied -- the capacity today versus long term prospects for a particular business. The decisions you talk about are being discussed and made as we prove along through our strategies and the market conditions dictate to us. So there is no one answer that on a given date we have the golden answer for you. We are not [went] to any particular set of assets that won't return the cost of capital in the long term. But at the same time, we have an obligation to try to make them as efficient as we can.

Thank you.

Our next question comes from the line of Mark Connelly with Credit Suisse First Boston.

Thank you. Just looking for a little bit of additional color on your expectations in container board. You know, clearly, if you saw the pickup from the California business, you had a little bit of a mixed shift. Is there more mix shift we should be expecting in the second half? And is there anything going on at the box plants that's new and encouraging?

The mix shift would change -- we wouldn't expect it to change much between the third quarter and the second quarter, Mark -- maybe modestly -- and then it will deteriorate in the fourth quarter as the produce market winds down. It is one of our highest average realization businesses in that segment. And so we did have a very strong quarter in container board, as Kathy mentioned. On a year-to-date basis, our shipments are still down more than the overall industry. And so -- but the second and third quarter will be our best quarters from a mix standpoint.

And can you talk about the box plans? Because you've expressed some frustration there before, but you've also got a lot of efforts going on, too, you know, to change the way they operate.

Well, Steve can comment on that. There's an extensive -- that rationalization is ongoing in our box plants.

Yes. I think that you might be referring to the fact that when you look at any given box plant, there is a lot of latent capacity in that plant because of the time of operation schedules we've had in the past. We're currently working very hard to maximize the efficiency of given box plants and shuttering capacity that's less efficient or is operating in markets that are decaying. So that effort is going on very aggressively in the corrugated group.

We referred in our prepared remarks, Mark, to the new products that we're introducing to the industry. The industry is demanding them and we feel that we are delivering something that will give us a competitive edge on major volumes on boxes. We have other new products that are in the development stage that aren't quite ready to roll out that at this point we couldn't comment on, but that effort continues as well. So it's a combination of making absolutely sure we're getting the most efficiency out of the set of assets we have, and then working to improve the product mix.

Okay, that's help -- that's very helpful. Thank you. Just one more question. When you look at uncoated freesheet, there hasn't been a lot of good news there. But what I'm curious is, why incrementally are prices falling now? You know, inventories are neither, you know, hugely high or especially low, and that's sort of been the pattern. Consumption's not that great, but operating rates aren't that high either. But prices had been holding. And so what's -- what's the new thing that is causing you to think the prices will continue to fall?

You know, I wish we had the answer to that, Mark. There seems to be a lot of things on the margin, with the introduction of some of the high brightness ground wood grades. What's happening in the marketplace in terms of demand, we don't have real timely figures at this point. As you know, there is -- industry data is somewhat lagged. And so I think that's a very good question. Our business works very hard to align with the right market segments to take cost out of delivering the product to the customer. But the -- it's a weak marketplace that continues to struggle with gaining any demand strength.

Okay, that's helpful. And, Dick, are your own inventories in okay shape?

Yes, yes. We had -- we had extensive maintenance downtime in the quarter and resulted in our inventories being held in very good shape.

Next question, please.

Thank you.

Thank you. Your next question comes from the line of Chip Dillon with Smith Barney.

Yes, good morning. First question I have is the amount of interest expense you incurred in the quarter was nicely down from the first quarter, and I'm sure that had to do with, I guess, with some of the asset sales. But you know, typically, your working capital hasn't started to come down a lot. And so as we look ahead, what is an appropriate interest expense number to look for in both the third and the fourth quarter, giving -- given your expectations on, you know, the proceeds from these asset sales? And secondly, can you update us on what your thoughts are regarding Cap Ex for this year and next?

Chip, the interest expense, as you know, increased about $10 million a quarter as a result of consolidating these SPEs there. And it's offset by the same amount of interest income in our Corporate and Other segment. So -- and it does affect that interest expense line. It would come down, depending on the timing of the debt reduction in the third quarter and be hard to predict in the third quarter, because it will effect on the exact -- excuse me -- depend on the exact timing of the debt reduction, and the charge to earnings will show up as an interest expense, so it probably won't change much in the third quarter at all. But in the fourth quarter, the debt we would retire would have an average coupon of probably 5.5% percent, something like that, would be a reasonable estimate. As far as Cap Ex goes, the -- we had a $331 million year to date through the first half. Just over $200 million in the second quarter. We're still operating against a budget for the year of $850 million.

Yes, and I noticed there is a lot of reviewing going on there. But sort of Xing out any major asset sales, would you expect the Cap Ex -- is there any way you would see it going up next year or would it likely stay at where it is and/or fall?

Our plan at this time -- our budget is to hold it flat. But Steve may want to elaborate on that.

We're over time planning a flat budget, Chip, but the realities of capital spending are one year it may be a little up and the next year a little down, depending on when progress maintenance on projects come through. But over time, we're looking at 850 as our norm.

And lastly, if you do contemplate -- let's say you do something fairly major on the divestiture front, which I guess is a possibility, is there a level of net debt beyond which you feel it would be prudent or positive for your shareholders to receive cash, either in the form of a special dividend or for you to step up and buy back stock like you -- you actually did quite well back in 2000?

Yes, as we mentioned in New York, Chip, you know, we're -- once we complete what are largely mechanical activities in terms of repatriating the funds and achieving the debt reduction from the sale of the Brascan -- or the assets to Brascan -- our priority will be to utilize the free cash flow to the benefit of shareholders, and our Board certainly has considered those things in the past and would likely consider them in the future.

In other words, you feel like that your debt is pretty much down enough to be more flexible rather than just look at debt reduction with the particular proceeds you're getting right now?

Yes, we've restored our target capital structure, and our goal would be to maintain that structure, not to continue to necessarily drive it lower. But we will be prudent in maintaining a conservative capital structure, but we have restored it to our target level.

Okay. One last quick one and I'll turn it over, please. You know, the Europeans have started up five of these family companies' new container board machines since late last year, and that has backed board up and directly into our market. Do you think there is the need for Weyerhaeuser as a market leader to maybe be involved in rationalization, or do you feel that's not necessary, given your system?

Well, I think we're constantly evaluating where we stand in supply and demand within our own country. And we look at not only the North American, but the world markets when we make those decisions. We're just not prepared today to share where our direction is, because that's a Board decision and I'm not going to speculate on their conclusions that will reach with regard to our strategies.

Okay. Thank you.

Your next question comes from the line of Peter Ruschmeier with Lehman Brothers.

Thanks, good morning. I wanted to come back if I could to the strategic review, I guess, that is underway. It seems that some of the decisions that are being contemplating -- contemplated -- have to do with perhaps businesses that aren't performing well. Timber is a business that's been performing very well, earning costs to capital. As you mentioned, it's part of the company for 100 years; but arguably, the tax structure isn't ideal, especially relative to some of the tax advantage competitors. I'm curious to the extent that you can comment if this idea, too, is being contemplated in a strategic review.

Well, certainly it's been public that we and our industry are working on the tax issue with regard to [sea corps]. We understand very clearly what the disadvantages are of being a sea corps in today's world from taxation. So we are definitely working in that area.

Okay. Shifting to RECO if I could, I believe in the past year or two, you've been really harvesting the cash generation from RECO in the form of dividend back to the parent. I'm curious if you can comment on the strategy of that cash generation going forward, whether that continues or whether that may be internalized.

Well, the -- there are a couple of things to say about that. First of all, we're very pleased with the results at RECO and the return of cash. You have to understand that when you liquidate a land position that you've held for four or five years and you're replacing that land position to maintain some form of backlog to build on, you're investing a lot more dollars per acre today than you had, so it is a capital consumer. We did indicate in our remarks that we intend to grow that business, albeit we're going to start off with acquisitions that are digestible that we can learn how to do this. So as we grow that business, it will take capital to grow as well.

Okay. And lastly, if I could, can you comment on the status of the energy projects -- I think you have a number underway -- and what's your initial feedback in terms of the IRRs you expect to achieve --- are they material? Do you have more energy related projects in the pipeline. Thanks.

Chip -- or I'm sorry, Pete, the energy projects are underway. They largely relate to the replacement of recovery boilers and the -- coupling those with the additions of turbines that utilize either consuming the spent liquor from the pulp and paper operations or hog fuel or biomass fuels of some sort. Those have very high returns -- in the 30 plus percent range, most of them. They are, though -- they take a couple of years to get those in place and up and running, so we won't see the benefits of those probably until beginning next year sometime. Yes.

But I would say, Pete, that the majority of the capital that we are investing, whether it is in the paper groups or the wood products group, it all has a component of efficiency and a high percentage of that efficiency improvement is energy. So it's -- goes well beyond the electrical and steam efficiency of our plants. There are a large number of projects we can do to improve our performance, and our hurdle rates for those projects are very, very good.

Thanks very much.

Your next question comes from the line of Christopher Chun with Deutsche Banc.

Thank you, good morning. I was wondering if you might be able to give us more color around the land sales in the real estate division. I saw that you gave us the amount of gains. But I was wondering how much sales there were and at what location of the country.

Well, the land sales in the first quarter that were larger than normal were two school sites that had been condemned in projects we owned in Southern California. And the other land sales, the normal ones, are really dispersed around the country among our operations and they tend to be sales of lots to other builders for with whom -- who may have a product line that we do not that they may be to part of a master planned community that is designated for light commercial development. And so almost all of our projects have lots or parcels of land that are designated for products that we do not produce, either as I said, in light commercial or perhaps in attached single family or multifamily, which are product lines we don't produce.

And so those are on going and represent some portion of our income on a normal basis. It is just more episodic than our our house closings, which are a more production plan process.

It's also true that we buy lots, as well. That is a common practice among builders when you're developing a community. I'd like to emphasize what Dick said, the two big dollar sales we had were sites for schools. So these acreages are relatively small, but very, very expensive in Southern California.

Okay, great. Thanks. And secondly, getting back to your strategic review but from a slightly different angle, is that I'm sure the bulk of your concerns are on your underperforming assets -- bulk and paper and packaging. But moving over to the panel side, I was wondering if, you know, you were concerned about the fate of [OSC] capacity announcements that we've had over the last several weeks, and what your outlook is for that market over the next couple of years?

Well, certainly there have been a spade of announcements, and our expectation, like many folks that are projecting in that field, there's going to be a very loose market for a period of time until that capacity is absorbed. If and when it's built, one thing we find is that it's easy to make announcements. It's another thing to complete a project.

Right, thanks for your help.

Thank you.

Your next question comes from the line of Rick Schneider with UBS.

Hi, Steve, I was wondering if you could comment on your views right now on what's happening in both the pulp and container board market; and pulp, particularly in light of the inventories that came in today, which showed the inventories down to 33 days.

Yes. I think we're finally beginning to see the impact of the downtime across the globe, and at the same time, there are some startups -- a startup, particularly in South America in hardwood -- that has not been felt yet because I think they're just getting their sea legs. So if we look at our view going forward, there is going to -- I think we've got mills going back into production and new capacity in the hardwood segment to contend with going forward. As far as Weyerhaeuser is concerned, we have been emphasizing specialty products and fluff products very heavily, and those markets have been growing and stable in pricing. So our own outlook for our business is probably different than the average outlook for soft wood pulp.

Okay. And on a container board?

O, on container board, our business, as we remarked, we showed some growth that was primarily due to the later crops in California. I think everything going forward is dependent on our general economic progress in the country. As far as balancing up our supply demand, we're going to take the actions necessary to see that we're an efficient producer and that we're not overproducing what we can sell into the marketplace at good returns.

So if you look at your second quarter, you know, you had pretty good volumes, at least compared to the first quarter. How do you balance that versus, you know, producing at a reasonably decent rate and its impact on industry pricing?

Well, I have to comment from the standpoint with our business and box plants through to our final customers. That's the majority of our product flow, and we are going to be there to satisfy our customers' needs. As we become more efficient, we become more competitive in that market. Then what remains is any excess -- production capacity would be all [mortar] cutup into our box [INAUDIBLE], and that's the area that I think everyone has to address as we look going forward across the world at what capacities are going to be.

And just one last question. How are you planning to update investors on things like unlocking Timberland value? Is there a time frame or is this going to be, you know, sort of flowing out as you reach these decisions?

Well, we were going to do what's right rather than do it right now. I think that our Board understands fully what the issues are. It is a highly complex area when we look at the alternatives for Timberland ownership. And it's clear at this time what the best solution for Weyerhaeuser is. That is going to take some time to determine the financial consequences for our shareholders.

So -- so -- and then looking at the rest of your strategic decisions on the open paper side of the business I guess in particular, is that an easier and less complex decision for you, and could have occurred earlier than maybe the Timberland situation?

Well, what I will say is, management along with all of the Board is looking at all of our options with all of our business -- and by the way, And that's an ongoing process. This isn't, again, something that started yesterday. But I can't speculate on what conclusion the Board may reach or what strategies may be implemented.

Okay, thanks.

Your next question comes from the line of Leo Larkin with Standard & Poors.

Good morning. This is Leo Larkin with Standard and Poors [INAUDIBLE]. Most of my questions have been answered except guidance for DD&A for '05, and if you have preliminary estimates for '06?

At this point the DD&A that is in our second quarter financial statement from continuing operations should be expected to continue going forward.

Okay. Thank you. And then just anything for '06? Or too soon to give guidance.

I think that this --it would be too soon. But in the absence of any major change in our asset base, it would continue pretty much at the level of the second quarter, which represents just continuing operations.

Thanks very much.

Your next question comes from Mark Pauper from Lehman Brothers.

Hi, guys, just a couple of questions. One, just with regard to your meeting your debt net target, is that to say on a net debt to capital basis you're where you want to be? And as you deploy your proceeds from the BC sale, would you be able to [INAUDIBLE] gross net to capital to a similar level? And second, just with regard to Timberland -- and once again, do you have any sense of looking to rather than contract holdings to expand to North America? It seems there will be plenty of assets on the block.

Mark, we had some difficulty hearing you.

We had some difficulty hearing you, but I heard your first question to be -- are -- will we be where we want to be on a net debt basis.

Yes, are you going to take that net debt number to be -- are you going to reduce gross debt and hold it as you run on a debt to cap basis similar where you are today or take it further down?

Well, we would expect to take the -- you know, we are where we are, and we are in the middle of -- our target capital structure. 35 to 45% -- I don't know -- we've got a lot of -- I'm getting a lot of back -- background noise.

Maybe you should just answer --

Can you -- could you please reask the question?

I think his line must have dropped. Operator, can we move to the next -- to the next question, and if Mark calls back in, perhaps he could --

I will answer the question, and let me repeat it. The question is I believe is, will we continue to drive debt lower or on a net debt basis, or will we hold it where it is. I would say that while we have reached our target capital structure, there -- the priorities, as we mentioned, will be to improve the returns to shareholders. However, we are going to maintain disciplined capital spending. Our cash flows are strong. And so it may be that there is continued reduction in our debt as we execute those strategies, be they dividends or share repurchases our Board may see fit to pursue. There still could be some delevering continue, just because we have very strong cash flow.

Your next question comes from the line of Steve Chercover with D.A. Davidson.

Good morning. Not to beat a dead horse, but with respect to the Timberlands, it seems to me that Weyerhaeuser would prefer to own them but the unequal playing field also might push your hand. Do you feel that you could make any headway with the IRS or whoever the powers that be are to convince them to equalize the situation and, you know, not have you forced to divest an asset that has clearly served you well?

Well, Steve, we have optimistic views on accomplishment improvement in the tax structure for [sea corps]. That work is going on on behalf of our industry. And we do expect to see some improvement.

Thank you. One other question. It appears almost that the entire paper industry in North America isn't viable -- for at least nine years out of ten. And yet, if you want to operate lumber mills, you need a depository for the chips, which has usually been the function of a pulp mill. Is the whole interrelationship between the lumber mills and pulp mills going to change? You know, I guess what I'm saying is, the pulp mills are paid to take away the chips as opposed to paying for the right to use the chips in order to maintain, you know, both a lumber and pulp to paper business.

Well, Steve, you bring us a really interesting point and question. Yes, there is a balance between solid wood products and fiber products. And as we go forward in the future, we expect that that balance may change as there are competing uses for the residual chip, whether it be panel plants or even for energy.

Our next question comes from the line of Claudia Shank with JP Morgan.

Hi, good morning. I just have two questions. One, I was hoping you could comment on the transportation situation, whether it's getting better or worse or if there are regions of particular difficulty. And then I just was hoping you could quantify the maintenance downtime that you took in the second quarter. Thanks.

I'll take the transportation question. Transportation is generally improving in terms of time of service, and there's even a slight improvement in costs as fuel surcharges can go up -- and in this case, go down a bit. But it is still expensive due to the fuel market. With regard to the maintenance downtime, Dick, were you going to comment on that?

As far as the maintenance downtime goes, we took maintenance downtime in the pulp and paper area. Claudia, I'll have to get back to you with the specific number of that maintenance downtime, but it was significant in the second quarter. We have time for one additional question.

Question coming from the line of Karen Gilsenan with Merrill Lynch.

Thanks. I was just wondering, Steve, if you could give us an update from your perspective on the Canadian/U.S. soft wood lumber dispute. I know some negotiations were going on and certainly, you know, will continue again next month.

That's true. Negotiations were taking place I think through Wednesday of this week, and being a large producer on both sides of the border, we're kept on the side lines. But as I understand it, the U.S. side tabled the new proposal to the Canadians, and I'm not sure where Canada stands on that proposal right now. I think that they are in discussions with it. I will hear more about the whole subject in the next day or so. We're hopeful that they will come to a negotiated solution in time.

At this time there are no further questions, Mr. Rogel. Are there any closing remarks?

Thank you, everyone for listening to our call today. And we'll look forward to working with you and answering your questions in the future.

Thank you, and I will be in my office in a few moments if anyone has any additional questions. Have a good day.

That concludes today's Weyerhaeuser conference call. You may now disconnect.