威爾豪瑟 (WY) 2005 Q3 法說會逐字稿

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  • Operator

  • Good morning. My name is Angela and you will be your conference facilitator today. At this time, I would like to welcome everyone to the Weyerhaeuser third-quarter earnings conference call.

  • [OPERATOR INSTRUCTIONS] Miss McAuley, you may begin your conference.

  • - VP IR

  • Thank you, Angela. Good morning.

  • Welcome to Weyerhaeuser's third quarter 2005 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations. Speakers on today's call will be Steve Rogel, Chairman, President and Chief Executive Officer; Rich Hanson, Executive Vice President and Chief Operating Officer; and Dick Taggart, Executive Vice President and Chief Financial Officer. Also with us today is Steve Hilliard, vice president and Chief Accounting Officer. This call is being webcast at www.weyerhaeuser.com.

  • The earnings release and presentation slides can be found at our website. Contact April Meyer at 253-924-2937 for copies of this information. Please review the warning statement in our press release and on the 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 third-quarter 2005 net earnings of 285 million or $1.16 per fully diluted share on net sales of 5.6 billion. Third-quarter earnings include the following after-tax items: A gain of 75 million or $0.31 per diluted share for the sale of MAS Capital Partners, a joint venture. A charge of 19 million or $0.08 per diluted share for the closure of facilities. A loss of 14 million or $0.06 per diluted share for the early extinguishment of debt. Also included is a one-time tax benefit of 14 million or $0.06 per diluted share related to a change in the Ohio State income tax law. These items total $0.23 per diluted share.

  • A GAAP reconciliation of special items is available on our website. I will now review sequential quarterly business trends third quarter 2005 versus second quarter 2005, beginning with Timberlands. Export log prices increased 1% from Q2. However, seasonally volumes declined 5%. Domestic log prices were flat, domestic log volumes increased 7%. Higher logging and hauling fuel costs negatively impacted the quarter. A $5 million write-off was taken for damage related to Hurricane Katrina. $6 million in earnings from BC Coastal operations which were sold in May. were not included in this segment's results.

  • Wood products. Average lumber and oriented strandboard prices were lower in third quarter from second quarter. The hurricanes drove up certain wood products prices in September, however, only one to two weeks of higher prices were realized during the third quarter. Soft wood lumber price realizations decreased $31 per thousand board feet in Q3 and volumes declined 7%.

  • Price realizations for plywood increased $4 per thousand square feet, volume also fell 7%. OSB price realizations were $30 per thousand square feet lower than in the second quarter, and volumes decreased 3%. Engineered wood product prices increased 2% to 5%. Countervailing and antidumping duties were 19 million in the quarter.

  • Cellulose fiber and white papers. Third-quarter pulp price realizations declined $18 per ton from second quarter. The decline occurred in paper-grade pulp -- rough prices were firm. Uncoated free sheet prices fell $23 per ton. Due to less scheduled maintenance downtime in third quarter versus second quarter, pulp shipments increased 11% and paper shipments 2%.

  • Productivity improvements more than compensated for higher transportation, energy, and raw-material costs as well as the negative effects of a stronger Canadian dollar. The third quarter includes a pre-tax charge of $22 million, primarily related to the closure of the Cosmopolis Washington pulp mill which was announced earlier this morning.

  • Container board packaging and recycling. Third quarter container board prices declined $27 per ton and shipments were 8% lower than in the second quarter. Box shipments were flat while prices fell 4%. Old corrugated container prices were flat during the quarter. While some facilities were in the region affected by the hurricanes, there was a minimal impact in this segment. Rich Hanson will discuss hurricane impacts during his presentation later on this call.

  • RECO. Single-family home closings declined slightly in the third quarter due to the effects of Hurricane Rita on Houston, delays in providing utility service in Las Vegas and fewer lot closings. The average price of homes closed during the quarter was $461,000, a 1% decline from Q2. This change was attributable to mix. On a year-over-year basis, average sales prices were 11% higher than last year's third quarter. The backlog increased in Q3 and is more than six months in duration.

  • For our next discussion, please refer to the waterfall charts on our website. This chart describes the major factors impacting third-quarter earnings. If we begin with the second-quarter earnings, which before special items was $1.34 per share, lower lumber -- lower prices for lumber, OSB, container board, boxes, pulp and white paper combined to have a negative earnings impact of $0.46 per share.

  • Lower volumes primarily in wood products further reduced earnings by $0.06 per share. Higher energy and other costs were more than offset by productivity gains in pulp and paper mills. These gains were the result of less maintenance downtime taken in the second -- taken in the third quarter versus the second quarter. Productivity contributed $0.11 per share. The combined effect of these items resulted in non-GAAP earnings of $0.93 per share.

  • I will now turn the call over to Steve Rogel.

  • - Chairman, President, and CEO

  • Thank you, Kathy.

  • At our analyst meeting in May, we committed to taking action to unlock the power of our portfolio to create additional shareholder value. We said that we would take such steps after engaging our senior management team and board of directors in a deliberate and strategic review of our business portfolio. We know that we'll face some tough decisions because of this review but we're confident that our process will produce lasting shareholder benefits.

  • We're working on this review from a position of strength. Our facilities are efficient. We've eliminated many unnecessary costs and we're seeing the benefits of earlier actions to improve shareholder value. Because of those measures, we were able to announce this morning the authorization by our board to repurchase 18 million shares of our outstanding stock. This is the second such action directly affecting our shareholders that we've taken this year.

  • In April, our improved operations allowed us to increase our quarterly dividend by 25% and our underlying financial strength gives our board the ability to consider additional measures to benefit shareholders. At the same time, however, we recognize that to deliver even greater returns for our shareholders we must address underperforming businesses operating in structurally challenged markets.

  • Earlier this morning, we announced one of the actions we're taking to address these underperforming assets: The closure of two mills in Washington State. Closing the specialty pulp mill in Cosmopolis will remove 140,000 tons per year from our pulp system. The closure of the Aberdeen large log mill will eliminate 125 million board feet of lumber. Against the backdrop of industry-wide market challenges, our strategic review led us to determine that these mills are no longer economically sustainable and they are not core to our operations.

  • This is the second such announcement this month. Earlier we announced the indefinite shutdown of our Prince Albert pulp and paper facility in Canada. That decision takes 280,000 tons of uncoated free-sheet capacity and 130,000 tons of pulp capacity out of the system. As a result, we've brought our overall capacity closer to the level that we need to serve customers and deliver value to our shareholders. These are the first, but by no means the final steps. There are more tough decisions ahead.

  • Our cellulose fiber, white paper, and container board packaging businesses operate in highly competitive and structurally challenged industries. To generate adequate returns, we must improve these product lines. We'll continue to explore ways to shed more non-competitive capacity or even exit product lines in the coming months.

  • Our commitment to improved shareholder returns also involves selective growth. We've targeted our real estate and residential wood products businesses for such growth and we're making progress in both areas. To grow our real estate business, we are acquiring the land in all of our major markets. This includes a strategy to edge out through recent acquisitions of land in Sacramento, California and the Greater Portland, Oregon markets.

  • We're also progressing on our plan to provide even greater focus on serving the changing needs of customers of our residential wood products business. As we noted in May, the building industry is becoming more consolidated and building methods are changing. In response, we created a new organization and developed new and innovative business approaches. In the coming months, we'll share more details on how we're serving this evolving market.

  • As I said before, we're in the early phase of unlocking the power of the Weyerhaeuser portfolio. We will not shrink from making the tough decisions. We are confident that the strength of our portfolio provides many opportunities for enhancing shareholder value. We also believe that we have earned the confidence of our shareholders through a proven record of creating long-term value. Over the past ten years, we've distributed $4.5 billion of capital to shareholders through dividends and repurchases.

  • Our acquisition strategy has produced synergies that have exceeded expectations and changed the way we operate. In the process, we've created a strong company that weathers tough times and operates from a position of strength to restructure and deliver enhanced value. Clearly, our history and proven performance demonstrate our ability to produce superior results through strategic decision-making and excellent execution.

  • In the months ahead, you will see the same steady and determined approach as we make the tough but necessary decisions. We expect the same results as our previous actions. We will create an even more competitive company and greater shareholder returns.

  • Thank you and now I'd like to turn the call over to Rich Hanson, our Chief Operating Officer. Rich will discuss in detail the impact of the recent hurricanes. Rich?

  • - EVP, COO

  • Okay. Thanks, Steve.

  • I'll describe the effects of the recent hurricanes on the operations in Louisiana, Mississippi and Alabama, and to do that I'll describe the impacts on our third-quarter results and then the ongoing effects that we expect to experience in the fourth quarter and beyond. From the standpoint of the third quarter, let me say we were very fortunate on most of our manufacturing operations escaped Hurricanes Katrina and Rita with little or no damage.

  • Disruptions to manufacturing occurred even to planned shutdowns in the primary pulp paper mills to prepare for those storms or the power outages that occurred afterwards. And, for example, these disruptions typically resulted in a day or two of downtime in the big pulp paper operations in Red River, Louisiana, Pine Hill, Alabama and Columbus, Mississippi. And then in the lumber side, our cluster of sawmills in that area, we lost around 22 million board feet of production. So to put that in perspective, that's a few weeks of production for a single mill. So, again, not really significant.

  • The asset most affected by the Hurricane was of course our timber lands, although in the broader picture at a corporate level that really resulted in a loss of less than 1% of the value of our timberland holdings Company-wide and Dick Taggart will comment about the financial write-off there. The damage on the Timberlands was limited to seven Mississippi counties, and two Louisiana parishes and we are still assessing the total damage but it appears in the area affected that about half of the timber sustained heavy damage and during the first quarter -- excuse me, during the fourth quarter this year, and the first quarter of next year, we'll salvage as much of this timber as possible.

  • We expect the salvage efforts to add about $7 million in costs to our logging and delivery costs for the fourth quarter and the first quarter and from a practical standpoint, anything not salvaged by the end of the first quarter will probably be lost because of blue stain that develops on downed wood in hot, humid conditions, and although the stain has no structural effect on the lumber, it does create a visual issue which renders stained wood unusable for lumber. Therefore, there's a great urgency in our salvage operations.

  • We won't see an affect on our overall 2006 harvest volumes, but we'll face some challenges, especially in terms of harvesting safety, log size, and quality, and many of the salvaged logs of course will be smaller than those that we would normally harvest. In addition, sawing, twisted and shattered and otherwise damaged logs will cause problems during the manufacturing process in the sawmills. And so we're expecting that in our four southern sawmills most affected in the area they won't run at full capacity when running these salvaged logs and we'll experience some increased maintenance most likely during that period as well.

  • And of course another longer term effect of the hurricanes is the effect on energy costs. We were able to moderate some of our energy costs in the third quarter with our hedging program. We've talked about that before. And actually had some lower natural gas costs in the third quarter compared with earlier in the year. Longer term, though, our energy costs remain high and were adversely affected by the loss in production capacity due to Hurricane Katrina and as you all know we've had a lot of difficulty passing these costs through in the form of price increases.

  • But, as an example, in our paper business with these higher energy and transportation costs, we've now informed our customers that effective on November 1st, we will implement a $11 per ton energy surcharge and we'll be periodically reviewing that and adjusting those surcharges up or down to reflect significant changes in energy costs. Just as an example, you might not think of this, but in our Timberlands operations alone, if you compare the year-to-year change in diesel costs, that has an impact of $40 million on our harvesting costs across the system, that is both in the west and south. So it's imperative that we recover these costs.

  • As Dick Taggart will discuss in detail, we've also been implementing price increases in our pulp, container board and packaging businesses to recover those costs, and we are encouraged by the initial acceptance of those price increases in the marketplace. Although the full effect of these increases won't be felt until 2006, these changes will help offset the increased costs we're experiencing and of course we'll be offsetting some of those costs through our improved operational efficiency.

  • Before I turn the call over to Dick, let me summarize the effects of the hurricanes on our operations again. Manufacturing escaped the hurricanes with minimal damage and not any significant downtime. Damage to our Timberlands operations was limited to less than 1% of our total. We'll experience cost increases in the fourth quarter and the first quarter due to the expenses associated with salvaging and sawing the downed wood and our energy surcharges and other price increases and improved operating efficiency will help offset increased costs.

  • So now at this point I'd like to have Dick Taggart, our Chief Financial Officer, discuss the outlook for the fourth quarter.

  • - CFO

  • Thank you, Rich. As we noted in our earnings release, we expect the earnings in all of our business segments with the exception of the real estate company to be lower in the fourth quarter than in the third. Timberlands will be slightly lower mainly from lower price realizations and higher logging costs associated with the hurricane-damaged timber that Rich has just described to you. As he indicated, we estimate these costs will add about -- will add about $7 million quarterly and that will begin in the first quarter and carry on into the fourth.

  • Our -- in the west our export log prices are expected to be flat as the Japanese housing market remains good. And domestic log prices are expected to soften somewhat seasonally along with lumber prices in the latter part of this quarter. Wood products prices, which strengthened at the end of the third quarter, with most of the increase attributed to the effects of the hurricanes on both demand of lumber and supply, we expect those prices to follow a normal seasonal decline in November and December and they've already begun to somewhat moderate.

  • Housing, however, the re -- still remains strong and the degree of that slowdown is uncertain. In this segment, we will take an estimated $25 million non-cash impairment charge at our Big River, Saskatchewan sawmill, which is associated with our recently announced -- announcement at the curtailment of our pulp and paper operation in Prince Albert. There are other wood products facilities under review also that may impact the fourth quarter.

  • As Kathy mentioned, we announced a closure of a large log mill in Aberdeen, Washington and there will be a nominal charge associated with that closure. container board prices are beginning to rise and recently announced box prices will largely impact the first quarter of 2006. In addition, cost increases in energy and transportation will take margins in this business in the fourth quarter to near break-even levels.

  • In cellulose fiber and white papers, paper prices are expected to begin increasing and as Rich mentioned we're instituting energy surcharges for transportation beginning the 1st of November. We've taken the first steps to long-term rationalization at our recently announced -- with our recently announced intention to indefinitely curtail our paper and pulp mill in Prince Albert, Saskatchewan.

  • While we are operating the paper machine for the legally mandated 90 days following our announcement, we are taking downtime in other facilities to balance our inventories. With cost increases similar to those mentioned for container board, our earnings in this business are expected to be lower in the fourth quarter as well.

  • Pulp prices are beginning to increase modestly in some markets, but for paper-grade pulp but they will largely impact first-quarter earnings as we recognized revenue in the pulp business when the product is delivered, and for pulp that can be up to six weeks for export shipments. We've announced a permanent closure today of our pulp mill in Cosmopolis, Washington.

  • That pulp mill will continue running until we have met current customer requirements. The pulp mill in Prince Albert will run through the winter at which time we will either close or sell the facility. We will take an estimated pre-tax charge of 350 to 375 million in the fourth quarter related to the Prince Albert closure. In addition, as Kathy noted, we took a $22 million charge to earnings in this segment in the third quarter associated with the closure of the Cosmopolis Mill. Excluding those charges, the segment is expected to be slightly at or below break-even levels in the fourth quarter.

  • In the fourth quarter the real estate company will be seasonally strong as it was last year. This is due not only to the normal closing patterns which is heavy to the fourth quarter, but also those closings that were delayed in the third quarter have been moved into the fourth. So single-family closings are expected to increase from the level of last year's fourth quarter with margins at similar levels.

  • Corporate and other will stay below normal as a result of the interest income, which will decline as our cash balance is applied to continue debt reduction and periodic share repurchase. As we reported this morning, Steve noted, the board has authorized an open-market share repurchase program for 18 million shares of our common stock. During the quarter, we reduced debt by about $1 billion, and at the end of the -- of the third quarter, we had slightly over $900 million in cash.

  • With that, we're happy to turn the call back to Kathy to take the Q and A.

  • - VP IR

  • Thank you, Dick. I would now like to open the floor to questions. So Angela, could you please poll for questions?

  • Operator

  • Thank you. [OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q & A roster. Your first question comes from Rich Schneider with UBS.

  • - Analyst

  • Steve, you didn't mention much about unlocking Timberland values, you talked mostly about the restructuring activities and trying to unlock value and improve value in the other businesses. Could you talk about where you may be on the Timberlands side?

  • - Chairman, President, and CEO

  • Rich, we think that unlocking timber value really involves the tax treatment that C-Corps get. And as perhaps you know, our industry has worked hard and bills have been submitted in the hopper both in the House and the Senate to address the tax treatment.

  • Of course, how soon or when those tax bills go through is a subject I'm not qualified to answer but we do have encouragement that the bills have a number of co-sponsors and they're growing. So we're looking for some tax relief for C-Corps.

  • - Analyst

  • And then on the share repurchase, are you looking at share repurchase over an extended time frame and maybe to move into purchases on a opportunistic basis, or what do you think in general your approach will be on the share repurchase?

  • - CFO

  • Rich, this is Dick Taggart. At this time we will be -- we will be repurchasing shares on an opportunistic basis as we're able to.

  • - Analyst

  • Okay. And I had a question on input costs. I think it was mentioned that productivity was up $0.11 in the quarter and it -- it sort of masked what may have happened with input costs or offset that. Could you talk about, you know, the impact of natural gas and chemical costs? Do you have a number for that going from the second to third quarter?

  • - VP IR

  • Rich.

  • - EVP, COO

  • Well, on the -- on the -- I'll just tell you. This is Rich. In general, as I mentioned, on natural gas costs because of our hedging program whereby we hedge about a third of our purchases we actually had lower natural gas costs in the third versus the fourth quarter. And the numbers on transportation costs continue to rise due to the fuel-cost increases of course. And that, I'd have to reconcile and go back by business and look at that. I don't have that right offhand. Dick?

  • - CFO

  • We don't have it by -- by business but in total in -- In the third quarter our natural gas purchases were about 83 billion -- $83 million. And we would expect that those would go up significantly in the fourth quarter as our hedges unfold. I don't have an estimate, but they would be significantly above that.

  • - Analyst

  • And what was the level in the second quarter, do you have that?

  • - CFO

  • I don't have the second quarter, no, Rich.

  • - Analyst

  • Okay.

  • - CFO

  • We'll follow up with you.

  • - Analyst

  • Okay.

  • - VP IR

  • I'll get back to you, Rich, on that.

  • - Analyst

  • Okay. And just one last question. Was Cosmopolis losing money or whichever way you want to look at it, was it generating negative cash?

  • - Chairman, President, and CEO

  • I think the best way to -- if you want to model, Cosmopolis was neutral both from an earnings and a cash standpoint.

  • - Analyst

  • Okay. Thank you.

  • - Chairman, President, and CEO

  • Immaterial either way.

  • Operator

  • Your next question comes from Mark Wilde with Deutsche Bank Securities.

  • - Analyst

  • I wonder if we can go a little deeper on the natural gas. I'm just curious as to how that's affected the cost position of -- of -- like the Cedar River mills or the mills that -- MacMillan Blodel had in Kentucky. Can you talk about that?

  • - Chairman, President, and CEO

  • I can address I think the mill in Cedar Rapids. That mill's associated with a power plant, takes its energy as by-product steam from the plant, and has electrical costs that are what I would call in the middle of the pack. So I don't see Cedar River as being overimpacted by the energy costs.

  • With regard to -- you mentioned Kentucky, but MacMillan Blodel's mill's in Alabama. So I guess maybe we should address both Kentucky and Alabama. The mills there are pretty efficient. We have taken measures over the years to reduce our energy costs, although we still have some more work to do. So I would say that they're better than average on their energy costs, but we have some upside with installation of additional energy-saving equipment and power generating.

  • - Analyst

  • Okay. And, Steve, is it possible for you to give us a little update on both the Latin American forestry options? You've talked in the past about maybe starting to put a little money in down there. And then also, just generally, what you think the options are for the pulp and white paper businesses?

  • - Chairman, President, and CEO

  • Okay. South American timber. We have been continuing to invest in Uruguay in bare land that we've been planning to -- both pine and eucalyptus depending on the weather condition and soil types. That program continues this year and they have been spreading out a bit, edging out from the core operations in order to expand the base.

  • With regard to manufacturing, we have a plywood and veneer mill under construction in Uruguay. It should start up late first quarter next year. And you were -- your other question, were options with regard to our pulp and paper operations.

  • - Analyst

  • Yes. I just looked at that and it just doesn't seem like there's a lot of people who are in the position to buy those kind of assets right now.

  • - Chairman, President, and CEO

  • Oh --

  • - Analyst

  • If you were interested in selling them.

  • - Chairman, President, and CEO

  • Yeah. Let's take Prince Albert as our case in point. Certainly we have announced -- and by Saskatchewan regulatory law we must give 90 days' advance notice of our intentions. So we're just embarking on the process of looking at potential future owners. The only thing I could say about future M & A activity is there are people that have shown interest.

  • - Analyst

  • Okay. Good enough. I'll drop back in the queue. Thanks, Steve.

  • - Chairman, President, and CEO

  • Thanks.

  • Operator

  • Your next question comes from Edings Thibault with Morgan Stanley.

  • - Analyst

  • Thanks and good morning. Just following up a little bit on that. Can you talk about, Steve, how you think about I guess two different processes. Number one, sort of your ability to internally fix some of these underperforming businesses or whether or not you plan or what your thought process is in terms of potentially exiting them? And then as a follow-up on using this Prince Albert case example, would you sell it as an uncoated mill? Would that be something you'd consider? And how do you think about your decision to sort of sell versus close given some of the capacity issues?

  • - Chairman, President, and CEO

  • The first question you had, Edings, was with regard to our ability to fix a situation. I have very high confidence in our people and their ability to fix and operate plants and mills in our Company that aren't structurally challenged. Structurally challenged would mean you've got geographic problems in getting product to market, you've got excessive power costs or things like that that you just can't overcome.

  • But with regard to our ability to fix something, I have high confidence in our people. With regard to exiting PA as an uncoated free-sheet mill, I think that we've announced a closure, other options including sale. When you go to sell a property, of course the purchaser has to make that decision on how they might operate it in the future.

  • - Analyst

  • But you wouldn't make that a condition that -- you wouldn't be able to run it as an uncoated free-sheet mill.

  • - Chairman, President, and CEO

  • I can't speculate on items like that at this point.

  • - Analyst

  • Okay. And just a quick follow-up on the first question. Would you describe any of your total businesses as structurally impaired?

  • - EVP, COO

  • Edings, I think we've made the comment in the past that we don't consider our own businesses as structurally impaired. We are operating in structurally impaired industries and we need to rationalize our businesses to those units that we do have the confidence in that we can -- that they can be the lowest-cost facilities in their businesses over time.

  • - Analyst

  • Great. Thanks very much.

  • Operator

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

  • - Analyst

  • Thank you. Two questions. First -- and I know these are both kind of hard questions. But when companies announce broad restructurings, they tend to fall sort of into one of two categories and never into -- into one exclusively.

  • But we've seen a couple in the last couple of years that were very heavily tilted towards productivity and cost. The comments you've made today suggest that yours is tilted more to capacity and mix. Is that -- is that a fair comment about the process you're going through?

  • - CFO

  • Mark, this is Dick Taggart. I would say it's both. I would say it is looking at the capacity that can be cost effective and how do we then size our businesses against the customers that we believe we will compete for long term with most competitive facilities and rationalize our set of mills to be the low-cost supplier to the market that we -- that we believe will be there.

  • - Chairman, President, and CEO

  • I think in addition, Dick, the -- the way we analyze these -- these days is not from a production -- but from a demand backed basis. What is our customer base? What are their needs going to be? And how can we most efficiently serve them?

  • - Analyst

  • Okay. That's fine. The second question. If we put your share repurchase into a historical context, this is now the second time where you've gone out and issued a substantial amount of stock and then come back in a relatively short time to at least talk about buying it back. Can you help us think about whether this situation is similar to what happened in '99 and 2000, or is there something structurally different that's driving it that should give shareholders a different sense of your purpose and underlying goals?

  • - Chairman, President, and CEO

  • Mark, I think that what drives the share repurchase is always the view that the company has a strong cash flow where it believes that its best use is to return it to the shareholders in the form of a share repurchase program. I don't know that there's any -- I guess that in that sense it's identical to what we did in -- in 2000 when -- after the acquisition of MacMillan Blodel where we issued 34 million shares, we repurchased half of those shares in two separate -- under two separate authorizations from the Board. But it's really driven by circumstances and philosophy to return cash to the shareholders when it's appropriate to do so.

  • - Analyst

  • I certainly understand and I completely agree with the thinking on the repurchase. It's the -- it's the combination of the issuance and the repurchase that sort of looks like you're swinging back between bondholder and equity holder that might leave some shareholders with the view that, oh, yeah, I don't really want to own the stock in the long term I'd rather trade in and out the way Weyerhaeuser seems to and obviously that's not what you're trying to tell the market so I'm just trying to put it in perspective. Should we assume that if the stock gets back up to 67 you'll be issuing shares again?

  • - Chairman, President, and CEO

  • Well, Mark, I think that -- that what we have done has been consistent with our philosophy, that we have a philosophy of maintaining a sound capital structure and that we -- we issued equity in order to accelerate the deleveraging of the company. We are comfortably within our target capital structure. We intend to stay within our target capital structure and by -- by maintaining a strong cash flow and we will manage both our debt and equity to stay in that target range.

  • - Analyst

  • Okay. That's very helpful. Thank you.

  • Operator

  • Your next question --

  • - Chairman, President, and CEO

  • Don't speculate on the price of stock, if that's what you're asking.

  • Operator

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

  • - Analyst

  • Hi everyone, good morning. Steve, asking again on the restructuring questions. When you look at the next step, what are the mile posts you're looking at in terms of the next moves you're contemplating on making. Is it more planning and organizational in nature in terms of these next steps? Are you waiting for trends to develop in the market? Said differently, have you already figured out what your next moves are even if you're not going to talk about it today?

  • - Chairman, President, and CEO

  • Well, our strategic planning is an ongoing process, George. But I think I want to reemphasize in each business we're working from the customer base back.

  • - Analyst

  • Right.

  • - Chairman, President, and CEO

  • And when you look at certain businesses, it's much more complicated than others. For example, in our corrugated container business, we have thousands of customers, dozens of box plants, and a big mill system. And when you're looking at that as a whole, as an entirety, it's a very complex decision-making process. Whereas if you're looking at a lone specialty pulp mill that serves just a few customers, the time frame and the decision-making process is much simpler. So we're moving all of our businesses through the process and looking at them with an intense microscope, but some take a little more time than others to decipher.

  • - Analyst

  • Okay. And that's -- would it be fair to say that we will see next moves of -- similar type that you've announced today within the next couple quarters? I know you don't like to be held to a timeline, we can understand that, but if you could help us nonetheless.

  • - Chairman, President, and CEO

  • I know that you'd like us to do that but we just can't speculate forward on time.

  • - Analyst

  • Fair enough, Steve. Fair enough. One question. I missed it, Dick, when you said before. What's the surcharge you put in place in white paper? Was it $11 a ton? Did I hear that right?

  • - EVP, COO

  • Yeah. This is Rich.

  • - Analyst

  • Hi, Rich.

  • - EVP, COO

  • It's $11 a ton and it's across the board regardless of the paper grade. It's a separate-line item on the invoice.

  • - Analyst

  • Okay. Have you contemplated or have you followed with your own uncoated free-sheet price increases some have proposed? And if not, why not?

  • - EVP, COO

  • What was the question again?

  • - Analyst

  • Uncoated free-sheet pricing.

  • - EVP, COO

  • Yes.

  • - Analyst

  • Have you put in your own on top of the surcharge or are you just using the surcharges --

  • - EVP, COO

  • We're moving the prices as well as the surcharge, yes.

  • - Analyst

  • Okay. Last question. And then I'll turn it over. In RECO we do the math, it looks like you're guiding to a very similar profit number for the fourth quarter relative to last year, which -- in the segment has been tremendous and you are to be credited for that.

  • Hard to answer precisely but how long do you think you can maintain these margins within RECO? Said differently, what mile posts should we be looking at, whether it's closings, etc., where we should start worrying about maintaining these margins? Thanks, guys.

  • - Chairman, President, and CEO

  • Well, there are a couple of answers to that question. The first one is what's going to happen with housing starts going into the future? And if they continue the way they are or reasonably the way they are, we can expect the margin on a specific home to be pretty good and continuing. But if the housing starts go downhill, then we have another problem.

  • The second answer is: Every time we build a home, we have to go out and replace that lot. And we have some pretty significant acquisition and development costs for lots, so as you look out into the future, our replacement of lots is much more expensive than they are costing us today, having been in inventory.

  • - CFO

  • But if you think about the timing, George, Kathy said we ended up the third quarter with a record backlog, higher than last quarter, higher than last year. That backlog is homes that are priced, material costs are not increasing at this point. There are some modest increases. So our margins to the extent that they do begin to shrink for the reasons that Steve indicated as somewhat higher land costs will come in where housing prices are -- are more stable, will not occur into well into late next year if -- if then.

  • - Analyst

  • Okay, Dick, that's great. Thanks very much.

  • Operator

  • Your next question comes from Steve Chercover with DA Davidson.

  • - Analyst

  • Thanks, good morning. The first question. With respect to CapEx for next year, should we be revising that number given the asset closures?

  • - CFO

  • Steve, at this time we are still planning against a budget of $850 million for next year. We will let you know if that -- if that changes as a result of these closures.

  • - Analyst

  • Okay. And at the risk of flogging a dead horse, Prince Albert seemed to me to have one of the newer uncoated free-sheet machines, in North America and reasonable size. So was the big problem currency, energy, distance to market, or, what made that mill fatally flawed?

  • - CFO

  • Steve, I think you named most of the --

  • - Chairman, President, and CEO

  • Two out of three.

  • - EVP, COO

  • Of the items that were problems for the Prince Albert Mill. The Canadian dollar, of course, is very strong. We never base long-term decisions on short-term swings in currencies. But on the other costs that you've mentioned, they certainly are against PA.

  • - CFO

  • It costs us $40 a ton more to get the paper to market from PA than from our US mills.

  • - Analyst

  • Well, Prince Albert's not going to get any closer to civilization in our lifetime, so I guess you're saying you don't expect any big swings in the opposite direction for the Canadian dollar or energy?

  • - EVP, COO

  • No. But our Canadian friends would probably say that they are very civilized.

  • - Chairman, President, and CEO

  • Well, Steve, a Canadian will allow you to make that comment.

  • - Analyst

  • Yeah, that's right. Okay. Thanks a lot.

  • Operator

  • Your next question comes from Chip Dillon with Citigroup Investment Research.

  • - Analyst

  • Yes, good morning. I just want a quick question on the slides, the seven slides you put on your website. I just want to verify this. It says that the operating earnings before special items in Timberlands was 1.91 but I believe that's 1.96, right, because you had the $5 million charge. And then it says the wood products was 1.30. And yet the press release says 1.24. Didn't see any unusual items in wood products. Could you just reconcile those, please.

  • - CFO

  • Well, Chip, we didn't refer to the $5 million damaged lot as a special item but because of its size and so that may have been -- you -- if you attribute it to that, that would be -- you would be correct. We just simply didn't refer to it as a special item.

  • - VP IR

  • And Chip I can walk through those individual items with you offline.

  • - Analyst

  • Okay. But again there was like -- it says 130 for wood products on the slide and 124 in the press release and you didn't say anything about anything unusual in wood, I don't believe. But -- okay. We'll talk I guess on that. If -- unless you know offhand what that was?

  • - VP IR

  • Chip, let me -- let me get back to you a little bit later.

  • - Analyst

  • Okay. And then I guess the next question is on the home-building front. Have you noticed any change in the marketplace in Houston in the wake of Katrina? You mentioned your backlogs are quite long at this point. I guess across the system. But are you seeing any unusual demand activity given the population shift to Houston?

  • - Chairman, President, and CEO

  • Chip, yes, we have. The first thing to say about Houston is I think they had a delay of delivery of about 30 homes due to Katrina but they're picking that up in the fourth quarter. But demand in general has picked up. Houston had been a little bit softer than our other markets but it's picked up very strongly. I heard a story the other day that there are like 350,000 people who are in Houston today as a result of Katrina and they're looking for all kinds of housing.

  • - Analyst

  • And then sort of shifting gear as little bit. When you look at the lumber supply, as you do your analysis for '06, it looks like that I guess Canada can be kind of a mixed situation where you have the East reducing their allowable harvest certainly you would -- you would think that would be the case in '06 versus '05, especially in Quebec. But then you keep hearing about the beetle problem in British Columbia and yet that's been around for a while and I just didn't know if you thought the interplay of those two factors would result in -- in Canada supplying more to the U.S. or less to the U.S. in '06 versus '05.

  • - Chairman, President, and CEO

  • Certainly you've got it right in the East. When any curtailment hits in terms of log supply into the eastern mills, it -- it'll probably happen earlier rather than later. With regard to the beetle problem in the West, I think that what -- the existing capacity is doing is displacing forests that are unaffected by the beetle with timber that's from the beetle kill, and it takes some time to get additional capacity in place if you're going to increase the volume. Probably the bigger factor is a strong Canadian dollar, and again people operate profitably next year in that kind of currency regime.

  • - Analyst

  • And then lastly, just looking at plywood. Until 2004, it seemed like we had plywood capacity going down. In fact, you've all shut one down at the end of '03 -- of '03 even after the six months of the run up you still shut down capacity. And yet it's been a while. Do you think with -- especially in Canada with the currency situation and given the inevitability of what will happen with all this OSB hits that there will be more industry closures as early as this winter, or do you think we're going to have to wait a while before we see more plywood shutdowns?

  • - Chairman, President, and CEO

  • I think there are several factors, Chip, that are going to impact us. There's OSB capacity coming onstream next year that's going to impact plywood. There's a lot of shifting from plywood to veneer peeling and drying for a laminated veneer lumber, LVL, that's going into engineered products. So you see capacity coming out that way. But plywood is going to have a continuing tough road given all the competitive factors.

  • - Analyst

  • Okay. Thank you.

  • - VP IR

  • Chip, just to answer your first question. The difference between the 124 million reported for wood products in our earnings release and on the earnings summary table, the 130 million that shows for wood products is a 6 million reversal of litigation from the second quarter, litigation accruals that occurred in the second quarter and this was a positive reversal.

  • - Analyst

  • Okay. Thank you.

  • Operator

  • Your next question comes from Rick Skidmore with Goldman Sachs.

  • - Analyst

  • Good morning. Just two quick clarifying questions. First on your natural gas hedges. I think you said you're 30% hedged and those were rolling off. Do those roll off all in the fourth quarter? And then, second question, is the cost savings as a result of the closure at Prince Albert, can you elaborate on that? Thanks.

  • - CFO

  • Rick, this is Dick Taggart. The hedge is moved monthly. We place hedges on monthly for a year out and so they will be climbing over the fourth quarter. Our average natural gas cost was about $7.50 per million BTUs across the system in the -- in the third quarter and of course the spot price now is $12 or so. And so we will -- and we hedge about a third of our volume. So they -- it is a moving program that is looking one year out and we adjust it monthly.

  • - Analyst

  • Okay. So you will always stay at 30% hedged, you just roll those forward?

  • - CFO

  • We generally will sometimes be somewhat less hedged in the summer months than the winter months but it will average about 30%.

  • - Analyst

  • Okay. Thank you.

  • - VP IR

  • The next question.

  • Operator

  • Your next question comes from Peter Ruschmeier with Lehman Brothers.

  • - Analyst

  • Thanks. Good morning. I had some cash flow questions, if I could. I think in the past your working capital has been a big source of cash in the fourth quarter to the tune of three to $400 million. I'm curious if you could comment on whatever working capital guidance you might have as you look at this year's fourth quarter.

  • - CFO

  • Well, Peter you're absolutely correct. And as we indicated, we expect the wood products to have their normal seasonal decline in November and December. And most of the decline is -- is in the -- in accounts receivable as the sales rate in wood products slows down as we get into the holiday months after Thanksgiving.

  • - Analyst

  • Okay. So maybe asking differently. It wouldn't necessarily be unusual to see a similar 3 to $400 million benefit from working capital.

  • - CFO

  • That's correct. It will be largely a function of price and sales rate but it will tend to be in the -- in the 250 to $350 million range.

  • - Analyst

  • Okay. Great. Related question would be the cash flow impact from the sale of mass capital, is that something that was recognized -- where you recognized the cash flow in 3 Q, or is that a 4 Q event, and what was that amount?

  • - CFO

  • Well, the -- the pre-tax amount was $115 million. And we recognized that as a gain and we received the cash in the third quarter.

  • - Analyst

  • Okay. And just a clarification on the issue of maintenance of $0.11, which I think you said showed up entirely in the white paper business. Do you have any guidance you can offer looking at the fourth quarter in terms of the change in maintenance for your businesses? Would you expect it to go back up again?

  • - CFO

  • Maintenance -- maintenance expense. No, the -- in the -- the fourth quarter will have a fair amount of downtime in cellulose fiber that is planned and unplanned. So I guess, Rich, you would expect it to go back up?

  • - EVP, COO

  • We'd expect it to be -- in that segment, just -- just in the pulp business, we would expect higher maintenance costs in the fourth quarter due to planned outages.

  • - Analyst

  • Okay. And just lastly, if I could switch gears to the wood products business. The volumes and prices were a little bit lower than I expected. I was curious if you could comment on how you are reporting these shipment and revenue numbers as it relates to intersegment sales, whether it's through trusts, joists, or through your own home-building business if you could just remind us how you account for that and is that part of -- is that impacting the volumes?

  • - EVP, COO

  • The volume impacts were largely a result of the wood products facilities that were curtailed as a result of the hurricanes and some out of log conditions that reduced the production in some of the Canadian mills. The shipments that we report are those that are shipped to third parties. And now when the real estate company uses Weyerhaeuser wood products and most of the Weyerhaeuser homes have some Weyerhaeuser wood products in them, they buy those from third parties.

  • So there are no intercompany transfers between Weyerhaeuser and the Weyerhaeuser real estate company. There are a lot of transfers within the segment and for chips between wood products and pulp and paper. But the -- but the -- but the shipments that we show are those that are to third parties usually from our building materials distribution business and the lag occurs because we have internal shipments from our manufacturing operations to our distribution operations that create a somewhat longer lag for us than for other producers who sell directly to wholesalers.

  • - Analyst

  • Okay. Great. That's very helpful. Thanks very much.

  • Operator

  • Your next question comes from John Tumazos with Prudential.

  • - Analyst

  • Good morning and forgive me if as a forecaster I try to make a wild guess every now and then. I'd like to just throw a couple observations out to you and if you disagree have any reaction and want to tell me I'm full of prunes that's just fine. First, would it be a reasonable forecasting provision to assume $0.25 a share of write-offs each quarter, the next three quarters since you're strategically reviewing?

  • Second, if there's unusually more wood demand because of reconstruction or the -- likes prices are real and not a fiction, is it possible you could use cash in the fourth quarter for receivables? Third, structurally for the next three winters, might it be reasonable to assume little or no seasonal slowdown since the Gulf Coast doesn't have much of a winner for the wood business and algebraically that has a big impact on wood prices. And fourthly, is it reasonable to expect wood prices to be higher on average because of reconstruction demand for the next several years?

  • - Chairman, President, and CEO

  • Well, John, first of all, let me just say I wouldn't -- I wouldn't speculate on what charges might result from strategic actions that we have yet to determine what they will be. Regarding the seasonality of wood products as it relates to the reconstruction in the South and the fact that southern housing is not as seasonal as northern housing because of the weather, that is certainly possible.

  • - VP IR

  • The next question.

  • - Chairman, President, and CEO

  • We --

  • - EVP, COO

  • We really don't know the impact on demand from the reconstruction of Katrina but of course it has to be positive.

  • - Analyst

  • Right.

  • - Chairman, President, and CEO

  • And the timing of it is -- is unknown, of course. We still think we'll see the normal seasonal slowdown in the fourth quarter. I think the thing that will affect the seasonality of wood products prices the most, as it did this last year, which was quite different than 2005 than in 2004, is that large home builders like Weyerhaeuser that have a six-month backlog, that backlog is visible to their suppliers and their suppliers are not going to get caught without inventory as they did a year or so ago in oriented strandboard and so they will buy in anticipation of those deliveries. And how those -- how those contract suppliers buy and how they manage their year-end inventories is what will determine the seasonality of the wood products prices, I believe.

  • - Analyst

  • Thank you.

  • - VP IR

  • Next question.

  • Operator

  • Your next question comes from Don Roberts with CIBC World Markets.

  • - Analyst

  • Yes, Steve. Again, just going back to the decision on the Prince Albert. You'd mentioned some of the issues, which, the Canadian dollar remoteness, but I'm just wondering the thought process when you look at Prince Albert visa the other dictated facilities you've got like a Dryden -- I would have thought the Dryden -- is even more challenging with respect to fiber and energy. Could you give us your thoughts on really Prince Albert versus Dryden?

  • - Chairman, President, and CEO

  • Well, it's hard for me to compare one mill to another. We look at our system, Don, and we look at not only the cost but what products they're making, distance to market and the market that they're serving. Saskatchewan generally flows down in more to the west and Dryden flows down more into the east. And as a two-mill operation, it has some higher grades in it than the PA Mill.

  • - Analyst

  • Okay.

  • - Chairman, President, and CEO

  • But we look at these as a system and how we can serve the customer best.

  • - Analyst

  • And is there I guess -- is there -- from what you're having, we hear a lot out of Ontario government of perhaps changes on energy policy and so forth. In the past I think you've looked at sort of a fairly major -- facility biomass base, is that something that you're actively pursuing to help address I guess those margins at Dryden?

  • - Chairman, President, and CEO

  • Actually, we're looking at those kinds of projects at all of our mills that don't have full energy-generating capacity.

  • - Analyst

  • Okay. Thank you.

  • Operator

  • Ladies and gentlemen, we do have time for one more question. Your final question comes from Mark Weintraub with Buckingham Research.

  • - Analyst

  • Thank you. First I just wanted to follow-up a little bit on the wood products business and what did seem to be very low production in lumber, for instance, in the third quarter. I think if I'm reading the stats right you were down 9% year-over-year, down 12% versus the prior quarter.

  • And if I understood you correctly, there had been very minimal impact from the hurricane and then I think, Dick, you indicated there has been some log issues in Canada and maybe that was the source of the rest of the shortfall, although it did seem to be very big.

  • And then the follow on, then, would be if you are producing that much less and I assume if others were having difficulties like that, where are we in the inventory channels on lumber? Are we very low right now? Because again production seemed to be down quite a bit and housing activity is strong?

  • - EVP, COO

  • Well, this is Rich. It's -- to answer your question, we'd have to do some reconciliation. We have some capacity out as well, some closures, and Dick mentioned the interruptions in Canada, coupled with the Katrina. The inventory levels are about where we want them. Neither low, nor high. So I think it just takes a little more detailed digging to answer your question by mill.

  • - Chairman, President, and CEO

  • I think that, Mark, one of the things that you mentioned was our statement about the South coming through relatively unscathed. That was a remark with regard to the physical assets of the property. They have suffered downtime because some of them are getting fewer logs because of the extended salvage effort, more broken pieces, their efficiency is down as we have entered the salvage effort. So it's a two-answer statement in the south. We did come through well physically, but they won't operate at the efficiency levels that they were because of log size and broken pieces.

  • - Analyst

  • Okay. And just shifting gears real quickly on the container board business. What -- and the corrugated packaging. What kind of longer term do you feel is an appropriate level of integration from board to boxes?

  • - Chairman, President, and CEO

  • We are operating at about 85 to 86% integration today and we're working very hard to improve that ratio, up the percentage of integration. I can't give you a precise percentage as to where we're headed, but in our case higher is better.

  • - Analyst

  • Okay. Because, Steve, a couple years back I believe your philosophy was that it was ideal to be fully integrated. Would that still be the case or not necessarily?

  • - Chairman, President, and CEO

  • I think the answer is to be a very high percent of integration. You want to have the ability to serve outside customers with minor and medium where those customers essentially are good for your business.

  • - Analyst

  • And would it be fair to expect that goal to play a role in whatever strategic decisions you are going to be making in the coming months and quarters?

  • - Chairman, President, and CEO

  • Oh, I think so.

  • - Analyst

  • Great. Thank you very much.

  • - VP IR

  • Thank you for joining us this morning on the call. I will be available for questions in a few moments when I get back to my office. And have a very good day. Thank you.

  • Operator

  • Thank you. This concludes today's Weyerhaeuser's third-quarter earnings conference call. You may now disconnect