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Operator
I'd like to welcome everyone to the Weyerhaeuser fourth quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Kathryn McAuley, Vice President of Investor Relations.
- VP, IR
Good morning. Welcome to Weyerhaeuser's fourth quarter and year end 2005 earnings conference call. I am Kathy McCauley, Vice President Investor Relations. Speakers this morning will be Steve Rogel, Chairman, President, and Chief Executive Officer; Dick Taggart, Executive Vice President and Chief Financial Officer; Dan Fulton, President and CEO of Weyerhaeuser Real Estate Company; Also with us today is Jeannie Tillman, Vice President and Corporate Controller. This call is being webcast at www.weyerhaeuser.com. The earnings release and presentation slides can be found at our website. Please contact April Meier at 253-924-2937 if you need any additional information.
Please review the warning statements 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 2005 net earnings of 733 million, or $2.98 per diluted share on net sales of 22.6 billion. For the fourth quarter the Company reported a net loss of 211 million, or $0.86 per diluted share. The quarter included the following after-tax items. A charge of 438 million, or $1.78 per diluted share for the closure of the Prince Albert mill and the charges for two associated sawmills, a paper machine at Dryden, a paper machine at Plymouth, seven packaging plants, and three other wood products facilities.
A list of facility closures and dispositions is included in our presentation materials. A charge of 32 million, or $0.13 per diluted share, for impairment charges primarily associated with the California land development. A charge of 25 million, or $0.10 per diluted share, associated with the settlement of liner board antitrust litigation. A loss of 10 million, or $0.04 per diluted share, for the early extinguishment of debt. A gain of 34 million, or $0.13 per diluted share, on the sale of the Company's French composite panel asset. Income of 28 million, or $0.12 per diluted share were the cumulative effect of a change to begin capitalizing Weyerhaeuser interest to assets of Weyerhaeuser real-estate company. These items total $1.80 per diluted share. A quarter by quarter GAAP reconciliation of special items for 2004 and 2005 is available on our website, along with the presentation materials for this conference call.
I will now review the sequential quarterly business trends fourth quarter versus third quarter beginning in Timberlands. Log exports in the fourth quarter were down slightly from the third quarter. However, export prices increased 4%. Domestic log prices and volumes were flat in the west. Hurricane-related salvage in the south resulted in heavier than normal volume increases of 20%. Southern log prices declined about 3%. Fuel and salvage costs rose significantly. An additional hurricane related write-off of $6 million was recognized in the fourth quarter.
Turning to Wood Products, hurricanes impacted oriented strand board price realizations which increased $42 per thousand square feet, and plywood prices increased $24 per thousand square feet. Average soft wood lumber price realization prices decreased $14 per thousand board feet and engineered wood product prices were flat in the fourth quarter. Wood products volumes in the fourth quarter were lower than in the third quarter as markets experienced their normal seasonal slowdown. Softwood lumber volumes declined 6%. Oriented strand board 2%, and engineered Wood Products were off 10%. Plywood volumes, which declined 13%, were also impacted by the closure of the Wright City, Oklahoma, plywood facility. Antidumping and countervailing duty charges were $16 million in the fourth quarter. A change in the duties calculation which took effect late in the fourth quarter will result in antidumping and countervailing duty charges of 8 to $10 million per quarter in 2006.
Cellulose fibers and white papers. Pulp prices realizations remained essentially unchanged from the third quarter. During the quarter Weyerhaeuser announced a February 1, northern bleached softwood craft price increase of $20 per ton. Pulp shipments in the fourth quarter experienced a normal seasonal decline of 3%. Uncoated free sheet prices declined $5 per ton during the fourth quarter from the third quarter. Weyerhaeuser announced January price increases of 50 to $60 per ton on offset grades, and increases of $60 per ton on cut-size grades effective February 13. Shipments of uncoated free sheet papers were up 1% in the fourth quarter and order backlogs were strong at year end.
Containerboard packaging and recycling. Containerboard prices declined on average $3 per ton in fourth quarter versus third quarter. Shipments increased 7%. Weyerhaeuser began to implement a $30 per ton containerboard price increase and in late November announced another price increase of $40 per ton effective January 1. Weyerhaeuser also informed customers it was no longer tying containerboard sales contracts to price trade publication indices. Box prices slid $2 per thousand square feet on average in the fourth quarter as the mid-year price decrease in containerboard flowed through the box business. Implementation of the October price increase began in November. Weyerhaeuser announced another round of box pricing at the end of January. Industry box plant consumption was strong in the fourth quarter and Weyerhaeuser's box shipments increased 3%. All corrugated container prices dropped approximately 15% in the quarter.
Weyerhaeuser real-estate company. Single-family home closings, which are normally strong in the fourth quarter, hit an all-time record increasing 17% over last year's fourth quarter. The average price of homes closed in the fourth quarter was $506,000, a 10% increase over the average price of homes closed in the third quarter. The large number of home closings in Q4 reduced the backlogs of homes sold but not closed. However, the backlog is over five months and higher than at year-end 2004.
For our next discussion please refer to the waterfall chart which appears on our website. This chart compares third quarter earnings to fourth quarter and identifies the major items impacting the quarter. The following items reconcile third quarter 2005 earnings before special items of $0.93 per share to fourth quarter results. Higher prices for WRECO homes and for panel products more than offset declines in containerboard prices. That contributed $0.06 per share.
Lower volumes for forest and paper products reduced earnings by $0.01 per share. An increase of more than 50% in the number of single-family homes closed during the fourth quarter from the third quarter contributed $0.28 per share. Higher raw material and manufacturing costs reduced earnings by $0.37 per share. Energy costs accounted for $0.23, and the remainder was composed of freight chemicals and fiber costs. Other miscellaneous costs contributed $0.05 per share. The combined effect of these items resulted in non-GAAP earnings of $0.95 per share. I will now turn the call over to Steve Rogel.
- Chairman, President, CEO
Thank you, Kathy. To suggest that 2005 was a challenging and transformative year for our industry is an understatement. The industry experienced flat demand, excess capacity, and high production cost for paper-grade pulp, fine paper, and containerboard packaging. We witnessed significant changes in the structure of our industry as competitors made dramatic changes in their operations and portfolios. While our Timberlands, wood products, and real estate businesses maintained their steady performance, at Weyerhaeuser we took action and began implementing major changes to address structurally challenged segments of our company and to improve overall performance.
I noted in my remarks at a conference in New York in early December that 2005 felt like both the best and the worst of times. I don't need to dwell on the nature of the market challenges we're facing or the structural changes to our industry. You're familiar with them and understand the competitive pressures under which we operate today. More important is what we're doing about it. I can tell that you our Board, our top management team, and our employees understand the challenges and are working shoulder to shoulder to address them. We know what we must do to make Weyerhaeuser a stronger company. We understand the need to improve shareholder returns and the urgency with which we must act. Our business leaders are aligned and focused on doing everything necessary to improve our performance.
Our single-minded focus in 2006 is to achieve steady improvement in shareholder returns by driving improved business results and safety performance. It's just that simple. Our strategy is already in motion. In 2005, you witnessed our efforts to sharpen our operating performance, focus and streamline our businesses, and address underperforming assets. Because of our strong cash flow, we were able to do this while increasing our dividends by 25%, and we fulfilled the promise we made to shareholders during our acquisition period by returning to our historic debt to equity capital structure. Our balance sheet is solid.
The portfolio review we began last year has resulted in a number of actions. In our earnings release, you'll find a complete list of the closures and asset sales either announced or completed, so I need not go into details here. Because of these actions, our portfolio today is stronger, better balanced, and positioned to produce improved operating performance, shareholder return, and opportunities for future growth. We are confident that the steps taken and those to come will show up in the bottom line. We have a lot on our table to implement, so strategy execution will be our focus over the next few months.
Each of our businesses continues to assess the ability of their individual facilities and product lines to earn the cost of capital. Those that cannot make the grade do not belong in our portfolio. We've demonstrated our determination to address our business and market dynamics in 2005 through clearly focused business by business strategies. Our resolve is unwavering today. We will make the right decisions again in 2006 to achieve company goals.
Our strategic review goes well beyond closing or selling facilities. It's also about changing the way we operate, the way we go to market, the way we meet customer needs, and our vision to grow where we see opportunities. Our residential wood products and containerboard businesses are implementing sweeping changes in the way they operate their mills and deliver products to customers. These reorganizations represent fundamental changes in how we do business and each demands engagement, energy, and dedication from our employees. Clearly defined business goals are driving a new culture. These changes are enabled by an aggressive supply-chain management supported by strategic investment in information technology.
Consolidation in the home building industry is reshaping wood products markets by creating larger enterprises with the regional or national footprint. In response, we've completely reorganized our wood products business. In more than 40 years in this industry, I have never seen such a large organization undergo such a dramatic revolution. What is even more noteworthy is to see firsthand the incredible enthusiasm and energy of our people as they execute a new strategy that will reshape their business and reinforce Weyerhaeuser's primacy in the wood products industry. We are not standing by and waiting for the wood products business to change. We are leading that change.
Our containerboard and packaging businesses faces similar market challenges and they're responding with an equally aggressive strategy for change. Yes, we have seen a significant shift of manufacturing offshore and many packaging needs that have followed. But North America still has excellent opportunities for companies who understand and react quickly to changing customer requirements. Weyerhaeuser is that kind of company. Our containerboard acquisitions from McMillan, Bloedel, and Willamette provided us with the flexibility, the reach, and human talent to help us adjust. In the coming months we will detail our new approach to those changing to those markets.
Finally, our strategic review identified areas for growth. I've always told you that we will grow in businesses where we see proven performance and opportunities to strengthen the Company to increase shareholder return. We are confident that selectively growing our real-estate business represents such an opportunity. Our WRECO management team just achieved their eighth consecutive year of record earnings. While the industry has benefited from the strong home buying market, our real-estate business produces industry-leading returns and boasts one of the best management teams in the business. Each regional unit operates with a value proposition tailored to their target market, matched with a land position that has allowed us to maintain a strong competitive position. Our real-estate businesses have delivered outstanding results, and here we have an opportunity to grow in a way that will strengthen the Company and increase shareholder returns. At this time, I'd like to turn the call over to Dan Fulton, President of our Real-Estate business, and let him brief you on the real-estate business and some recent actions we've undertaken to grow. Dan.
- President, Real Estate Company
Good morning. Real estate and related assets reported earnings of $250 million for the fourth quarter of 2005 compared to $217 million for the fourth quarter of last year, and $145 million last quarter. The increase in earnings for the quarter on a year-over-year basis is attributable to higher single-family closing volume, coupled with stronger single-family margins from price increases implemented in prior months. During the fourth quarter of this year, we closed 1,922 homes, or 17% more than the fourth quarter last year. Single family margins for the fourth quarter were 34.3% compared to 32.3% in the fourth quarter of last year.
Real estate's fourth quarter earnings included a previously announced pretax charge of $33 million for impairment on undeveloped land located in northern California. This charge to earnings was recognized after voters defeated an initiative to annex and rezone the property to higher density. For the full year 2005, earnings for real estate and related assets were $734 million, a 20% increase from 2004. All of our operations participated in this success with each turning in a record performance.
As reported last quarter, our operations were impacted at the end of the third quarter by the hurricanes in Houston and by delays in providing utility services to homes scheduled for closing in Las Vegas. These circumstances caused a shift of approximately 65 closings from the third quarter to the fourth quarter of 2005. The average price of our homes closed during the quarter was $506,000, representing a 12% increase compared to the fourth quarter of last year. On a full-year basis, average sale prices increased 14% in 2005 over the prior year. With this increase in volume and average price, total revenues in the quarter were $1 billion, nearly 12% greater than the $911 million realized during the same quarter one year ago.
For the full year 2005, real estate's revenues were $2.9 billion, or 17% greater than the 2.5 billion revenue generated in 2004. Our single-family revenue accounted for 96% of total revenue during the fourth quarter, compared to 81% of total revenue for the fourth quarter of last year. On a full-year basis, single-family revenue accounted for 92% of total revenue in 2005 compared to 88% in the prior year.
We continued to generate strong gross margins on single-family closings as price increases implemented last year are now being captured at closing. Single-family margins were 34.3% during the quarter compared to 32.3% in the same quarter one year ago and 32.9% last quarter. On a full-year basis, our single-family margins were 32.8% in 2005 compared with 29.7% last year. The gross profit contribution from land sales activity was $3.6 million during the fourth quarter compared to $23.6 million in the same quarter last year, and on a full year basis, gross profit contribution from land sales was approximately equal to last year. $78.8 million in 2005, compared to $75.2 million in 2004.
With respect to sales activity, we sold 1,174 homes during the quarter, or 18% more than the same quarter one year ago. Sales declined seasonally from the third quarter to the fourth quarter by 27% this year compared to a 24% seasonal decline last year. And for the full year 2005, we sold 5,685 homes, or 6% more than in the prior year.
We're encouraged by the fact that our traffic patterns are showing strength on a year-over-year basis. In the fourth quarter of this year, traffic to our communities was 17% greater than during the same quarter one year ago. Traffic patterns in the first few weeks of 2006 are also very strong on a year-over-year basis, up 24% in January. Southern California and Las Vegas are especially active with favorable traffic and sales volumes on a year-over-year basis. The markets in the Washington D.C. suburbs have weakened after several consecutive years of sustained expansion with weakness more evident in Virginia than Maryland. However, the overall job market fundamentals remained favorable. Houston has shown significant improvement starting in the middle of the fourth quarter, seemingly a result of oil industry related job growth.
Contract cancellations during the quarter were 18% compared to 14% in the same quarter last year, and 21% last quarter. For the full year of 2005, contract cancellations were 16% compared to 14% last year. Our backlog of 2,410 homes sold but not delivered is 2% higher than a year ago. This represents approximately five months of sales this year compared to six months sales at this time one year ago. Aggregate future revenue from our backlog is approximately 1.265 billion, which is about 16% higher than last year at this same time.
Note that we continue to experience a seasonal rhythm in our markets of stronger sales in the first half of the year followed by a strong closing volume in the last half of the year. For the last several years our backlog is at its seasonal low at the end of the year as fourth quarter traditionally represents our highest closing volume quarter. With the exception of TrendMaker in Houston, our home building operations are generally presellers of their product. We'll also build a limited number of specs from time to time as a means to efficiently utilize production capacity including deployment of subcontractors. At the close of 2005 we had an inventory, a total of 110 homes completed but unsold compared to 117 at the same time last year. Real estate and related assets generated cash of $586 million during 2005 prior to reinvesting in land and deposits of $459 million. Total assets as of year end are 2.9 billion compared to 2.5 billion at the end of 2005.
We continue to restock our land and lot pipelines as desirable opportunities become available. Currently our land pipeline of lots owned and controlled through option contracts and deposits represents an approximate 5.4-year supply to satisfy estimated future housing demand. We customarily take longer positions in the more highly regulated geographies that have extended time requirements for approval. Approximately 43% of our current land pipeline is owned.
Though we expect some cooling in 2006, we continue to be optimistic about our housing business over the long term. At the investor conference that we hosted last May in Reston, Virginia, at which we introduced you to the WRECO business and our senior management team, we shared this view of the future and we indicated that our objective was to gradually grow our business at a measured pace in a three-pronged manner. Our first priority is to continue to grow organically in our existing markets and our 7% year-over-year growth in closings reflect this plan. You can expect this trend to continue as we have opportunity to increase share in all of our markets.
Second, we will grow in markets which are proximate to our existing operations where we can leverage our regional brands and management. In 2005, we made steps to expand Pardee in northern California and Quadrant in the Portland, Oregon, metro market. We'll have construction activities in these new areas in 2006 with initial home deliveries in 2007.
Third, we have indicated that we would expand into select new market, either through acquisition or start-up. Consistent with this direction, earlier this week we announced that we have entered a definitive agreement to purchase Maracay Homes, LLC, a privately held homebuilder based in Phoenix, Arizona. We view this as a measured step in the overall WRECO strategy. As we evaluated potential new markets for expansion, Phoenix emerged as our most desirable opportunity. It is one of the perennial highest volume markets in the country, it shares many of the characteristics of our southern California and Las Vegas markets. We believe that it has great long-term prospects for continued growth as migration to the sun belt continues unabated, and along with other border states, it benefits from steady immigration. Finally, it's a market where we have had a significant experience through our Weyerhaeuser realty investors subsidiary which has maintained an office in Scottsdale for nearly ten years.
Maracay is the 20th largest builder in the Phoenix with closings of approximately 650 homes last year, revenues of approximately $270 million. Founded in 1991, Maracay has generally targeted first and second-time move-up segments but is capable of extending its market reach up through the luxury market segment. The Company offers its customers a high level of design and construction choices in customizing their homes. Maracay has a current sales backlog of approximately 350 homes.
We were attracted to Maracay for a number of reasons. First, their management team is proven and well-known to us through a business relationship with Weyerhaeuser realty investors first established nearly ten years ago. We're fortunate to have been able to retain the entire Maracay management team to operate the Company as a subsidiary of WRECO into the future. Second, the performance orientation of Maracay's culture will assimilate easily into the WRECO family. They have a proven value proposition that we believe we can use as a platform for additional growth in Phoenix and also in Tucson. Finally, Maracay has assembled a very desirable land position. At this time Maracay controls more than 8,000 lots. This land position is well diversified across the entire Phoenix metro market area. Of their total lot pipeline under control, approximately 80% is owned and 20% is optioned. This high level of ownership contrasts with WRECO's current level of 43% owned.
The size of this position and its level of ownership will give us operating flexibility to both grow the business as well as to rationalize ownership levels over time to ratios that are more consistent with the rest of WRECO. We believe Maracay to be a perfect fit in terms of further geographic diversification, compatible company culture, and market-tested strategies. By combining Maracay's proven competitive edge with WRECO's strength, <Maracay will be well positioned to reach its potential in both the Phoenix and Tucson markets. We expect to close on the Maracay transaction in the middle of February. As is typical in the home building industry, this is a private acquisition and it was agreed between the parties that we will not be disclosing the transaction details. We can say that we do not expect to book any goodwill and we expect the deal to be accretive for the year 2006. Now I will turn the discussion over to Dick.
- CFO
Thank you, Dan. As we look -- enter this first quarter of 2006, and look out to 2006 we're experiencing improving conditions in most of our businesses. In Timberlands, log prices are improving. In both the export and domestic markets with volumes remaining steady compared to fourth quarter levels. Higher prices are expected to be offset somewhat by higher costs in the south associated with continuing salvaging of the hurricane damaged timber. Earnings, therefore, expected to remain relatively flat in this segment in the first quarter of 2006 when compared to 2005. 2005's fourth quarter.
In wood products, after declining for most of the fourth quarter, most wood products prices began improving in December. Prices for the first quarter are expected to average a value similar to the fourth with volumes increasing seasonally from the fourth quarter. Raw material costs are expected to increase modestly, resulting in a modestly lower earnings from the fourth quarter when we exclude the charges from facility closures that occurred in the fourth quarter.
In cellulose fiber and fine paper, as Kathy noted, prices are improving in a number of pulp and paper grades. Cost pressures are beginning to moderate, and we expect this segment to be modestly profitable in the first quarter as we begun implementing previously announced price increases. The situation is similar in containerboard packaging. We've begun increasing box prices on the heels of the previously announced liner board price increase, and OCC costs are expected to continue to decline in the first quarter. We expect this segment to also return to profitability in the first quarter.
As Dan noted in his comments in real estate business we expect to see a seasonal decline in single family closings in the first quarter from the fourth. Single family closings are expected to be similar to year-ago levels resulting in a significant decline in earnings when compared to the seasonally stronger fourth quarter. Other items of note for the full year, capital spending for 2005 was approximately $875 million, and we continue to manage against a capital spending budget of 850 million for 2006. Our pension expense for 2006 will decline approximately $40 million from the 2005 level as we continue to experience significant returns in our pension fund. Our debt was reduced by approximately $600 million in the fourth quarter, bringing our total debt reduction for 2005 to $2.1 billion.
We purchased 174,000 shares of stock in the fourth quarter. For several reasons we were limited to the number of days we could be in the market in the fourth quarter, but we still expect to complete the share repurchase program within the two-year time frame authorized by our Board. Lastly, we expect our tax rate in 2006 to fluctuate between 34 and 34.5%. And with that brief overview on the outlook, I'd like to turn the call back to Kathy so that we can take your questions.
- VP, IR
If you could open the more to questions, please.
Operator
[OPERATOR INSTRUCTIONS] Your first question comes from Mark Connelly of Credit Suisse.
- Analyst
Thank you. That was a great rundown. A couple of different things. The charge in the wood products division of 91 million, it seemed like a big charge to me for those three closures. Can you give us a sense of what's in there? Maybe I just need to be recalibrating.
- CFO
Well, Mark, in addition to the closures, as a result of the closure of the paper machine in Prince Albert Saskatchewan and the anticipated sale or closure of the pulp mill in April, by April, we had to recognize an impairment charge to the sawmills associated with those who supply chips to those mills because their future is somewhat in doubt, depending on the outcome of the disposition of that pulp mill in Saskatchewan.
- Analyst
That makes perfect sense. Thank you. Wondered if you could give us a little more color on what's going on in uncoated free sheet. We've seen some success with prices so far. Now we see producers getting more bullish on the cut size. Can you tell us how tight that business feels to you? You did say that the backlogs are up.
- Chairman, President, CEO
Mark, this is Steve. I'll take that one. We have significantly tightened markets. Our business volumes are very strong with our major customers, particularly in the cut size arena, and we're highly confident of getting the price increases in place. I personally visited with some of our major customers, and their big concern is that we can continue to supply their growth.
- President, Real Estate Company
I'd just add, Mark, that as you know, we closed the -- we shut down permanently the paper machine in Prince Albert, and we are managing the -- our customer shipments with less volume and we're managing in anticipation of the closure of the machine and Dryden in early April. And so that has made our system very, very tight.
- Analyst
Okay. Just one last question. I don't know if you can answer this or not. But with respect to the acquisition of Maracay can you give us any sense of why Maracay was interested in selling? Is there a generational change or anything going on there that you can speak to?
- President, Real Estate Company
I'll address that, Mark. Maracay has some partners in the business that are managers, then they had two passive partners, and the passive partners had decided to exit the business.
- Analyst
Got it. That's very helpful. Thank you.
- VP, IR
Next question, please.
Operator
Your next question comes from George Staphos of Banc of America Securities.
- Analyst
Steve, I had a question for you. I just wanted to make sure I understood you correctly. You said the primary priority for this year will be to improve the share performance through, I guess, operational performance. I might be paraphrasing. Does that mean that you are confident that you will get the operating performance you expect from the plans that you already have implemented? Or that you may see some additional strategic moves, and that we might see some strategic moves out of the Company over the course of a year?
- Chairman, President, CEO
The answer, George, is we do expect operational improvements from the things that we have put in place. Our plants and mills are all operating at a high level of operational efficiency. We have accommodated the tremendous increase in energy costs that impacted direct energy spend as well as transportation and chemical costs. We're beginning to get the price improvements back out of the market that cover those and take us beyond. So from an operational sense, we do expect 2006 to be a good performing year. With regard to the other strategic moves, with regard to the announced sales and disposition of assets, we do expect to be moving forward aggressively on those, and we see good activity in the sales that we've already completed and those that we have out there. With regard to other strategic elements that are underway, those are unannounced at present, but as we bring them forward you will be the first to know.
- Analyst
So there could be even more on the strategic front, and it won't be full year driven by operational improvement? That's the summary?
- Chairman, President, CEO
Yes. We do have strategic moves that are underway, and certainly that's an ongoing process for us.
- Analyst
Okay. Fair enough. With regard to Maracay, if you could give us a feel for the market, we've understood from some of our sources that the Phoenix market has maybe shown some signs of cooling down. Would you agree with that? And also, separately, what's driving the significant improvement in profitability for closing? Has it been purely market and pricing related, or are you starting to get the benefits from some of the strategic moves you've made, vis-a-vis wood product and modular home building et cetera. Thanks.
- Chairman, President, CEO
A two-part question. We have begun to see some cooling in the Phoenix market, as we've seen in a number of the markets in the west. We've built in that assumption as we go forward, and I think what we're seeing is just some adjustment as we have in a number of our markets where the level of price appreciation is slowing, and builders and buyers both adjust. With respect to the profitability of the business, I think what you're seeing is ongoing price appreciation in the markets in which we do business, and so that's a function of both overall market activity, plus the land position that we've been able to control, which really gives us a very attractive, competitive position.
- Analyst
Last question and I'll turn it over, Dick, what was the adjusted tax rate for the quarter? We were getting something in the low to mid 20s, but there were so many moving parts, figured we would ask.
- CFO
George, you were breaking up on the call. I didn't understand the question.
- Analyst
Forgive me. The adjusted tax rate, what was that in the quarter? We calculated 20 to 25% but there were lots of moving parts.
- CFO
Well, the tax rate for the quarter was 33.3%. It was, as Kathy noted on the call, there was a small tax change, and that was really associated with the fact that the tax rate associated with the charges that we took was different than our normal ongoing tax rate.
- Analyst
Okay. Thanks very much.
Operator
Your next question comes from Edings Thibault with Morgan Stanley.
- Analyst
I was wondering if I could dig in a little bit more deeply to your comments I think Kathy made on the containerboard segment in which you highlighted that you had, in fact, delinked your contracts from the price indices. Is that now implemented across the entirety of your business or just in those contracts that were up for renewal?
- Chairman, President, CEO
Edings, this is Steve. As we negotiate contracts when they come up, we are negotiating out of those. Some are in place. Others, it takes time to do because the contracts are in force, and, of course, we have to live by the terms of what we've negotiated in the past. So it takes some time to work out of it.
- Analyst
Does that mean the new segment is, your box prices are entirely -- I won't say entirely, but in that concept, would be divorced from your liner board prices or your containerboard prices? Or do you still link the two, it's just linked internally in Weyerhaeuser?
- VP, IR
It's delinked, Edings, from the index, and the first move is delinking the linerboard and corrugated medium prices from the index, then the second move is to begun to renegotiate when the contracts come up on the box side, not delinking them from our negotiation with the customer on price change, but from the public -- published indices.
- Analyst
Got it. Then a follow-up to that, just to be sure. I think, Kathy, you said your corrugated volumes were up 3% in the quarter, but your sales volumes were up 9% as per the release. Can you talk about the difference, or did I just mishear something?
- VP, IR
Edings, let me get back to you on that. I just want to double-check what you're getting. Okay?
- Analyst
Okay. Great. Sorry. One final question is for Dan. Where do you see Maracay in a few years? It's about 1% of the Phoenix market, maybe one and a third percent of the Phoenix market in 2005. Just conceptually is your view with consolidation amongst large builders that you would anticipate that would be 4% in five years? 2%? What kind of rate of growth should we expect in terms of the pace of either consolidation or simply the large guys getting the bulk of the growth?
- President, Real Estate Company
Well, I think you'll continue to see consolidation and Phoenix is a market that's dominated by large builders. The very few privates actually in that top 20 with the one large exception being Shea. We would expect Maracay's volume to grow gradually at what I would say is a steady pace, based upon market conditions. They've got the land to do. I can't give you a particular percentage in part because the other players keep changing, and there's a function there that there may be further consolidation even among the existing players. Our goal is to take advantage of the market, to take advantage of their land position, and get back to, Mark Connelly's point, I think we have the opportunity with our sponsorship to see the business grow at a little bit faster rate than they might have in the past, just because of change in sponsorship.
- Analyst
Great. Thanks.
Operator
Your next question comes from Chip Dillon of Citigroup.
- Analyst
I just had one clarification. You mentioned in terms of the volumes in uncoated free sheet being I think changed just a little bit, up 1%. Was that versus the third quarter or versus the year-ago quarter?
- VP, IR
Versus the third quarter, Chip.
- Analyst
So that's versus the third quarter. Okay. And then you did -- when you look at your home building business, you mentioned closings would be similar to first quarter '05, and you made, 183 million then. It would seem that given the price increases we've seen throughout '05, that you probably would do something above that number, even though obviously it's going to be well below the level we saw in the fourth quarter of '05. Could you help us a little bit with that?
- Chairman, President, CEO
We expect a modest increase in volume in our first quarter '06 versus '05, and as I commented, when I talked about the value in our backlog, we've had continued increases in prices over the last year, and those price increases will be rolling through the P&L as we close those homes in the first quarter.
- CFO
I would only add, Chip, that my recollection in the first quarter of '05, we had a land sale that contributed to the earnings in the first quarter that we would not expect to see repeated in the first quarter of this year.
- Analyst
And so what space would you use for last year? I'm not sure. I have 183 in my model. I'm not sure if that included that land sale or not, to be candid.
- Chairman, President, CEO
Actually, that land sale was -- contributed $57 million to earnings first quarter of last year.
- Analyst
right. And so it would have been like 120, or something much lower then, is what you're saying.
- Chairman, President, CEO
Right.
- Analyst
Okay. So you're even looking for it to be below the 183 because of the lack of the land sale.
- Chairman, President, CEO
Probably.
- Analyst
Okay. Thank you.
Operator
Your next question comes from Mark Wilde of Deutsche Bank.
- Analyst
I wanted to step back to the containerboard business for a minute. One of the statistical sheets that you have shows that your MSF volumes were up about 9% year-over-year. I wondered if you could talk about that? Then just give us maybe some sense of how box pricing might work going forward. I think some people in the business had had a few contracts that were tied to things like OCC costs.
- Chairman, President, CEO
First of all, our volume is up, and I think that represents the improvements in our business model, and going to market in different ways into a variety of different customers. And, by the way, in our discussion this morning, we talked about the early review of the changes in the way our corrugated business will go to market to meet customer demands in the future, so I'm expecting their continued growth. The second part of your question, Mark, was?
- Analyst
Just to get some sense if we're not going to tie things to the trade papers, what the new mechanism might be for trying to negotiate box prices?
- Chairman, President, CEO
Well, as we get into the contracts and discussions with our customers and usually these are with the bigger customers, we'll know more about that after we come away, but we're trying to negotiate strictly on the basis of our box price, our inputs of costs and the margins that we have to have to make a return on capital.
- Analyst
All right. Then, Steve, moving over to your pulp business, I noticed that Stora is talking about two more pulp mills in Latin America. I think one of the Latin players has started to move into the fluff business. Has your view of that business changed further just in the last year or two?
- Chairman, President, CEO
Of the pulp business in general or the fluff?
- Analyst
Actually both.
- Chairman, President, CEO
Well, certainly I think they're on somewhat different tracks. The paper grade pulps are going to be influenced heavily by the new capacity in South America. Because those pulps, primarily eucalyptus, are going into the paper grade and, of course, the tissue toweling area. With regard to fluff, although it's a fairly mature market in North America, it still has growth elements left both in what we call the diaper business, but also as our country ages, the adult incontinent business. Our business is continuing to grow very well because of the differentiated products we have in chemically modified plops. For us, that is a very nice and growing business.
- Analyst
Okay. And then finally, Dick Taggart, can you give us a little more color on accounting change that was listed as one of the gains in the quarter?
- CFO
I'll try. I have the Controller here, so she can pipe in, but this was an issue that was raised by our auditors recently that we should change the approach we use in capitalizing interest for the real-estate company. The real-estate company had assets -- investments that qualified for capitalized interest treatment that exceeded the interest expense in the real-estate company, and it was deemed that it was appropriate for us to capitalize Weyerhaeuser Company interest against the real estate company assets. And -- after going through extensive discussions with our auditors we concluded we would adopt this practice and have done so, and that we'll be our accounting treatment going forward should the real-estate company assets qualify for capitalized interest that exceeds the interest in the real-estate company, we will capitalize Weyerhaeuser Company interest as appropriate.
- Analyst
Okay. Thanks, Dick.
Operator
Your next question comes from Mark Weintraub of Buckingham Research.
- Analyst
Thank you. Can you update us with any hedging on the energy side that you might have in place first?
- Chairman, President, CEO
Well, Mark, as we indicated on our last conference call, we hedge about 30% of our natural gas requirements on a programmatic basis, and we continue to do that. And so we still are about 30% hedged for our natural gas requirements. Our average cost, net of the hedges, increased from about $7 per million BTU's in the third quarter to about $10 in the fourth quarter.
- Analyst
Great. And then on the packaging business, it's a pretty big loss, and I imagine that your energy position played a significant role in that. Strategically, are you thinking about actions to try to improve your flexibility or your energy position in this packaging area?
- Chairman, President, CEO
Good question. Our capital investment direction is virtually all aimed at efficiency and energy. We have virtually no capital going in those businesses, containerboard into capacity, so it's a good observation. Spending a lot of money improving our energy efficiencies.
- CFO
One of the other things that contributes to that Mark, for us, is that it's, as you know, the machine we're closing in Plymouth, North Carolina, is a recycle machine. It is the nature of recycle facilities that they utilize more natural gas because they don't have the black liquor and the byproducts of the pulping process to use for energy consumption, so as we reduce our exposure to recycled fiber we will also be reducing our relative natural gas consumption.
- Analyst
Then just shifting gears one second if I could, on the wood product side. I guess results for the fourth came in a little better than I might have imagined given the seasonal weakness, the lower prices, the higher manufacturing costs. Is there a simple explanation for it? Was distribution stronger than in the fourth quarter, or some other element that you can help clarify?
- CFO
I think it's mainly, Mark, the timing of that when reported prices end up flowing through our P&L. I think that there certainly is some relationship to the fact that we were higher than expected this quarter but lower than expected last quarter. And it has to do with, I think, the timing of how things flow through our system because of the distribution business.
- Analyst
Okay. Thank you.
Operator
Your next question comes from Rich Schneider with UBS.
- Analyst
I was wondering, Steve, if you can comment on how long you think it it would be before you complete this phase of your ongoing restructuring review.
- Chairman, President, CEO
Well, the easy answer, Rich, is our strategic review is ongoing and we'll be continuously going through our businesses and focusing on those that aren't performing well, fixing them, selling them, or closing them, and adding to those that are going to do well in the future, such as this recent acquisition with Maracay. So it's an ongoing process. As we come to conclusions and can reveal them to the public and to you folks, we will do that. But at this stage, the thing that we can assure you is this is a continuous process.
- Analyst
But wouldn't sort of the bulk of what you're doing you'd like to probably get done in a certain period of time and obviously you look at things on a more even pace going -- beyond that?
- Chairman, President, CEO
Well, the thing about any particular strategic direction we're taking and let's talk about divestment, for example of the composite panel plants. It always takes longer than people think to get a project like that done. By the time you get through preparing for sale, the analysis, the bid process, the negotiating process, it takes many months more than people expect.
- Analyst
Okay. Just on that issue of the accounting change, Dick, is that going to have any immediate effect on increasing capitalized interest, for example, in the first quarter, as you see it?
- CFO
It will have a very small effect. What we booked was the cumulative effect of many years of the alternative treatment that -- to provide the catch-up. On an ongoing basis, it will be something less than 3 or $4 million a quarter, perhaps, in a strong quarter it might reach $0.01 a share.
- Analyst
Okay. And the loss, the swing in -- from profits to a loss in the pulp and white paper area was much larger than I would have expected, a $70 million swing. Then you mentioned that you think you're going to be profitable in the first quarter. I know pricing going from third to fourth was fairly flat. So again, this was energy, and then, to swing back to profitability in the first quarter, I'm trying to understand that. I know there's price initiatives, but these are huge swings. Could you go through some of the elements of that?
- CFO
It is primarily price, both in pulp and in fine paper. We will have at least the closure of TA behind us, and we will be doing the preparation for Dryden, but our mills are running better, the closures are reducing our system to those mills that are most efficient and will run most efficiently and we'll continue to run them pretty well flat-out with the lower capacity against our customer needs, and we've been -- we anticipate to be successful in both the pulp and paper price increases that will be initiated here beginning in February in paper and earlier in pulp.
- Analyst
Okay. And the swing from the third to the fourth quarter, your pricing that you detailed in both pulp and uncoated free sheet was pretty flat in the fourth quarter compared to the third. So the big decline of $70 million, that was primarily related to energy and input costs?
- CFO
Primarily, yes.
- Chairman, President, CEO
I think that our operations in Canada are impacted much more heavily because of longer transportation, and that's tied to energy as well, energy itself is more expensive, and, of course, the strong Canadian dollar impacts us.
- CFO
And also, Rich, remember that pulp and paper product are sold on a delivered cost basis. So the increases in freight costs flow into cost of goods sold.
- Analyst
Okay.
- CFO
And there were significant increases in freight as well.
- Analyst
Okay. Just last question, Dick, you had mentioned that you thought wood Products could be down a bit in the first quarter and you said that you expect higher energy and raw material costs in wood in the first quarter, yet, we are experiencing some lower natural gas prices. I'm just trying to understand where the higher energy and raw material costs would be impacting you in wood in the first quarter versus the fourth?
- CFO
It primarily impacts you in the fuel charges you're continuing to pay, but the big impact in wood products will be primarily for the higher log costs that we talked about in the Timberlands business.
- Analyst
Okay. Thanks.
Operator
Your next question comes from Rick Skidmore of Goldman Sachs.
- Analyst
Good morning. Just two quick strategic questions, Steve, if you will with regards to the uncoated free sheet business where you talked about addressing structurally challenged businesses, knowing what to do, and the businesses that don't make cost of capital, perhaps don't belong in Weyerhaeuser. What is it that's -- that you're looking at that will swing your decision either way with regards to that business? And then second question, with regards to real estate and the acquisition that you made, does this -- should we expect that there will be another one soon, sooner rather than later, or does this essentially fulfill the growth for real estate in the near term, next one or two years?
- Chairman, President, CEO
Real estate, first, I think Dan's words were measured growth. The way they approach their business is they take it on when they think that they have everything else put to bed. So they're going to be working the Maracay acquisition into the Company, getting it into Tucson, getting things leveled out, then they will be looking at other activities. Uncoated free sheet you mentioned. The first strategic steps for us in uncoated free sheet, of course, were the closure of excess capacity, and I think that's the story of that business, that industry, is with the electronic revolution, we've just had too much capacity to meet the demand. So our first steps were to get the house in order and our capacity to match our demand. As Dick just indicated, we still have work left to do there. Then we have to monitor our markets and see if we've made enough changes to it to bring that business to a cost of capital.
- Analyst
Okay. So it's really assessing after the changes that you're making to see where you stand before the next strategic decision gets made there?
- Chairman, President, CEO
That would be fair.
- Analyst
Thank you.
Operator
Your next question comes from Peter Ruschmeier of Lehman Brothers.
- Analyst
Thanks. Good morning. Steve, I wanted to ask a question, if I could, about your cash flow and your balance sheet, net debt declined 600 million in the quarter and is down about 6 billion in the last three years. You have a high class problem. I'm just curious about how you're thinking about your free cash flow even with your buyback and even with acquisitions that you've made in housing, that's basically one year's worth of cash flow for the Company. Are you thinking any differently about the ideal capital structure for the Company or do you still think that you should have a very conservative position? I'm just struggling to see where you're going with the free cash flow.
- Chairman, President, CEO
Well, certainly our highest priority is to reward our shareholders. Last year we increased the dividend dramatically. We announced a stock buyback that we are just getting underway. We started that up in a quarter where we were essentially blacked out for a lot of the time. So we think that we're going to maintain our capital spending in a reasonable range. We're in the 850 to 870 a year. We don't plan to change that dramatically. It's keeping our capital ratios right but reward the shareholder.
- Analyst
Can you comment on special dividends, as to whether that's something that you might give consideration?
- Chairman, President, CEO
I can't give an opinion on what the Board might do. That's their prerogative. But certainly we've given indications with our last dividend increase that it wouldn't be ten years before you saw another one.
- Analyst
Okay. Question for Dan, if I could. I'm curious about the capacity of the home building business now. And I guess what I mean by that, is assuming a very robust housing environment, or stable environment here, I'm curious on what you think the potential for closings could be in 2006, recognizing that the market is going to dictate, but from your end, in terms of what you can bring to market, can you help us to understand what you would be shooting for?
- President, Real Estate Company
I think you can look at the kind of growth that we've had the last several years, which has all been organic, and project out. We don't make specific forecasts of closings, but we'll have steady organic growth. As I mentioned, as we look into the future, our existing operations are growing, plus they are edging out. So I mentioned Pardee in northern California, and I mentioned Quadrant in Portland. So effectively they're moving into some new markets. You won't see closings until next year. But we think we have the opportunity to continue to edge it up. Interestingly, we don't have all the numbers for '05. In '04 we were the 16th largest homebuilder in terms of volume in the country, and we had a market share of less than 0.5%. So we've got a little bit of room, and I think you'll see this ongoing shift towards the public homebuilder community, and we intend to participate in that.
- Analyst
Okay.
- VP, IR
Thank you, Pete. We're running rather late. Could we just take one more question.
Operator
Yes, ma'am. The final question will come from Steve Chercover with D.A. Davidson.
- Analyst
Two more questions on home building please. First of all, you've got better than a 10 year land position at Maracay at the current build rate. Is that typical across your other WRECO companies?
- Chairman, President, CEO
I commented in my remarks that we have roughly I think 5.6 years. We adjust that, look at it every quarter, because it's a bit of a moving target as you flow lots into production and also there's some estimate of growth potential. So that's a longer position than is typical, and it reflects two things. I think one is, the potential for growth, so they can grow into some of that, but I would also expect, as I mentioned, to rationalize some of that because it may be a little bit longer position than we need, and our goal would be to try to position the Company longer term for growth, but at the same time, to bring down the ratio of lots owned versus those that are optioned to something that's more similar to what we see in the rest of WRECO.
- Analyst
Well, hopefully the second question hasn't already been answered, but in terms of growing into peripheral markets, like taking Quadrant into Portland, and going into Tucson, do you find that you need to have an existing presence in a region to address the kind of peripheral markets, or could you go greenfield in an area where you have no presence at all?
- Chairman, President, CEO
It's certainly possible to go greenfield. Our preference is to move into markets that we know something about, and especially where we can extend our local management. We just think it is still a local business. It's a business that's based upon local knowledge, local contacts, local politics, and we always err on the side of valuing the relationships that our own people have in their markets, or in the case of an acquisition, being able to inherit relationships that have been built over a long period of time.
- Analyst
Are there any areas where you'd like to be maybe five years from now, or is it just the high-growth areas across the country?
- Chairman, President, CEO
In our remarks last May, we talked about -- the markets that are attractive to us are those that have prospects for higher than average growth, but most importantly, markets in which we believe we can establish or maintain a competitive edge. As you can see by our numbers, our margins are higher than many other builders, and that's really a function of the markets that we're in, and the fact that we're more of a regional player, not national. And so I would expect that that's what's going to drive our decision process as we move forward.
- VP, IR
Thank you, Steve, and I would like to thank everyone for their questions, and now we'd like to turn the call back to Steve Rogel for a few closing remarks.
- Chairman, President, CEO
Okay. Thank you, Kathy. As we look ahead to 2006 and beyond, we are confident that we're on the right path to address the structurally challenged segments of our industry and to improve our overall performance. Everyone, our Board, top management, and employees, understand the challenges we face, and we're all working to address them. In 2005, that commitment resulted in some significant actions, but they are not the last. Our single-minded focus in 2006 is to achieve steady improvement in shareholder returns by driving improved business results and safety performance. Some of that will involve additional adjustments to our portfolio.
Our strategic business review continues to assess the ability of our individual facilities and product lines to earn the cost of capital. Those that cannot make the grade do not belong in the portfolio. But 2006 also promises to be a year of opportunities for Weyerhaeuser. We will look for additional growth opportunities for our real-estate business, our residential wood product and containerboard businesses will continue implementing innovative changes in the way they operate their mills and deliver products to customers. We will develop further alignment and focus to improve our performance. 2006 will be a year of challenges, but it will also be a year where we take the necessary actions to make Weyerhaeuser a stronger company. We look forward to reporting to you on our progress in the months ahead. Thanks for your interest in Weyerhaeuser and for participating on today's call. Good day.
Operator
Ladies and gentlemen, this concludes today's conference. You may now disconnect.