威爾豪瑟 (WY) 2006 Q1 法說會逐字稿

Good morning. My name is Brian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Ms. McAuley, you may begin your conference.

Thank you, Brian. Good morning. Welcome to Weyerhaeuser's first quarter 2006 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations. Speakers this morning will be Steve Rogel, Chairman, President and Chief Executive Officer; Patty Bedient, Senior Vice President, Finance and Strategic Planning. Also with us today are Dick Taggart, Executive Vice President and Chief Financial Officer; and Jeanne Hillman, 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 Meier at 253-924-2937 if you need any additional information. Please review the warning statement in our press release and on the presentation slides concerning the risks associated with forward-looking statements. We will be making forward-looking statements during this conference call. I will now turn the call over to Steve Rogel. Steve?

Thank you, Kathy. Earlier today we announced that we're considering strategic alternatives for our fine paper business. These alternatives range from continuing to hold and operate the assets to a possible sale or other disposition. In the process of these deliberations and following a review with our Board and consultation with our auditors, we've concluded that the goodwill associated with that business is impaired. We have reflected our current estimate of the impairment in our first quarter earnings release.

While we are in active discussions with several parties and the release will obviously generate numerous questions, there are few additional comments that we can add to our press release. As you know, it is our policy not to comment on rumors or speculation and we'll adhere to that policy on this call. There are, however, a number of items we do want to discuss regarding our first quarter performance. And I'd like to have Kathy review the quarter. I'll make a few brief comments before Patty Bedient, our Senior Vice President of Finance and Strategic Planning, discusses the outlook for the second quarter. Kathy, back to you.

Thank you, Steve. This morning Weyerhaeuser reported a first quarter 2006 loss of 580 million or $2.36 per diluted shares on net sales of 5.4 billion. The quarter included the following after-tax items. A charge of $746 million, or $3.03 per diluted share, for the estimated amount of a write-off of goodwill associated with the fine paper business -- this is as Steve just discussed; non-recurring income of 12 million or $0.05 per diluted share in WRECO. This income was associated with insurance recoveries and the recognition of deferred income in connection with partnership restructuring.

A charge of 17 million or $0.07 per diluted share for foreign exchange losses. A charge of 14 million or $0.06 per share related to the adoption of FASB statement 123(R), the stock based compensation accounting standard. This charge is expected to be approximately 2 million to 4 million per quarter during the remainder of 2006. Significant fluctuations in the Company's stock price could cause the charge in future quarters to be above or below the estimated range.

A GAAP reconciliation of non-reoccurring items is available on our website along with the presentation material for this conference call. A segment breakdown of earnings per share and selected quarterly net price realization charts were included in these materials. I will now review sequential quarterly business trends by segments first quarter 2006 versus fourth quarter 2005. Please refer to the earnings per share sector breakdown and net price realization charts which are available on the website.

Beginning with Timberlands. Timberlands contributed $0.03 per share to operating earnings due to higher log prices. Export log prices increased 4% in the quarter and Western domestic log prices rose 7%, more than offsetting a 2% decline in log prices in the South. Log volumes decreased 5% despite a 1% increase in export log volume.

Wood products. Wood products' operating earnings were flat this fourth quarter. Average lumber prices increased $13 per thousand board feet. However, lumber shipment volumes declined 7%. Plywood prices declined $8 per thousand square feet and volumes dropped nearly 20%. OSB prices declined $19 per thousand square feet, but volumes rose 1%. Engineered wood product prices and volumes were steady in the first quarter. Manufacturing costs for lumber products remained constant from quarter-to-quarter. Engineered products' manufacturing costs declined slightly due to higher productivity. CDD and AD duties were $11 million in the quarter.

Cellulose fibers and white papers. Price improvements for pulp and paper grades contributed $0.09 per share to operating earnings for the quarter. Pulp prices increased $21 per ton in the first quarter and shipments increased 3% due to less maintenance related downtime. Fine paper price realizations increased $17 per ton. Shipments declined 2%, largely due to the January closing of Prince Albert paper operations. Energy costs remained stable at the high level of the fourth quarter. Higher raw materials and chemicals costs offset improvements in productivity and lower freight costs.

Containerboard packaging and recycling. Higher containerboard and packaging prices resulted in an $0.11 contribution from this segment to operating earnings. Containerboard prices increased $31 per ton in the first quarter. Shipments, however, were over 20% below fourth quarter levels due to lower volumes available after the closure of the Plymouth, North Carolina containerboard machine.

OCC prices declined $6 per ton. Slightly higher labor costs were offset by lower transportation and energy costs. Average box prices net of freight increased 4% in Q1. Box shipments declined 4% following exceptionally strong fourth quarter box shipments. On a year-over-year basis, box shipments were 5% higher than the first quarter of 2005.

Weyerhaeuser real estate company. As expected, first quarter WRECO earnings were seasonally lower following a record fourth quarter 2005 earning, accounting for $0.34 per share decline in first quarter earnings versus fourth quarter. Operating results in the first quarter included a pre-tax gain of $33 million from land sales. Last year's first quarter included land sales of $57 million. Fourth quarter land sales were only 3.6 million.

Single-family home closings declined from a seasonally strong fourth quarter and were slightly below first quarter 2005. Due to this mix, the average home price declined from 506,000 in the fourth quarter to 485,000 in Q1. But year-over-year, first quarter average home prices were 8% higher. Single-family home margins contracted from 34.3% in fourth quarter to 30.9% in first quarter 2006. This was also due to mix.

Last year's first quarter margins were 32%. The backlog of homes sold, but not closed increased to 5.5 months of supply from 5.1 months at the end of Q4. The backlog also increased slightly from the 5.4 months of supply backlog that we had at the end of Q1 2005. The average sales price of homes under contract in the backlog is now 536,000 compared to 525,000 in last year's quarter -- fourth quarter. The cancellation rate declined 19% in the first quarter from 22% in the fourth quarter. Last year's first quarter cancellation rate was 15%. Maracay operating results were included from mid-February.

For our next discussion, please refer to the waterfall chart which appears on our website. This chart compares fourth quarter 2005 operating earnings to first quarter 2006, and identifies the major items impacting the quarter. The following items reconcile Q4 earnings of $0.94 per share to first quarter 2006 operating earnings of $0.62 per share.

Lower volumes in wood products, Timberlands and containerboard reduced earnings $0.07 per share. Higher prices for containerboard and packaging products, cellulose fiber and white paper grades, wood products and Timberlands contributed $0.37 per share to earnings. Slightly lower manufacturing costs contributed $0.05 per share to earnings.

Compensation related expenses reduced earnings $0.14 per share. Other corporate items lowered earnings $0.13 per share, which included a negative $0.02 for foreign exchange and a negative $0.07 per share for a higher tax rate. Lower WRECO Q1 earnings following a seasonally strong record fourth quarter reduced operating earnings $0.34 per share.

And I will now turn the call back over to Steve Rogel.

Thanks again, Kathy. As we mentioned in our earnings release, we began to see some improvement in market conditions for our cellulose fiber, fine paper, containerboard and packaging businesses, which resulted in price improvement in the first quarter. Given the continued strengthening of those markets, we believe this trend will continue and should have a positive effect upon our second quarter performance. While we welcome these improving conditions, we are not relying on the market to help us deliver stronger shareholder returns.

About this time last year, we committed to review our portfolio and make whatever adjustments were necessary. As you saw by our announcement earlier this morning, part of that process includes the review of the possible sale or other disposition of all or part of our fine paper business and related assets. Although I know this announcement will generate quite a few questions on this call, we cannot comment beyond what was included in the release we issued this morning. But while our review is still ongoing, we have kept our commitment to make the portfolio changes and made significant progress during the first quarter. These include the closure of our Prince Albert paper operation in Canada, eliminating 290,000 tons of fine paper.

Earlier this month, we completed the second portion of that closure by shutting down the 120,000 ton pulp facility. We completed the sale or closure of two box plants and a [bag] facility as part of our ongoing efforts to streamline our manufacturing system. In February, we closed the 350,000 ton containerboard machine in Plymouth, North Carolina. Portfolio adjustments such as these are an important step in creating shareholder value, but they are not the only steps that we're taking.

Just last week, we publicly announced iLevel, the new brand for our residential wood products business. But iLevel is more than a new brand; it is a new innovative way of doing business. It is our intent to lead this market, not follow it. To prepare for this launch, we completely restructured our wood products organization. Where once we had four separate businesses, we are now one. One voice, one way of doing business, one focus on the customer.

We believe no other company can match the mix of the best Timberlands, the right products, and a strong unified team to lead the market. iLevel does not rely on the strength of just one product. Instead it bundles all of our products and technology to provide a unique, whole house capability to our customers. This means providing home builders with value added integrated solutions that reduce cycle time and eliminate cost from the building process.

Our containerboard packaging organization is also changing. Instead of being organized around a type of box or containerboard, we're organizing ourselves around market segments. For example, our new retailers group will bring an entire set of solutions to retailers ranging from corrugated packaging to point of purchase displays to bags offering cross promotion opportunities.

In addition, we're organizing our containerboard and packaging manufacturing operations into optimization zones. Under this approach all of these mills and packaging plants work together to efficiently manufacture and deliver products to customers in a zone at the lowest cost.

We're also growing strategically and added Maracay Homes LLC, a Phoenix-based home builder, to our real estate in February. Outstanding job growth and migration into that region of the country bodes well for continued strong home sales in the area. We look forward to the contribution Maracay will make to our earnings in the second quarter and beyond. These are exciting times at Weyerhaeuser and I look forward to reporting on additional changes in the coming quarters.

I'll now turn the call over to Patty Bedient, our Senior Vice President of Finances and Strategic Planning. Many of you already know Patty from our analysts meetings and one on one discussions. But I'm pleased to introduce Patty in her new role today. Part of her expanded responsibilities will mean that Patty will play a bigger part in working with Kathy McAuley in investor relations. One of her first tasks in this new role will be -- be to provide our outlook for the second quarter. Patty?

Thanks, Steve, and good morning everyone. As we begin the second quarter, we continue to experience improving market conditions in fine paper, cellulose fiber and corrugated packaging, while wood products and real estate markets are showing some signs of slowing.

In Timberlands, log prices are holding in the export market, but could soften somewhat in the domestic market. Harvest volume is expected to be slightly higher in the second quarter than the first and that would -- should result in modestly higher earnings. Wood products prices will be flat to down slightly in the quarter and volumes are expected to be seasonally higher and raw material costs stable. And that should result in better earnings in the second quarter than in the first.

As mentioned earlier, market conditions are improving in cellulose fiber and fine paper. Energy costs are declining, but chemicals and transportation continue at high levels. Although volumes will be lower due to our earlier mill closures that Steve reviewed, and seasonal scheduled maintenance earnings are still expected to improve in the second quarter.

Corrugated packaging prices are expected to be higher in the second quarter as the announced box prices continue to be implemented. Energy costs are expected to decline in the second quarter, although recycled fiber costs have begun to increase. Earnings in this segment are expected to continue to improve in the second quarter. The second quarter is expected to be another good quarter in the home building business, although we are seeing some signs of slowdown in housing activity. Single-family closings will increase seasonally from the first quarter, but earnings could be modestly lower due to lower land sales.

As we previously announced, we have reached an agreement in principle for the sale of our composite panel business in the U.S. and Europe. The earliest we would expect to close a transaction would be the end of the second quarter, but more likely it will be sometime later in the year. Capital spending was $194 million in the first quarter and we are still planning 850 million for the full year.

With that brief overview, I'll turn the call back to Kathy for our Q&A session. Kathy?

Thank you Patty. Brian, I'd now like to open the floor for question.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Edings Thibault with Morgan Stanley.

Congratulations and good morning. Steve, a question for you. I was wondering if you could review with us the process that led to this decision on the fine papers business and is there anything that as you mentioned this has been an ongoing process, is there anything that occurred recently that may have triggered this move?

Edings, this is a result of our strategic planning process that we conduct on an annual basis looking at businesses, particularly that aren't returning cost of capital. So this business has been under scrutiny for some time and the process that we announced today has been underway for a significant period of time.

And as I recall, you were also looking at the entire pulp and paper segment. Do you not anticipate other strategic decisions before the end of the year or where does the overall process stand right now?

Well, I think the best way to approach it is by saying that we're constantly looking at the businesses that are under stress, not returning the cost of capital. But we've not announced a timetable for any events that might occur with regard to any of our other businesses. So we're working hard to improve all of them, particularly, in our paper business and we expect to see those improvements start to show up in the bottomline here.

Great. Thank you.

Our next question comes from Rich Schneider with UBS.

Hi, Steve. Just following up on the white paper's side, you have a couple of mills anyway that have both pulp and white paper in it. How do you deal with the mix mill situation when you look at these options?

Well, certainly we have a couple of mills that are complicated by the fact that they're in multiple product lines. But we're not at a stage where we could talk about what disposition might be with regard to those particular properties, Rich.

Okay. Just a financial question. On corporate and other, that was a major increase as you showed on your waterfall chart. Is that -- primarily it looks like at least most of that came from the higher compensation expenses. Is that the way to look at that?

Rich, there are actually a couple of things that impact that segment. And you picked up one of them. It is the impact of implementing FAS 123R on the compensation -- stock-based compensation. The other major item in that increase is the foreign exchange rate, which is a higher number this quarter than the last quarter.

Could you provide us with that -- the breakout of those two items?

Rich, the breakdown of the item is - let's see, the impact of --

Compensation was $0.14 which is about 50 million or something?

Right. And I'm just trying to -- Rich, can I get back to you -- [inaudible - cross talk].

That is fine. And just in terms of Maracay, that was in the quarter since February, right. Are you able to give us some idea what that contribution was, was it much in the quarter?

Rich, this is Dick Taggart. Maracay didn't close until February. And so there was very little contribution in the first quarter - it was $1 million or so. Regarding the question you asked earlier, in the corporate and other of the 107 million, 26 million was related to variable comps and about a similar amount related to the foreign exchange translation.

Yes, the foreign exchange was actually even a little higher than that.

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

Thanks. Good morning. Steve, I was curious if could you just confirm -- I think, in the past you said that both the white paper business and brown paper business have to earn cost of capital to remain in the portfolio. I know you're not prepared to make comments about other businesses at the time, but is it fair statement that you haven't necessarily ruled anything out either for the brown paper business?

On our brown paper business, we're -- as I indicated in my prepared remarks -- we're doing a lot of work there that we feel is going to give us a lot of bottomline power. As we put the businesses into these optimization zones and operate as a system rather than as a group of independent box plants bound together only by national account business, we have a lot of upside potential and we're optimistic about the corrugated business for the future.

Okay. Fair enough. Can I ask on the buyback, your outstanding programs, to the extent that you purchased any shares in the quarter, and if you care to share any thoughts on how you think about the buyback program over a timeframe?

Pete, this is Dick. As you know we do have an authorization to repurchase stock at this time. But because of the deliberations that are going on relative to the white paper business that have not been fully disclosed to the market, we are not able to repurchase stock at this time. We are anxious to be in the market and to complete that authorization, but we simply are not able to at this time.

Okay. And just lastly, if I could. Steve, capitalize interest, I think, was 16 million in the quarter. Can you remind us, Dick, what that is related to and if you have any full year guidance for capitalized interest?

Well, the capitalized interest is related to two things, the Weyerhaeuser Company. It is related to level of capital spending and related to the issue we reported on in our fourth quarter that some of the Weyerhaeuser Company interest is capitalized in the real-estate company, because they have insufficient interest expense to satisfy their ability to capitalize interest. It will probably stay roughly at this level, I would expect, because we are -- our capital spending is about at the normalized rate, as is the rate of construction at Rico at this time.

Okay. Thanks very much and good luck with the initiatives.

Thank you.

Thanks.

Our next question comes from the line of Mark Wilde with Deutsche Bank.

Good morning. Steve, just one more question back on the white paper business. You talked about some of the changes that you're doing in building products and in container board. I think even while you kind of, deliberate on uncoated free sheet, you've made some changes in the way that you go to market and who you go to market with, and I was wondered, if you could talk about that at all at this point?

In our white paper business. Mark?

Exactly.

Okay. Certainly, that group has worked very hard and I should comment it's an extremely talented group. They do a great job. They have the ability to go to market in several directions. The two biggest, of course, are direct to the big users -- or not big users, but the big retailers of commodity papers. They also use the merchant community where the merchant community brings value. We have still a couple of other ways to market.

One through a group that was at one time in the past had -- exclusively sold business forms, but now includes free sheet roll stock and cut size papers in their repertoire. So they have several pathways to the market and have extreme flexibility there.

Okay. It sounded to me just from talking to people in the market that maybe you've exited some markets geographically and just made some other changes over the last several months. I just wondered if you could give us any color on that?

Sure. I think Mark there, as we have closed up capacity, particularly the PA machine, we've had to rebalance our portfolio of customers to match because those machines were all operating for. It's just that as we pulled them back, we had to rebalance the customers.

Okay. Then one other question I had. I think that you've got the Nelson joint venture up for sale down in New Zealand and I just wondered, Steve, if there are going to be other changes that you anticipate in the offshore Timberland portfolio?

Well certainly we have that process underway. You're right. Along with our partners, you might recall that it's a joint venture. We have previously announced and we continue to add to our portfolio of Timberlands in South America, Uruguay in particular, as we grow the estate down there.

Okay, very good. Thanks Steve.

Yes.

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

Thanks. Hi everyone, good morning. Dick, I just wanted to make sure I understood one point that you were making earlier in terms of share repurchases. Did you say that you couldn't be in the market because of the news that was pending on fine papers today or is there other things that are still underway that you can't comment on and that is keeping you out of the market?

Well, as Steve mentioned, we're in deliberations with a number of parties. And it is uncertain what the outcome of those deliberations will be. It is our advice from counsel that we should not be active in the market until those deliberations are completed and the resulting -- and whatever the results are are disclosed.

Okay. No, that's fair. Now, I know you've talked to this issue in the past and I understand it's ultimately a difficult question to answer, perhaps you can't, but having studied the business for the last year or so as part of this process, if in fact the deliberations don't lead to a transaction or an event that would be favorable to Weyerhaeuser from your vantage point, in terms of business, do you have a line of sight such that you could get the fine papers business to earning cost of capital on its own within the portfolio or is that still indeterminate?

I think we have to look at this for the near-term future and perhaps that's all to further our vision reaches. But the markets have been improving for fine papers and I think that's a result of the new balance that we have in our business. But we're optimistic over the near-term future of the white paper business. I think as you look at the intermediate to longer-term, you have to take into consideration the continuing transformation of business to electronic transaction and away from paper and make economic decisions based on what you think there.

Okay, fair enough Steve. Two last questions. First, in WRECO, the margins for closing were a little bit lower our forecast. I know you said sequentially, seasonally, you tend to see a drop-off in margin. Were the margins where you had expected per home in the first quarter versus the fourth quarter? And can you give us a little bit of color regionally, what you might have seen in the business?

Yes. First of all, if we talk regionally, we still have some very, very strong areas. Up here in the Puget Sound, it's still very strong. We have some strength in California, some very pronounced weakness in the Washington D.C./Baltimore area at the moment. Houston has been seen as improving over the last quarter, perhaps as the influx of Katrina victims moving into that area has strengthened the market. But it has been much better.

A little softer in the Las Vegas area. All in all, our business has been very good. The mix can change as people buy a little different house than what they might have been considering before. And certainly with the accoutrements that go in the home, you can see changes there happening. But it's still a pretty darn robust business for us.

Okay. So were the margins basically where you had expected them, Steve, or maybe a little bit lower?

The margins, yes, were where we expected, I think you made a comment about comparison with the fourth quarter.

Yes.

Fourth quarter is always a close out quarter for the year and if you look at our pattern in WRECO, it's generally been a very strong quarter. If you look at the first quarter versus the first quarter last year, I think you'll see a favorable comparison.

Okay. Last question and I'll turn it over. On the box side, volumes were down sequentially if I heard you correctly. Anything more than just a very difficult comparison and how would you -- if you could give us a bit more color on to how you see this market progressing over the next quarter. Thanks.

Okay. I think we talked -- the down numbers were on our containerboard. That was the closure of the machine in Plymouth. So that was the extent of it. But our box business per se I think strengthened fairly significantly and Kathy, you probably have some numbers there.

Yes. The fourth quarter was an exceptionally strong quarter as you know, George. And so the box business was a little off sequentially from the fourth quarter but that was an exceptionally strong quarter. Overall, what was quite important was it was better than last year's first quarter, significantly better than last year's first quarter. On the containerboard side, the difference was the closure of the Plymouth machine in volume. Next question?

Our next question comes from the line of Chip Dillon with Citigroup.

Yes, hi. Good morning. I was wondering, there has been some talk recently about -- and in fact I think even the outgoing trade representative said something about settling this situation with Canada on the lumber front. And you guys have been front, center and backwards on this. Do you think that we are close and most importantly, do you think the settlement would involve any rebate or prior paid duties which of course you all would be very interested in?

You're quite right about the front, center and backwards, mainly backwards it was.

Well, I was trying to be nice.

Okay. What we do know is the two governments at the highest levels are in pretty continuous negotiations. From time to time, I think they have called in various companies in Canada provinces for consultations. The rumor I hear is they're making good progress towards a settlement. I would certainly hope that a significant chunk of what we put on deposit comes back to the company, because as you know, it's a large chunk.

And then I guess on a related point, the second quick question is a lot of other companies that own substantial Timberlands like you or just lands have been doing more to talk about what they have and how it may come to fruition in terms of shareholder value. And we're seeing now some pretty meaningful transactions in real estate, like you mentioned the 33 million.

Can you give us some idea in terms of what kind of backlog you have? And maybe more broadly, not just in the real estate are where you might have some warehoused land that's got some appreciation there, but also just in the general Timberland segment, do you have a given amount of your nearly 6 million acres that you might view as either add on potentially near an HBU status?

Good question. With each year, our foresters and our business people go through a cycle of analysis of our forest lands for their, what we call HBU, Highest and Best Use value. And when we categorize lands into HBU status, they automatically go into a program that we have that has been ongoing for years of putting HBU land onto the marketplace and then doing the tax-free exchange into other timberland that's more suited for timber growing. Since we have been doing that for some period of time, I wouldn't say that our lands are completely picked over, because as cities grow and population moves, there are always new HBU areas. But we've been fairly aggressive at creating the value out of those.

Thank you.

Next question?

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

Hi. Just a couple of questions. I was wondering if you might be able to give a little bit of color on commodity prices and where they were at the end of the quarter versus sort of the quarter average?

Yes, Claudia. Let me kind of go through -- we do have, as you know, a table if you were able to pull it up on the various businesses. And if we look at containerboard, if we look at both the containerboard price at the end of March was higher than the fourth quarter average. The packaging price, which is the box price, was also higher than the fourth quarter average.

In cellulose fiber, the paper-grade price was also higher than the first quarter average as was the overall total cellulose fiber pulp prices. And in white paper, the white paper price was also higher than the first quarter average.

Okay, thanks. And then just curious, you mentioned some maintenance in your paper segment. A little bit of color on that would be helpful.

I beg your pardon, Claudia?

I think you mentioned that you'll be taking some maintenance in the paper segment in the second quarter?

Yes. The second quarter is normally the heaviest quarter for scheduled maintenance in our paper business. And so we have a substantial number of projects that we've scheduled these outages for -- in the second quarter.

I would make a comment about maintenance. Given the extreme amount of construction in Canada and reconstruction because of Katrina in the U.S., we have to be pretty careful on scheduling or shutdowns because of the availability of external labor forces. And we try to get the maintenance done now in times when that labor is available to us. So this sequence that may have been more standard to you in the past is changing a little because of that.

And Claudia, we do have in addition to fine paper scheduled maintenance, we do have some scheduled maintenance in our cellulose fiber segment as well.

Okay. Thank you. And then just real quick on OCC costs, which seem to have increased, could you talk a little about the trend you're seeing there. I know they were down in the first quarter, but they seem to be moving up again now.

The OCC?

Yes.

Yes. We do predict that we'll have some rise in OCC pricing due to world competitive pressures for the commodity.

And are you seeing that now?

Yes.

Okay. Thanks.

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

Good morning. A couple of questions, just on the strategic review and the announcement today. Does the announcement today on fine paper -- does that include any of the paper-grade pulp or is it just the uncoated fine paper?

We've announced that it is our fine paper and related assets.

Okay. And then, Steve, just on the strategic review, you mentioned that the process is mainly focused on those businesses that are not generating cost of capital. Is there any focus on the other businesses, i.e., wood products, Timberlands, real estate, either on the capital structure in those business or growth in those businesses? And can you elaborate on what the thinking is on those businesses?

Certainly. We're -- going through our strategic review, I emphasized to everyone that the businesses not earning cost to capital get the most attention. But all businesses get attention and have a strategic plan going before them. As a result of those strategic plans, we've publicly said that we're going to grow our home building business. I think you saw a step in that with Maracay Homes in Phoenix.

We've also indicated that we'll be growing our international businesses, particularly South America and in timber in those areas. So as we make those decisions and you begin to see our public actions, you'll be hearing about more growth initiatives in those areas.

Okay. And then just lastly, can you comment on the timber tax and where that stands in Washington and what you're seeing there and how that might change any of your strategic thinking if it does go through?

We do have a close watch on what's going on in D.C. on the tax bill. First comment is it's had great support, not only from our industry through AF & PA and other companies that are interested in the tax relief, but in Congress itself. We have virtually had no one oppose it. Everyone understands the need to have some quality in taxation and not be -- tax in one type of business entity at a different rate than another business when they're essentially the same business. We have 130 or more converse people who have signed onto the bill and about 28 Senators. That is a large number of sign-ons and we do continually add to that list. I think that what Congress is waiting for, of course, they have been on a recess and they are coming back and in reworking the tax bills again and we think our next great chance is as they move on what I understand are two different tax bills moving through.

Okay. And if that tax bill does hypothetically go through, how does that change your strategic view on timberlands from a growth standpoint? Would you be more active in that area?

Certainly, it makes us much more competitive in the acquisition of timber and as we've said, that is the core of the Weyerhaeuser Company. We have our greatest expertise there and we're delivering great value. So certainly, timber would be a growth business for us.

Our next question comes from the line of John Tumazos with Prudential.

In terms of the financial profile of the cellulose and white paper business, could you give us a little bit of a description as to the book value after the impairment charge, the working capital, any other salient financial characteristics? We can see from the annual that the segment including current liability and other items had assets employed of 7.216 billion at the end of last year and reducing that for the impairment charge, would get it to 6.470 but that's segment assets and not book value per se. Anything you can to describe the financial characteristics would help us guess what the value is.

Hi, John. This is Dick Taggart. We have historically not disclosed the individual product lines within that segment. But fine paper business is the largest business within that segment and represents --

Dick, I didn't -- I'm sorry. I didn't make myself clear, I'm not asking you to play out the pieces of the segment. I wanted to know what the shareholder's equity of the segment in total is.

Oh, the shareholders equity -- John is.

Yes, the book value of the segment that you put up for sure. Or did I misunderstand, are you putting the whole segment up for sale?

No. We are not putting the whole segment up for sale. And I don't have an allocation of shareholder's equity by business line. We do not track a separate capital structure for each business.

I'm sorry, could you --

I think, John's question is he's wondering what the book value is of the asset that are in the strategic review or the financing--

Thank you, Kathy.

And related asset. This is Patty, John. Not at all. And as Dick said, we have not broken out that book value of any part of that business, separately. We have not disclosed it separately.

Is there anything you can do to give us a hint as to whether you're selling $1 billion or $5 billion worth of business?

John, it would be inappropriate for us to go beyond the disclosures that we've already made publicly at this time in that regard. I think that a reasonable review of the capacities of the various businesses against the book value would give you a reasonable estimate of their relative size of the different businesses in the segment.

As Dick said earlier, the fine paper business is the largest part of that segment. So directionally, it would be greater than half of that segment.

Our next question comes from the line of Mark Weintraub with Buckingham Research.

Thank you. First, I just wanted to clarify on the corporate and other which was the 102 million. I guess I heard a bunch of different numbers thrown around and I want to make sure that I have this straight. And also looking through the press release, I got on the specific numbers. In the press release, it seems like the -- both the variable compensation and the foreign exchange wereorder of magnitude 26 million pre-tax each? Is that about right?

That's pretty close.

Okay. And so if I back those out then I would have been roughly about 50 million for corporate and other? If I back that out of the 102, is that an appropriate run -- what should I be thinking of as a run rate going forward for corporate and other?

I think the run rate for corporate and other is about $40 million. The other piece that's in 102 or another piece is the capitalized interest that's related to the real estate projects that Dick referred to earlier in the call, it's about $7 million and 102.

Okay. And that there will be ongoing. So that line segment hope another, roughly 50 million, is that type of number on a go-forward basis to use?

Yes. It's order of magnitude, that might be a little bit high.

Terrific. And then I guess, if you could update us on your -- the status of your natural gas hedging given as there has been a lot of volatility with that into cost?

Mark, we have a as a program hedged that is seasonal and as we're going into the -- that peaks at about 30% of our usage in the winter and will decline somewhat as we go into the summer months. And to the impact of our hedge will be declining as we go into the summer months of the year. Our natural gas costs, we expect will continue to decline and now at about 60% to 70% at the rate of the spot price changes.

Great. Helpful. And then lastly, if possible Steve, could you provide any color on the Weyerhaeuser perspective on what the implications of the potential changes or resolutions of the soft wood lumber dispute could be for Weyerhaeuser? The pluses and minuses as you see it.

Well, of course, we talked about earlier the first positive, the return of deposits, which is very significant for us. We can't speculate how much that would be because I'm sure it's going to be a subject of negotiation of how much is actually returned. Then, we get to what -- what is going to be in that settlement with regard to Canada and the amount of what flowing over the border into the U.S. As you're aware, I'm sure, we can only meet about two-thirds of our needs of U.S. production totally in the US.

So my speculation is that there in the agreement with Canada, there will be some sort of agreement on volumes and some sort of an escalating duty or tax based on pricing. So what I expect the agreement to have is some sort of a leveling effect on the marketplace.

Okay. And just can you just remind us, how much do you have escrowed related to the duties?

It's just over a $350 million.

Okay. Thank you, Dick.

We have time for one more question.

Thank you. Our final question for the day comes from the line of Sue Goodman with ABP Investments.

Great, thank you. Could you comment on what your use of proceeds would be of any theoretical assets sales?

Well Sue, we have -- as you know we have share repurchase authorization our board -- certainly periodically reviews the dividend. We will use the proceeds of in the best of interest that shareholders consistent with the strategic plan and the priorities that we laid out -it is premature to know what those would be depending on the final outcome in the form of any transaction we'd make and what form of consideration would be so --

Right, Dick, you mentioned it'd be in the best interest of shareholders, but would you see any substantial use of proceeds going to reduce and you debt therefore if it is not this could be a leveraging event?

We will -- we will maintain our financial policies as it relates to our target capitals structure Sue. And as we have said a number of times, we have been diligent in paying down our debt and achieving that target capital structure and our focus is now on how we maintain that and returned cash to shareholders.

Okay. A couple of small items. You had a big decline in the current liabilities critic's senses of quarter even looking past back to the other, 4-5 quarters what was that going on there?

Sue, let's get back to on that item. We'll go through and if you give the give me a call after we conclude this call we'll go through those individual items.

Okay. And then just finally with regards to their home building segments, can you comment on what percent you believe are on occupied primary homes, and what you are selling?

That is a very good, perceptive question. We have tried to be careful in selling our homes to be sure that we're selling to home owner occupied. We do not have any confirmed numbers for you in our businesses, but we are convinced that we're very high or occupied.

What about primary versus secondary residences to that's another way to cut it?

Yes. That's now -- that you are getting hard to be able to put together some numbers on that because we have no way of knowing.

And maybe nationwide, they say it's about 80% is on occupied with primary residences. Bob what do you think you're above or below that percentage looking at your market?

The information I have from our folks in WRECO our home building group is that we would be higher than the average because we've been hawking that closely.

And we are - and Sue we are not in markets that have a high percentage of second homes such as Florida of course we are -- there are some in the Las Vegas area, and of course a higher percentage in Phoenix.

Great. Thank you so much.

I would like to thank everyone for joining us today on our earnings call and also would like to remind you that we will be hosting an analyst meeting in New York at the [Sofatel] on Friday morning, May 12. If you would like more information about this meeting, please contact either myself or April Meier. I will be available for further questions after this call. Thank you for joining us.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.