威爾豪瑟 (WY) 2006 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Weyerhaeuser second quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). Ms. McAuley, you may begin your conference.

Good morning. Welcome to Weyerhaeuser's second quarter 2006 earnings conference call. I'm Kathy McAuley, Vice President of Investor Relations. Speaking this morning will be Steve Rogel, Chairman, President and Chief Executive Officer; Dan Fulton, President and CEO, Weyerhaeuser Real Estate Company; 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. Please contact April Meyer at 253-924-2937 if you need additional information.

Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements. Forward-looking statements will be made during this conference call.

This morning Weyerhaeuser reported second quarter 2006 net earnings of 314 million, or $1.26 per diluted share. On net sales are 5.7 billion. The second quarter includes the following after-tax items -- a charge of 12 million or $0.05 per share related to the restructuring of the Containerboard, Packaging and Recycling business model; a charge of 11 million or $0.04 per share related to the closure of facility; a onetime tax benefit of 48 million or $0.19 per share related to a change in Texas state income tax law, a change in the Canadian Federal Income tax rate, and a deferred tax adjustment related to the Medicare Part D subsidy.

These items totaled $0.10 per diluted share. A GAAP reconciliation of non-recurring items is available on our website, along with the presentation materials for this conference call. A segment breakdown of earnings per share and selected quarterly net price realization charts are included in these materials.

I will now review sequential quarterly business trends by segment second quarter 2006 versus first quarter 2006. Please refer to the earnings per share sector breakdown and net price realization charts on our website.

Beginning with Timberlands. Timberlands contributed $0.07 per share after tax to the increase in net earnings in Q2. Log volumes decreased 14%. Western volumes were higher; however, they were offset by spring break up conditions which seasonally reduce Canadian volumes, and a slightly lower second quarter harvest in the South, which resulted in lower third-party sales.

Export log prices rose 2%. Domestic log prices increased 4% in the South, and were flat in the West. Second quarter non-strategic portfolio improvement sales were higher than normal due to the timing of a large timber sale for the Weyerhaeuser Foundation. Higher fuel prices adversely impacted logging costs.

Wood Products. Wood Products contributed $0.04 per share after tax to the increase in net earnings in Q2. Average lumber prices were flat with first quarter due to mix. Lumber volumes increased 10% during the seasonally strong second quarter.

Plywood prices declined $24 per thousand square feet as shipments rose 18%. OSB oriented strand board prices declined $32 per thousand square feet, and shipments increased 7%. Engineered lumber products prices were approximately 1% lower than in the first quarter; however, shipment volumes increased over 20%.

Manufacturing costs declined slightly for engineered lumber products and were flat with first quarter for lumber and panel products due to lower resin prices and a moderation in natural gas prices. EDD and AD duties were 10 million in the quarter.

Cellulose fibers and white paper. Cellulose fibers and white paper contributed $0.13 per share after tax to the increase in net income in Q2. Market conditions improved during the quarter for these products. Cellulose fiber prices increased $16 per ton during the quarter. Paper grade pulp prices were $41 per ton higher; however, flush pulp prices were flat. Flush pulp is characterized by price stability, unlike paper grade pulp, which is subject to greater price fluctuation. Cellulose fiber shipments were flat due to maintenance downtime in the second quarter.

White paper prices increased on average $83 per ton. Shipments declined 10% because of machine closures at Prince Albert and paper machine number one at Dryden and maintenance downtime. Annual maintenance downtime and an extended power outage at Plymouth adversely affected manufacturing costs. Energy, principally natural gas and chip costs were lower, but were partially offset by the negative effects of the rising Canadian dollar.

Containerboard, Packaging and Recycling. Containerboard, Packaging and Recycling contributed $0.20 per share after tax to the increase in net earnings in the second quarter. This segment's performance was driven by higher packaging and containerboard prices and increased packaging shipments, as well as lower manufacturing costs. Containerboard prices rose $54 per ton and packaging prices increased 5.3% during the quarter.

Containerboard shipments declined 10% due to the closure of the Plymouth paper machine in the first quarter. Box shipments, however, were 5% higher in second quarter. This occurred even as five packaging facilities were closed during the quarter, bringing the total packaging closures to 7 since December 2005.

Manufacturing costs declined as a result of improved asset utilization due to our business model change and moderating natural gas prices. Old corrugated containers prices rose sharply due to seasonal supply and market conditions.

Real estate and related assets. WRECO reduced in net income by $0.08 per share after tax in Q2. There were no lot sales in the second quarter. Dan Fulton, President and CEO of WRECO, will discuss his business in more detailed later on this conference call.

For our next discussion please refer to the earnings per share comparison Q1 versus Q2 on our website. The following items reconciled first quarter 2006 non-GAAP earnings per share of $0.62 with second quarter non-GAAP earnings of $1.16 per share. This chart again defines the major items impacting the second quarter.

Stronger volumes, especially for wood products, contributed $0.12 per share. Higher prices contributed $0.29 per share to the second quarter earnings. White paper, pulp, containerboard and packaging prices, which contributed $0.35 per share, were offset by lower panel prices.

Manufacturing costs reduced earnings by $0.04 per share. Higher fuel costs in Timberlands and [gas time] in cellulose fibers and white paper mills more than offset improved manufacturing utilization in containerboard and packaging mills.

Variable and stock-based compensation contributed $0.10 per share to the change in quarterly earnings. The changes is due to a higher than normal quarter expense in Q1 from the adoption of new rules for stock-based compensation, plus a Q2 decline in deferred compensation liability, which is paid to the Company's stock price. Other items contributed $0.15 per share to earnings. $0.10 per share of this contribution is from foreign exchange.

Lower WRECO earnings reduced operating income $0.08 per share, primarily due to the decreased in lot sales in second quarter. I will now turn the call over to Steve Rogel.

Let me start today by addressing three issues that are probably on everyone's mind. First, I assume that some of you will ask about the status of our discussions with other parties regarding our sale of the white paper business. Due to the confidentiality agreements in place, I can't share too much information with you, other than to say we have made substantial progress in our discussions with other parties. We expect to bring this to a conclusion in the near future.

Second, you probably want to know where we are with the timber tax legislation. As you have read, there is continued progress in the U.S. Congress on the Timber Tax Bill. The list of the bill's cosponsors is growing, with 144 cosponsors on the House bill and 30 cosponsors for the Senate bill.

A timber tax amendment was included in the Estate Tax Bill recently passed by the U.S. House of Representatives. Although this situation remains fluid, we continue to work with the U.S. forest industry to promote enactment of the timber tax legislation.

Third, you are probably wondering about the housing market and the effect this will have on our real estate business, and our plans to grow that portion of the Company. Due to this interest, we have asked Dan Fulton, President of our Real Estate business to join us this morning to discuss the housing market in more detail. I will say, however, that our real estate business is still earning excellent returns and that it remains an area we're targeting for future growth.

With those issues behind us, I want to turn my focus to the significant progress in the execution of our strategic plan that we had outlined earlier this year. I would like to take a few moments today to update you on our progress and how this positions us for future activity.

As you'll remember, at our annual investor meeting in New York I outlined three strategy elements, grow real estate and timberlands, execute new strategies in wood products, containerboard and cellulose fiber to fully realized their financial potential, and bring our strategic process in fine paper to a successful conclusion.

I have touched on the fine paper process and our plans to grow real estate. In timberlands we continue to pursue a growth approach that includes capturing value from our sawlog strategy. A good example is the recent startup of our plywood mail in Uruguay. This mill was completed under budget and leverages our timberlands investment in South America.

At this point I would like to turn our focus on to the second element, the strategies we are executing in our wood products, containerboard and cellulose fiber business.

Every business has a unique strategy, but at the core of each is how we change the way we go to market and manage our supply chain. To change the way we to go to market we're turning the normal forest products model on its head. In the past, you grew the tree, harvested it, made some products and then found a market. Our new approach reverses that and begins with what the market wants and when it needs it. We then take this requirement back through our system to produce just what the customer needs.

This requires a new way of thinking about how we supply mills with fiber to how we warehouses and transport our goods. Everything changes and it requires our people to think differently about how they operate.

Although this is happening throughout Weyerhaeuser, the changes are very apparent in our wood products and containerboard businesses. Last quarter we announced the launch of iLevel, the new brand for our residential wood products business. This new innovative way of doing business continues to gain support with our customers. No other company can match the mix of products or the strong unified customer focus we bring to the market with iLevel. The excitement this approach has created with customers indicates that it will provide significant benefits.

Meanwhile, a new integrated supply chain business model is already delivering operational and margin improvement for our containerboard packaging and recycling business. In our integrated packaging system we have separated the management of supply from demand. Under this new approach we organize our demand side around market segments focused on specific customer requirements of those markets.

On the supply side, our focus is to optimally load customer orders across our box plant system to efficiently meet customer requirements and at the lowest cost. This is in contrast to the traditional system where each box plant operated on an independent basis.

The result of our new business model is improved asset utilization, resulting in lower manufacturing costs and improved service. The benefits of the changes these two organizations have undergone are being replicated throughout the Company. Such a change is exciting, but it is also very involved.

Not only are we developing and implementing new processes, we are creating a culture shift necessary to ensure the success of this new approach. I'm gratified by how well our people have adopted to change, and I'm positive our supply chain efforts will be successful. In the process we will deliver long-term benefits to our shareholders.

Thank you, and now I will turn the call over to Dan.

Good morning. As we have discussed on prior calls, we expected some moderation in the home-building markets after realizing very strong results over the past several years. Given our long-term view of the favorable dynamics of the home-building industry, we believe that transition currently being experienced in certain key markets represents a good opportunity for our business.

Real estate and related assets reported earnings of $123 million for the second quarter of 2006, compared to earnings of $172 million last quarter, and $156 million for the second quarter of last year. On a year-to-date basis earnings of 295 million are 13% lower than at the same time last year.

As stated in this morning’s press release, our first quarter results included $50 million in earnings contributions from land sales, insurance recoveries and the restructuring of a partnership, while earnings in the second quarter of last year included a contribution of $21 million from land sales.

The second quarter earnings were almost exclusively driven by our single-family operations. We closed 1,483 homes in the second quarter, an increase of 28% compared to the first quarter, and an increase of a 16% compared to the second quarter of last year.

Our average sales price in the second quarter was $491,000, an increase of 5% compared to the same quarter last year, and 1% above first quarter 2006, Evidence of slowing appreciation as well as a slight shift in mix.

This combination of increased volume and the slight increase in average price resulted in total revenues in the second water of $747 million, an increase of 8% compared to the prior quarter, an increase of 15% compared to the second quarter of 2005.

As we have reported in the past, housing markets are highly differential in terms of strength, influenced by local factors such as job growth, demographic trends, land use regulation, available housing supply, and as of late, the degree of investor activity. Our scope of operations is limited to a few select markets with a diverse set of economic drivers of job growth characteristics.

We believe our markets are highly desirable because of favorable long-term outlooks for economic expansion, job creation, and increasing land use regulation. However, our markets are currently operating in different stages of the market cycle for housing, highlighting that home-building is still a local business.

Our operations in Houston and the Puget Sound areas are experience experiencing strong buyer interest with active markets. We are well-positioned in these geographies and we expect to generate year-over-year increases in closings with prices and margins that are trending favorably.

By contrast, new home sales have slowed and margins have declined in Southern California, Las Vegas, the Washington D.C. suburbs, and Phoenix. These markets have been some of the best in the country over the past three or four years, experiencing unsustainable price appreciation. Now these markets are catching their breath, experiencing an inevitable increase in both new and existing homes available for sale, leading to higher than normal contract cancellations and an increase in sales incentives and price discounting. It is also now clear that some of this shift has been amplified by the presence of investor activity in these markets.

In our more challenging markets we sense that many potential customers are now deferring their home purchase decision until they are confident that a new pricing equilibrium has been reached. Starting in March we started to observe a year-over-year decline in monthly traffic to our communities. For the second quarter our traffic declined 14% compared to the first quarter, and traffic declined 31% compared to the same quarter one year ago.

The historic pattern of our business is that we experience seasonally strong sales in the first half of the year, followed by strong closing volume in the second half of the year. However, with the change in market conditions, second quarter sales volume declined 10% compared to the first quarter and 13% compared to the second quarter of last year.

Much of the decline in sales for us and for our competitors can be attributed to an increase in contract cancellation rates. Our contract cancellation rate in the second quarter was 26% compared to 19% last quarter and 12% in the second quarter of last year. The contract cancellation rate is a key indicator of buyer commitment and buyer confidence in the local housing market. Until such time as the rate of cancellation approaches normalcy, we expect to encounter challenging conditions.

Our backlog of homes sold did not close is 5% higher than last year at this time, representing more than five months sales. During the second quarter, however, our backlog fell 5% as closings exceeded new sales by 158 homes. As you would expect, our backlog has lengthened in some markets, while it is lower in markets were sales have slowed.

Total revenues in backlog is approximately $1.5 billion, averaging $525,000 per home, which is 7% higher than the average price of homes closed during the second quarter and 2% lower than the average price in our backlog at the end of the first quarter.

We must compete with the prevailing market trends in each of our markets in order to sell homes. To do so we selectively discount our home prices in certain projects in order to reach agreement with buyers, but we have not made wholesale price reductions. For the most part, our discounts are in the form of reduced prices on options and upgrades and/or closing costs and financing subsidies. Pricing decisions are made locally, not only on a market by market basis, but in most cases community by community, all based on relative competitiveness of our communities, our lots and our homes.

With continued unsettled conditions in certain markets, sales volume and margins may continue to trend lower over the next several quarters. By historic standards our margins remain strong, although as expected, they are lower than the peak margins generated in recent quarters.

Single-family margins in the second quarter were 26.3% compared to 30.9% in the prior quarter, and 31.1% in the second quarter of last year. Margins during the downturn in this cycle were likely to trend toward a more normalized level per our experiences in early years of the decade when we generated margins in the lower 20% range. Still attractive results for our industry in an historical context.

We believe our industry-leading home-building margins are attributable to the markets in which we operate, to the success of our local value propositions, and to our land positions which have been acquired over time in highly desirable locations.

Controlling, processing and developing communities are core competencies of WRECO, and a distinct competitive advantage. Our land pipeline of lots owned and controlled through option contracts and deposits represents a 5.5 year supply to satisfy estimated future demand. We customarily take longer land positions in the more highly regulated geographies that have extended time requirements for approval. Approximately 51% of our current land pipeline is owned.

Our home-building operations generally presale their product, although we will build a limited number of specs as a means to efficiently utilize productive capacity. The number of specs on inventory has been impacted recently by an increase in cancellations in the last quarter, as contract purchasers cancel late in the construction process. At the end of the second quarter a total of 176 homes in inventory were completed but unsold compared to 119 last quarter and 109 in the second quarter one year ago.

With local markets transitioning from their respective housing cycles, the location of our spec inventory has shifted from Houston last year to Las Vegas and Southern California this year.

Finally, some comments on Maracay Homes, which was acquired earlier this year in February. Maracay has not avoided the overall slowdown in the Phoenix housing market, resulting in disappointing sales base during the spring. Nevertheless, Maracay maintains a substantial sales backlog of over six months sales, and is well-positioned to take advantage of the long-term growth that is projected in their markets. We have been pleased that new communities, and both Phoenix and Tucson have opened to encouraging traffic and sales.

Integration of the operation into WRECO has been smooth, in large part because we have been able to leverage the experience gained across Weyerhaeuser from acquisitions made over the last eight years.

We have experienced difficult housing markets before, and we will undoubtedly pass them again. The senior management of WRECO has an average tenure of nearly 23 years with our business, each with regional -- each regional leader has experienced multiple housing cycles, though each successive cycle has its own unique characteristics.

In response to today's challenging market conditions, we're taking a number of management actions. One, we're limiting housing starts where appropriate to control our unsold inventory position. Two, we are reinitiating and deferring land purchase commitments wherever possible in order to keep our powder dry. In a few cases we have elected not to precede with land purchase commitments under option agreements, choosing instead to forfeit deposits and related predevelopment costs.

Three, maintaining constant contact with customers in our sales backlog in order to increase the likelihood of getting to the closing table. Four, we're reanalyzing on a project by-product basis our competitive pricing and the effectiveness of buyer incentives. And finally we have rescoped certain initiatives that may unfavorably impact overhead in the short term.

It should be noted also what we won't do. We will not chase sales through wholesale discounting. Based upon our analysis of publicly available data, our home-building business has generated the highest pretax margin percentage in the industry for several years. And though we expect margins to moderate from the past two years' record levels, it is our intention to maintain our leadership position through the housing cycle.

We believe that the demand for housing remains strong over the long term, especially in the high-growth markets in which we operate. Our view is that the current conditions of the housing cycle represent a key opportunity for our business. Experience suggests that it is likely that previously unavailable but desirable land positions may return to the market, perhaps at more favorable prices and terms.

Real estate is a business targeted for growth in Weyerhaeuser Company. Our earnings and financial returns remain compelling. And we are positioned to take advantage of buying opportunities in support of our long-term vision for business expansion.

Now I will turn the call over to Patty Bedient.

Good morning everyone. As we enter the third quarter, we see a continuation of the market trends we experienced in the second quarter, namely, continued strengthening in our packaging and paper-based businesses, and softening in markets for wood products and home-building.

Turning first to timberlands. Domestic log prices in the West are expected to decrease as a result of lower end product prices. Volumes will be seasonally lower. Export sales volumes will be flat to down slightly, depending on vessel schedules. Prices and volumes in the South are roughly in line with the second quarter. Sales of non-strategic timber will be lower than the second quarter which were higher than normal, as Kathy discussed earlier.

Lumber sales realization averages are expected to decline and volume should be in line with second quarter levels. Although some softening in log prices is expected to occur during the quarter, log price declines will lag behind decreases in end product prices.

Average sales realizations in OSB are also expected to decline and sales volumes will be reduced, partially due to expected downtime for the replacement of the press at our Sutton West Virginia plant. Timber strand and [Paraland] production costs are anticipated to increase as a result of some extended maintenance shutdowns. All of these factors will result in substantially lower earnings in our residential wood products business in the third quarter, compared to the second.

As we previously reported, we anticipate closing the sale of our North American composite panels business in the third quarter, and we expect to gain from this transaction.

Earnings in cellulose fiber and white papers will continue to improve as we realize the full benefit from the earlier announced price increases in both pulp, primarily paper grade, and white paper. Manufacturing costs will decrease as the annual spring maintenance shutdowns are behind, as as well as most of the costs from the Plymouth power outage.

We anticipate continued earnings improvement in our containerboard packaging segments in the third quarter compared to the second. Prices on domestic containerboard sales are expected to increase as the full quarterly impact of the price increase is realized. Packaging prices will also increase, reflecting continued implementation of the May 2006 increase.

Third quarter packaging volume is expected to decline from the second quarter level, as the produce season which is traditionally strong in the second quarter, comes to an end.

OCC cost will likely continue to increase over second quarter due to rising export demand, combined with high mill operating rates. Mill manufacturing costs are expected to decline compared to the second quarter levels, primarily due to lower prices for natural gas, lower chemical costs, and lower maintenance spending.

Dan has just brought you up-to-date on WRECO, and we expect third quarter earnings in our real estate segment to be roughly the same as the second quarter.

Weyerhaeuser Company capital spending through June 30 was $386 million, and we still anticipate total spending for the full year of 850 million. With that brief overview, I will turn the call back to Kathy to begin our question and answer session.

We would like to open the floor now to questions.

(OPERATOR INSTRUCTIONS). Chip Dillon with Citigroup.

My first question has to do with the chart, which is great by the way, on the price realization in boxes. I know that you tend to get about 13,000 square feet more or less from a ton. And you can back -- you configure that out from a lot of companies. It looks like you're getting something of like 60 or $70 a ton of what would have been the $130 of increases.

I know the low point might not exactly be the low point, because it is a quarterly average, but we infer that you've got substantially higher by maybe 3 or $4 a 1,000 square feet in realizations yet to capture in the third quarter?

This is Steve. Certainly as we implement price increases, and depending on contractual requirements, the implementation time lengthens out, so you can anticipate that some improvement is to go forward, yes.

Let's say we don't get any further price initiatives in board this year. Is it possible that you could still see a little bit more even in the fourth quarter versus the third, just because of the way contracts are written?

That's true. But it would be much less than in the third quarter.

And then maybe you could elaborate a little bit on the significance or the amount of decline that you see in wood in the third quarter. The second quarter number was certainly a lot better than those that are kind of married to the what [Random and Prose] tells us what prices are. So it seems like there has been quite a bit of a lag.

In fact, you might also just tell me if you agree with this, but if you look at some of your competitors that gives you pretty good numbers in OSB. It would seem that with current prices out there, there has got to be a lot of capacity that is below cash costs levels.

I guess taking those two points, could we see your earnings cut by more than half sequentially in the third quarter in the segment overall? And secondly, do you think, if my assertion is right about cash costs levels, that you could see a lot of downtime in OSB across the industry or else others -- producing at a cash loss?

This is Patty. Certainly OSB pricing has been off compared to the second quarter. And if that continues, there could be people that would take down time in the quarter, but we don't project what that time might be. As I mentioned in my outlook comments, we do expect that our earnings in the third quarter will be substantially lower than what they were in the second quarter.

I think when we talk about OSB we have to reflect that a large portion of our equivalent production goes into our Trus Joist products and they have much more stable pricing that OSB panels.

And then last question, when you look at the timberlands -- maybe I just missed this -- what was the amount -- can you give us a ballpark number in terms of the unusual nature of the land sales, like how much more than you think it will be in the third quarter it was?

This is Dick Taggart. The contribution of the sales for the Foundation was about $18 million in the second quarter, which would have been roughly the amount it was above the normal level.

George Staphos with Banc of America.

I just one to make one clarification. The guidance on wood products that you were giving, Patty, that obviously excludes the gain, whatever it might be, on composite. In other words, you won't be down substantially including the gain, or was the gain included in that analysis as well?

That is correct. That does not include the gain that we anticipate from the composite panels business. My comments about wood products -- residential wood products earnings was irrespective of the panels business. Another thing to keep in mind on our composite panels business, depending upon when that closes for the quarter we would only have a partial quarter earnings from composite panels.

Fair enough. Are you including -- should we include composites -- that partial quarter -- into your guidance as well or that will be excluded?

No.

Dan, I appreciate all the color on WRECO. When we back of the envelope calculate the profit for home it was perhaps a little bit lower than we were looking for. It looked like you're back to 2003 levels. You went through a number of factors again, we appreciate that.

Was the profit for home, realizing it a regional market, below where you were looking? And if so, what factors that you enumerated, whether it was cancellations or some discounting led to that?

And then on cancellations, what would be a normal level of cancellations and what does the ratio look like as we are early into the third quarter?

With respect to earnings in the business during the second quarter, we have been anticipating, as we have told you, that earnings would start to decline. And that is a combination of those pricing out of the chute, but in the sales that we're reporting in the quarter they are really sales that have been in backlog. In some cases it is a mix issue. In other cases it does reflect some discounting in getting buyers to the closing table, and some additional selling costs that we incur through buydowns of rates.

As we look forward, as we mentioned, we expect to see some further decline. And you are correct as you look at our historic margins. In the early part of the decade our margins were 23, 24%. We're going through that clime. Some of this is also a mix shift as we have increased sales in the Puget Sound area and in Houston.

With respect to cancellations, as we mentioned, they have been up. And cancellations for us vary on a market by market basis based upon our value proposition and how we sell homes. We would expect cancellations percentages to be on average in the mid teens.

In the third quarter?

I can't tell you what they're going to be in the third quarter because it's --.

I'm sorry, normalized.

I wish I knew what they were going to be in the third quarter.

Well, you let us know when you find out I'm sure. On containerboard there is nice sequential improvement in the quarter. But as you think about your performance and look at some of the results that have been reported during earnings season, were that any areas that you think you might have trailed, Steve, either realizations, or maybe operating efficiency, or OCC, or do you think you performed about as well as you would have expected, given pricing and demand for the quarter?

I think that we performed very well during the quarter. But I have to say my expectations are always for higher. I do think that since we are only partially through the change in the business proposition and its structure of containerboard packaging, that in the future we will get the continued good improvement.

Rick Schneider with UBS.

I was wondering, Dan, if you could talk about the closing pattern. As you mentioned, second half of the year is usually much greater, particularly the fourth quarter. And I guess focusing on the fourth quarter would you expect a bump up in the closing in the fourth quarter as you have had historically, even though it will be at a lower level?

Yes, we would expect the trend to continue. We anticipate at this point that closings for the third quarter will be up from second quarter. Some of that is seasonal. Some of that is just simply a shift from some closings that we anticipated in the second quarter that have rolled into the third quarter. And then we expect that fourth quarter will be at higher volume. Albeit, we're cautious at this point based upon the slowing of these markets. But that would be the seasonal pattern, and we don't see it changing.

Could you also discuss the impact of landownership. You went through some of that and you said you had lost some of your deposits, particularly on things where you decided not to take advantage of options. Are their other impacts on the landownership situation, any mark-to-market issues or anything that could be impacting numbers going forward?

I don't expect it. We're really pleased with our land position. But as I mentioned we continue to evaluate option contracts, and in some cases in a declining market what we will try to do is we will try to shift out the closing period, in some cases renegotiate price. And in some situations we have sellers that are unwilling to do so in light of a declining market. It is awfully sticky on the way down with land prices. In the second quarter we did elect to walk from some options, and actually took a charge of about $7.8 million in deposits that we forfeited.

But there's no mark-to-market situations if land values go down is there in terms of your income?

There should not be. We go through a process ongoing. We look at the realization value of all of our properties, as we do for all of our assets of the Company. We evaluate those positions. We don't have any issues at this point in time. But we look at that at least on a quarterly basis to be sure that we don't have impairment issues.

In terms of, Steve, in terms of containerboard great quarter. How far along do believe you are in this process of restructuring that business? Could you give us an idea of what you think the impact has been of the improved asset realization, for example, in this quarter how much could it have been worth?

I think that in the process we have physically all of our people in place and operating under the new business model. It takes some time for all of that to jell. Obviously we had piloted this in certain zones in the country and they are much further along. So we still have some ways to go to put it all in place.

With regard to efficiencies, I think we indicated that we have had seven plant closures since December of '05. And yet we're getting the same -- well, we improved productivity out of the remaining plants. That should give you some idea of the improved efficiencies.

Are their more plants to be shut or is that process over with?

That is an ongoing evaluation process, but we have nothing to announce at this time.

Just one final question. When you look at your costs on a situation, I know you had gains in containerboard, etc. Your manufacturing costs as you showed on the waterfall chart were up $0.04. And you went over some of that, but could you give us an idea looking into the third quarter, Patty, what you are expecting on manufacturing costs? It is hard for us to see it from the outside. Particularly in celluloses fiber, etc., you're not going to maintenance and other things that impacted you. And I guess that was the issue with Plymount. Could you give us an idea of how you're looking at costs going into the third quarter?

Yes. In sale of fiber and white paper both, as I mentioned, we would expect that manufacturing costs will decrease for primarily the two reasons that you noted. Both the fact that the maintenance downtime, which was significant in the second quarter, those are just our normal spring downtimes, but typically that is the quarter that they're taken in. We won't have that going forward. And we don't anticipate any issues around manufacturing as we had with Plymouth.

In containerboard manufacturing those costs also we expect to continue to decline based primarily on prices for natural gas, although we will have to see how that comes out.

OCC costs in containerboard we do expect will continue to increase. There will be increased pressure from the Chinese from the export perspective. And given the fact that markets are good in containerboard, the mill operating rate for those recycled mills we expect will be also high. For those two, both on our paper-based businesses, we would expect that the manufacturing costs would decline.

Could you quantify that cost reduction in cellulose fiber -- cellulose fiber and pulp?

We typically don't quantify those for the third quarter outlook or on an outlook basis.

Mark Connelly with Credit Suisse.

Just one quick thing and then another question. As you talk about containerboard and being done, or done for now box plants -- and I think I mis-said that again. But, Steve, you had talked in April about having a 72% capacity utilization rate and a plan to take it to 90. I'm curious whether you can update that where you are in your process.

My second question is about the home-building business. You've got a bullish long-term outlook. Do you see further opportunities for acquisitions out there? Have you seen any yet? Is your experience with Maracay causing you to lean in that direction?

I will try to take the containerboard question, and then ask Dan to comment on home-building and his future plans. Certainly, I indicated that we are in a change over phase. We have closed a number of corrugated container plants and loaded up a number of other plans. Those that are high-volume moderate product range are loaded up very heavily. And then the specialty plants and come in behind them and get loaded again. We've got some that are operating at very high rates, others that are building.

It is tough for me to give you a complete answer at this stage on what our overall efficiency has reached. The business volume is growing. We have those seven plants closed, and we have got capacity left in our other box plants.

There is one other thing that is impacting the situation, and that is closure of the Plymouth linerboard machine. We would remind you that that was over an 1,000 a ton a day machine and it was 100% OCC-based. Our mix of virgin to OCC has changed with some -- a fairly significant percentage because of the dropout of that particular machine.

To answer your question about priorities within WRECO. As we have said before our first priority is to maintain and build a solid position in the markets in which we already operate. That becomes a priority in a slowdown just in looking for opportunistic situations to improve our overall land position and competitiveness.

Secondly, edging out into adjacent markets. This is another opportunity to do so. Thirdly, as you mentioned, there's an opportunity to go into some new markets, and you talk about that situation. We're certainly seeing an increase of opportunities presented to us. I think that is a function of the market. We're going to be careful and measured in our approach. But we think, as we said, that this may present an opportunity for us over the next 12 to 18 months. We're going to be diligently looking at things that come our way.

Mark Wilde with Deutsche Bank.

I wondered if we could talk a little bit about the wood products business, and particularly lumber. Steve, can you give us any sense of where you think the overall lumber business is right now, even beyond Weyerhaeuser, in terms of being cash positive at current lumber prices?

I would give you a generalized view of the world. Certainly it is much more difficult for Canadian manufacturers today because of the strong Canadian dollar, and of course, the deposits continue. Coming into the U.S. market out of Canada is certainly got the smaller, less cost competitive mills in a poor position. But I don't know that on the U.S. side that the mills are in general in that bad a position.

Would you guess that that is tougher, Steve, maybe for a West Coast producer than a Southern U.S. lumber producer right now?

I don't think that internally we have made a determination that one is far better or far worse than the other at this point. Certainly in acquiring logs there are different challenges between the two. We're more in balance on the West Coast.

If lumber prices remain where there at, how will that translate through to log pricing and to earnings from your timberland operations?

I think if you're in the part of the cycle that is headed down, and that is a prolonged cycle, you'll see some moderation in timber pricing. But I think one thing to bear mind is in best of circumstances are forests in the U.S. can only produce about two-thirds of our needs, so that there is constant pressure on them for lumber. And the marginal production comes in from outside, particularly Canada. As prices for lumber fall, you inevitably are going to see something in timber, but it is moderated by the fact that it is a stressed market already.

And then finally, Steve, if I can, these white paper prices have really rallied very, very sharply since the start of the year. It looks like they're going to go up again in the third quarter. Has that changed your view of the value of your white paper business, or do you see this as just a cyclical pop and it hasn't made much of a difference?

I will take that question. Of course we see increased value in our business. But our decisions around fine paper are not made over part of a cycle. They are made based on what we would see as a strategic future. And we think in that business the business would be better placed outside of the Company.

Richard Skidmore with Goldman Sachs.

Just a question for Dan, if I might, on the real estate business. In terms of the percentage of homes that you have sold, what is the percentage mix between Puget Sound and the other area that you mentioned that was doing well versus the areas that you have seen some slowing? And then are the margins consistent across those respective regions?

The margins are not consistent, because they really relate to local market competitiveness and the value proposition that we operate under in our markets. I talk about Houston and Puget Sound, those are our strongest markets right now.

I can't give you strict percentages, but the average price in each of those markets is at the low end of our range, as compared to the higher priced markets, California especially, as well as Washington D.C. Our relative earnings contribution on the closings in those markets varies also. A lot of what you see in our earnings is there is a change in mix and a change in where those closings are occurring. But a closing in Houston is not as valuable to us as a closing in San Diego.

I guess as we look forward perhaps beyond the third quarter those margins -- the compression could accelerate in the next couple of quarters as that mix shifts to Houston and Puget Sound versus the other areas?

I wouldn't expect it to accelerate, no.

And then just to change to the containerboard just for a second. Steve, can you just comment about -- you mentioned business volume growing in containerboard. Is that function just of the economy and you are growing with customers, or you are able to be gaining market share versus some of your competitors?

I think again it is regional. But again in many cases it is growth with existing customers. But in certain regions we have been able to increase our share of the available business, so it is a bit of both.

Have you seen any change on the margin in the demand side of the equation?

Demand has been very strong. We have been able to, of course, achieve the major portions of our price increase. We expect that to continue through the third quarter, as Patty has indicated.

We have time for one more question please.

Steve Chercover with D.A. Davidson.

Some of my questions have been answered, but I would like to ask a little bit more about the buyback. You've got 18 million shares authorized, and I have a feeling you'll have a lot of dry powder soon. Would you consider reloading on the buyback if other accretive acquisitions don't present themselves in the next (multiple speakers)?

(indiscernible) We have to save one question for Dick.

This is Dick Taggart. We have most of the remaining -- of our current authorization remaining of 18 million shares. As soon as we are able to be back in the market, we will work diligently at executing that buyback. And we will then consider our situation at that time in light of what may transpire from our strategic initiatives. But right now the Board is comfortable with us considering continuing to pursue our 18 million shares at the time that we're able to.

Thank you for joining us this morning on our conference call. I will be available shortly for further questions. If you have any problems getting the materials, please contract April Meyer. Thank you. Have a good day.

Thank you. This does conclude the conference call. You may now disconnect.