威爾豪瑟 (WY) 2006 Q3 法說會逐字稿

Good morning, my name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2006 conference call. [OPERATOR INSTRUCTIONS] Thank you. Ms. McAuley, you may begin your conference.

Thank you, Casey. Welcome to Weyerhaeuser's third 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; Jim Keller, Senior Vice President Containerboard Packaging and Recycling; Dan Fulton, President and Chief Executive Officer of Weyerhaeuser Real Estate Company; and Patty Bedient Senior Vice President Finance and Strategic Planning. Also with us are Dick Taggert, 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 materials can be found at our Web site. Please contact April Meyer at 253-924-2937 for additional information. Please review the warning statement 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 third quarter 2006 net earnings of $211 million or $0.85 per diluted share, on net sales of $5.3 billion. The third quarter includes the following after-tax items. A gain of $31 million or $0.13 per diluted share from the sale of the North American composites business, a gain of $15 million or $0.06 per diluted share due to a reduction in the hardboard siding reserve, a charge of $43 million or $0.17 per diluted share for asset impairment costs associated with facility closures or curtailments and a goodwill write-off associated with previously disclosed businesses.

The components of the $43 million charge include a charge at $18 million or $0.07 per diluted share for asset impairment and costs associated with facility closures or curtailments, primarily in the Wood Products segment. A charge of $17 million or $0.07 per diluted share for an additional asset impairment charge associated with the closure of the Prince Albert Saskatchewan mill. A charge of $8 million or $0.03 per diluted share for a writeoff of additional good will associated with the former BC Coastal business. Please note that the Prince Albert and BC Coastal-related charges are reflected in the corporate and other segment. the quarter also includes a charge of $9 million or $0.04 per diluted share for the impairment of real estate assets, and a charge of $6 million or $0.02 per diluted share related to the previously announced acquisition of Organic ID, a research and development company in the area of RFID. These items total $0.04 per diluted share.

A GAAP reconciliation of nonrecurring items is available on our Web site along with the presentation materials for this conference call. A segment breakdown of earnings per share and selected quarterly net price realization charts are also included in this material. I will now review sequential quarterly business trends by segment. Third quarter 2006 versus second quarter 2006. Please refer to chart 4, changes in earnings per share by segment and net price realization charts 5, 6, and 7 on our Web site.

Timberlands. Timberlands reduced earnings per share by $0.12 third quarter versus second quarter. Log volumes increased 5% due to higher southern volume. Export log prices were flat and domestic log prices in the west declined 2%. Southern log prices were flat.

Wood Products. Wood Products reduced earnings per share by $0.49 third quarter versus second quarter. Average lumber prices declined $35 per thousand board feet during third quarter. Lumber volumes dropped 7%. Average plywood prices declined $17 per thousand square feet, and plywood volume was 5% lower than in second quarter.OSB prices fell $50 per thousand square feet and shipment volume declined 7%. Engineered I-Joist prices increased 1%, however shipments declined 20%. Engineered section prices fell 3% and shipments dropped 18%. CD and AGDGs were $7 million during the quarter.

Cellulose fibers and white paper. Cellulose fibers and white paper contributed $0.24 per share to the earnings variance third quarter versus second quarter. Cellulose fiber prices increased $27 per ton during the third quarter. Cellulose fiber shipments were 3% lower due to the closure of the Cosmopolis Washington pulp mill and the Prince Albert, Saskatchewan mill. Average white paper prices increased $29 per ton. White paper shipments also declined 3% during the quarter due to the closure of the Prince Albert Saskatchewan mill and the paper machine in Ontario.

Containerboard Packaging and Recycling. Containerboard Packaging and Recycling contributed $0.01 per share to earnings third quarter versus second quarter. Containerboard prices increased on average $12 per ton in Q3. Containerboard shipments increased 7%. OCC prices rose $20 per ton. Box prices increased 4%, however shipment volumes decreased 3.9%. Jim Keller will comment further on this segment later on this call.

Real estate-related assets. Real estate-related assets contributed $0.07 per share to earnings third quarter versus second quarter. Closings declined 3% in the third quarter from second quarter but were 14% higher than the closing volume in third quarter last year. Traffic in the third quarter declined 15% versus second quarter and was 41% lower than third quarter 2005. Sales followed a pattern similar to traffic and declined 32% compared to Q2 and was 44% lower than the same quarter last year. The cancellation rate in the third quarter rose to 36% compared to 26% in the second quarter and 17% in the same quarter last year. Real estate and related assets current backlog of homes sold but not closed represents approximately four and a half months of sales compared to 6.3 months of sales last quarter. Later in the call, Dan Fulton will comment further on this segment.

For our next discussion, please refer to chart 8, key changes in earnings -- the key changes in earnings per share. This chart is also available on our Web site. The following items reconciled second quarter 2006 earnings of before special items $1.16 per share with third quarter earnings before special items of $0.89 per share. This chart identifies the major items impacting the third quarter.

Lower volumes principally for Wood Products and Timberlands reduced earnings $0.21 per share. Weaker prices primarily for Wood Products reduced earnings $0.38 per share. Higher containerboard, cellulose fibers, and white paper prices contributed $0.19 per share to earnings. Containerboard Packaging and Recycling manufacturing costs were higher driven by fiber cost increases. However, this was more than offset by lower manufacturing costs for cellulose fibers and white papers, resulting in an $0.11 per share benefit to earnings. Other items lowered earnings $0.04 per share.

The primary change from second quarter is the loss of North American composite earnings, which was sold in July of 2006. Real estate-related assets contributed $0.07 per share to third quarter earnings. I will now turn the call over to Jim Keller.

Thank you, Kathy. Over the next portion of our earnings call this morning, I would like to cover three topics.

I'll start by reviewing the items that contributed to the sector's third quarter performance. This will give you a better understanding of what drove the numbers we announced this morning. Then I want to discuss our new business model, how it changes the way we operate, the progress we've made in our restructuring efforts, and the financial improvements we expect this new model to produce. Finally, I'll finish with our outlook for market conditions during the fourth quarter.

As Kathy has already discussed, containerboard packaging and recycling reported earnings in the third quarter of $96 million after special charges of $6 million. Our price improvements over the second quarter represent the full implementation of our previously-announced increases. Increased prices accounted for earnings improvements of $37 million. We still have a few annual fixed price contracts where increases will be implemented at the first of the year, but we have made significant progress in our pricing efforts. Since announcing our price increases late in 2005 and earlier this year, our domestic containerboard price has moved $125 per ton, export prices $100 per ton; and packaging prices have increased 14.3%.

Turning our attention to our shipments in the third quarter, we normally see a decrease in our packaging volume due to the seasonal slowdown and produce production and this year was no different. The season was especially affected by hot weather in California, which reduced grape and cherry production. In addition to the lower normal volumes, shipments were also affected by our decision to remove what would amount to an annualized 1 billion square feet of low margin, unprofitable business where we couldn't achieve acceptable price increases. Most of this volume was concentrated in the plants we closed during the year. These factors resulted in lower volumes compared with the second quarter.

Packaging volume decreased 3.9% from second quarter and was down slightly from third quarter last year. In the quarter, our containerboard shipments increased 12,000 tons. This year's third quarter volumes, however, were down 36,000 tons from last year due to our exit of third party containerboard markets after the closure of our Plymouth, North Carolina, liner machine in February of this year. Increased fiber costs were the largest negative factor to earnings in the third quarter.

Overall, fiber costs were higher by $24 million in the quarter. Our OCC costs increased by $20 per ton. Costs were particularly influenced by increases we incurred on the west coast where chip costs escalated $14 a bone-dry ton due to shortages caused by lumber mill curtailments.

I would now like to turn to the changes we're making in transforming our business model. You've heard us talk about the conversion of Weyerhaeuser to a market-focused supply chain company. As part of this effort, containerboard packaging and recycling has moved to a plant-centric model to a customer focused national and retail chain design. We are already beginning to see the benefits in increased customer service and more efficient asset utilization. The new model also provides a direct line of sight to the customer base that allows us to determine which segments provide the greatest contribution through the system on a total cost to serve basis.

We've discussed this new model in the past, but let me quickly recap what we've accomplished and how it benefits our company, customers, and shareholders. Our organization is now focused in two areas. The first is our sales and marketing team, also known as our demand organization. This group is charged with serving six market segments that we have designated as strategic business units or SBUs. Each SBU is charged with identifying the target customers in that segment that will give us the greatest return for our supply chain. Then we align our resources to serve these customers.

To improve profitability, we're also implementing value-based pricing strategies to reflect the value customers place on the unique services we provide. We have been successful in certain accounts and segments in migrating to alternative pricing mechanisms, such as timed negotiations, cost reduction sharing programs, and quarterly adjustments based on market conditions. If you now refer to chart 9 on our Web site, I will describe the improvements we expect to achieve in the next two years. We believe that our sales and marketing organization can increase sales margins by over $100 million over the next two years as we improve mix, customer selection, new product introductions, and targeted growth.

The second organization is the manufacturing or supply group. We have organized our converting plants into geographic zones while our mills and box plants operate as a single organization. This team is charged with allocating customer orders to the proper mix of facilities to create the lowest delivered cost while meeting customer needs on time, in full, and to spec. By closely coupling our supply with demand, we are able to operate our lowest cost plants to their full capacity and we will continue to balance our supply with available demand.

While there is always some dislocation with any major reorganization, our supply and demand organizations are working together in a new business model and our customers are seeing improved quality, better service, faster new product introductions and innovations as our SBUs focus on unique customer value propositions. We as a customer have already experienced a more reliable system That responds quicker to unanticipated changes either in supply or demand. We are also eliminating our inefficient or excess packaging capacity and relocating profitable customers to the remaining more efficient facilities.

Last week, we announced the closure of two packaging plants, bringing the total number of plant closures this year to ten plants, while we're retaining over 75% of the volume produced by those closed facilities. I should point out that each closure took an average of $4 million of fixed costs off our system and we've retained our preferred profitable customers. These closures have allowed us to increase our utilization as calculated on a five-day 24-hour basis to 70% at the end of 2005 to approximately 82% today. Our long-term goal is to achieve 90% utilization.

As you're aware, we've taken charges to earnings in the past, as we have moved to this new business model, but we're already seeing the benefits to our bottom line results. For example, we've reduced head count by 950 people since the first of the year, and we expect that number to reach 1200 by year end, or approximately $60 million in annual savings. On another front, our supply teams are working in their zones to look at the most efficient transportation and warehousing alternatives and for the first nine months of this year, we've eliminated 13 warehouses at a savings of approximately $3 million per year. Remember, these are ongoing savings, not one-time events.

Over the next two years, our supply organization is committed to delivering a measurable $65 million in improvements in the mill system through labor reductions, more efficient maintenance spending, and lower chemical and energy consumption. During the same period of time, we're also looking for $65 million from our converting operations to improved efficiencies, lower fixed costs due to lower plant rationalizations and reduced transportation and warehousing costs. The new business model also allows us to use our capital budget more efficiently and our overall capital expenditures will remain in the area of 70 to 75% of depreciation over the next two years. What I have just described can simply be summarized by saying that we're going to market in a different way that allows us to meet customer needs more efficiently while producing greater returns from our business. These results are what we are being held accountable to believe deliver and my management team is committed to meeting these expectations.

Before I close, let me provide a quick fourth quarter outlook. We believe our fourth quarter volume will be comparable to the second quarter, but still below last year's record fourth quarter as we continue to feel the affects of returning some low-margin packaging to the market due to our closures. While OCC costs are expected to decrease, an increase in chip costs and seasonally higher energy usage will offset the OCC reductions. Operating costs and productivity should be comparable to third quarter and we expect earnings to be in-line with third quarter results before special items.

Now I'd like to turn the call over to Dan Fulton, who will discuss the performance of our real estate business. Dan?

Thanks, Jim.

For the recently-ended third quarter, real estate and related assets generated earnings of $135 million compared to $123 million last quarter and $145 million in the same quarter one year ago. Operations during each of these quarters were driven by single family home closings. Year-to-date, real estate and related assets have generated assets of $430 million, which is 11% less than the $484 million earned through the third quarter of 2005.

National housing trends continue to reflect a decline in activity as certain major markets transition through a period of adjustment. The pattern of this market cycle to date is not consistent with past experience. Rather than being precipitated by high interest rates, a weak economy, or excessive job loss, the driving influence today appears to be an oversupply of new and existing homes available for sale leading to a loss of consumer confidence with respect to the future trend of home prices. Investors who spurred demand for housing in 2004 and 2005 have become sellers, causing some buyers to cancel their contracts for homes already under construction, thereby creating additional unsold inventory.

From a long-term perspective, we believe our markets are highly desirable due to favorable outlooks for economic expansion, job creation, and in migration. However, each of our markets is operating in a different stage of the housing cycle, once again reinforcing our conviction that housing is a local business, subject to local economic influences. There are a number of key indicators that we follow to monitor the health of our local markets. New home market tends to move in concert with the market for existing homes. We analyzed the trend for volumes of resells in the market, in total and by product category. The trend in the average number of days on market for resales is also indicative of market balance.

We track trends in sales velocities, contract cancellation rates, effective price levels, available inventory and sales in backlog as key market indicators. In the markets in which we operate, Houston and Puget sound region continue steady with a favorable balance of housing demand and supply in our target market segments. It's our sense that these markets, while remaining healthy are beginning to show some signs of moderation as traffic patterns slow and buyers seem to have less urgency. In both of these markets for the full-year of 2006, we expect to generate modestly higher sales and closing activity compared to the prior year with improved year-over-year margins.

In southern California, Las Vegas, and Phoenix, the market force is contributing to the downward momentum and have not subsided and we've experienced deteriorating traffic and sales patterns and declining margins. Unstable price levels and affordability concerns have caused potential buyers to be understandably cautious. We believe it's likely that the housing markets in these geographies have more downside risk in the near term.

The suburban Washington, D.C. markets have symptoms similar to other soft housing markets, however, the rate of decline in market conditions of the Washington, D.C. metropolitan area seems to have moderated in recent weeks, perhaps a signal that this market is approaching the bottom of the cycle. Our single family margins were 26% in the third quarter, comparable to last quarter, but lower than the 33% margins generated in the same quarter a year ago.

Given sales discounting and buyer incentives offered in certain markets and a geographic shift in mix, we expect the overall margins to decline further next quarter as the market searches for price equilibrium in the most dynamic geographies. We routinely reevaluate our land and our pipeline and renegotiate or drop those positions that we believe no longer meet our return requirements. Our current land position is comparable to our investment in the prior quarter. In the third quarter, we recorded a charge to pretax earnings of $14 million for impairment related to residential communities in Phoenix and northern Virginia, both areas having been particularly impacted by local market adjustments. This earnings charge surfaced through the routine process we utilize to reevaluate the profitability of our projects, as well as the valuation of the land in our pipeline. This process is ongoing based upon an analysis of both current and projected market conditions. Any additional impairment charges or write-offs of land option deposits will depend upon the direction of the markets in which we operate.

To address the challenging business conditions we currently face in certain markets, we've taken a number of actions to provide with us flexibility. First, we continue to monitor the effectiveness of our subsidiaries value propositions and make adjustments if necessary. Decisions concerning design enhancements, product specifications, pricing and incentives are made to fit the competitive environment. We have slowed starts to minimize inventory. In September, we started fewer homes than we closed, a trend expected to continue until we get a sense of market direction.

We've also slowed the pace of new land acquisitions to balance with forecasted closings. We are aggressively reviewing and renegotiating existing land deals in light of current market conditions. The pricing pressure we are experiencing is being partially mitigated with cost reductions from vendors and suppliers and we're also leveraging our national contracts program. As starts have slowed, we are selectively reducing field staff to balance current demand and capacity.

The key components of a healthy housing market seem to be present, reasonable job growth, steady household formation and low interest rates by historical standards. We're confident that the housing markets will return to firm footing when the current oversupply of homes is absorbed and when buyers become confident that home prices have stabilized. With potential buyers on the sidelines now, we believe that increasing pent-up demand will move back into the market when buyer sentiment improves.

We're in a challenging environment with powerful market forces. However, changes in the markets conditions were anticipated, and we've managed through downturns before. Our management team is seasoned and we're structured for the long-term in every sense. Desirable land position, diverse markets, depth of management and strong balance sheet. We expect that during this cycle, WRECO will remain a strong presence in our target markets. Now I'll turn the call over to Patty Bedient.

Thank you, Dan, and good morning, everyone. During the fourth quarter, we estimate the patterns of the economic cycles for our business to be similar to the third quarter. We believe housing will continue to soften, which will negatively impact our home building, wood products, and Timberlands businesses. At the same time, we expect our paper and packaging-based businesses to remain strong producing healthy cash flow.

Dan and Jim have already addressed the fourth quarter outlook for our home building and containerboard packaging businesses, therefore I'll briefly review the outlook for our remaining businesses. Starting with Timberlands. Earnings for Timberlands are expected to decrease from the third quarter as a result of normal seasonal patterns and as the affect of lower prices for Wood Products slowly works its way back to raw material input. In the west and south, we expect domestic log prices will decrease somewhat, curtailment in Wood Products operations as a result of the weakened housing market are also projected to result in lower harvest volumes.

Export volumes and pricing in the west are expected to remain strong, although there is some possibility of softening prices given the weakness in the domestic log market. Wood Products losses are expected to continue in the fourth quarter as the normal seasonal decline is further impacted by slowly housing demand. Average sales realizations for lumber and OSB are expected to be lower in the fourth quarter compared to the third and engineered lumber price decreases have been announced. Margins are expected to benefit from the somewhat lower log costs and rising chip costs primarily in the west. Our mills are reducing shifts and taking downtime across all product lines to balance the plywood demand.

As a result of these curtailments, markets appear to be stabilizing. However, seasonal and cyclical slowdowns could cause losses in the fourth quarter to increase compared to the third. Given the implementation of the soft wood lumber agreement effective earlier this month, we anticipate a return of a significant portion of our previously paid duties based on the anticipated refund formula of approximately 81% of the amount paid including entrance, the expected refund would be about $335 million before tax.

In our cellulose fibers and white paper segment, we expect earnings for the fourth quarter to be comparable that of the third. Until we close our transaction, which is on track for the first quarter of 2007, the earnings of the affected operations will continue to be combined in this segment. Excluding those operations, the third quarter earnings for the segment would have been about $54 million. When we file our third quarter 10-Q, we will be providing some supplemental information to break out those results separately.

Weyerhaeuser Company capital spending through September was $567 million and we still anticipate total spending for the full year of approximately $850 million. With that overview, I'll turn the call over to Steve Rogel.

Thank you, Patty.

We operate in businesses that are subject to different market cycles. You've heard just some of the actions that Weyerhaeuser is taking to generate strong returns through these cycles. Our track record demonstrates that we deliver on our commitments. We use the recent market conditions to prudently grow, pay down debt, and return cash to shareholders. Despite the housing slowdown, our Board demonstrated its belief in the strength of our overall portfolio by increasing our dividend and authorizing the repurchase of 18 million shares of common stock. Following the Domtar announcement on August 23rd, we resumed our buyback program and repurchased 5.3 million shares during the third quarter. We intend to complete to the 18 million share program within the original two-year period authorized by the Board.

Earlier this year, we delivered on our commitment to shareholders to maximize the value of our fine paper business. That review resulted in our announcement to combine our fine paper assets with Domtar to create an industry leader. Because of its substantial scale, high quality assets, and deep management team, the new Domtar will be well positioned to compete. We've structured the transaction to give our shareholders an opportunity to benefit from the significant upside this new company offers.

In addition. Weyerhaeuser will receive approximately $1.35 billion in tax-free cash which we'll use to pay down debt. The transition worker to create the new Domtar is progressing smoothly. We cleared Hart Scott Rodino anti-trust review, and our transition teams are in place and working together. I'm extremely pleased with how well this transition is going. We continue to work with Domtar towards the successful launch of the new company early in 2007.

We also continued to look for opportunities to grow where it adds value for our shareholders. In South America, we are now producing plywood made from wood harvested from our fast-growing plantations in Uruguay. This high grade industrial plywood has received extremely favorable customer reviews, and we are actively developing new markets worldwide for this product.

Despite the current weak market, we remain positive on residential housing over the long-term due to attractive demographic trends and job growth. This means we will continue to look for strategic opportunities to grow our real estate business and enhance the ability of our Wood Products facilities to meet long-term demand more efficiently. As part of that effort, we've announced the construction of a new state of the art saw mill in Oregon, which replaces existing capacity as well as the announcement of significant improvements to our saw mill in Grand Prairie, Alberta.

I'm confident in our ability to perform. We will benefit from the steps we've taken to prepare us for these times. Thank you very much, and we'll now open the call to your questions. Kathy?

Casey, could you please open the floor to questions?

Yes, ma'am. [OPERATOR INSTRUCTIONS] Chip Dillon, Citigroup.

Yes, good morning. When you look at the real estate segment, the operating earnings before the write-off were $149 million. And I know that you talked about the fourth quarter being higher. Is that assuming -- is that off of the 149 number or the lower prewrite-off number -- or post write-off number?

This is Dan Fulton, That would be in comparison not third quarter number and primarily a function increase projected closings for the fourth quarter. As you know, we normally have a stronger fourth quarter with respect to closings. However, in our fourth quarter this year as compared to last year, as we've suggested, we'll continue to see some decline in margin.

Yes, but which third quarter number. 135 or 149?

I'm sorry, can you state your question again, please?

You said it will be up, is it versus the 149 in chart 1, which excludes the $14 million write-off, or is it versus the 135 that you reported that includes the $14 million impairment charge.

We would expect it to be above both.

Okay, that's helpful. And if I heard right, a clarification, Kathy, you mentioned that, if I have this right, that the 119 from operations in cellulose, fibers, and white papers, the fiber part you're keeping is 54 and the part that goes to Domtar is 65? Did I hear that right?

Yes, Chip, this is Patty, I gave those numbers, and that is right. The 54 is in operations in that segment that would be remaining.

Okay. The last question, Patty, sorry for the confusion, when you look at the Wood Products business, you're saying that you expect to continue to lose money, but you mentioned that it could widen a little bit. But then you said you thought the margins would be up because of woodchips. Would a wider loss, more than $46 million, would that be contingent on prices falling further from here, or if they stayed exactly where randomly printed on midweek they stayed, or last week, they stayed at current levels, would we expect to see the loss not widen?

What I actually said was with respect to margins was that they would benefit from the lower cost and the rising chip price. I didn't say that that would be necessarily enough to overcome the pricing pattern. So as we look at our wood products operations typically in the fourth quarter, that is a seasonally down quarter for us. So both with the seasonal impact of the fourth quarter as well as the impact from the lower housing. That could cause that loss to be greater in the fourth quarter compared to the third quarter loss.

And as we look at the business going forward there, I think that most -- we've seen lumber start to recover and a different set of incentives out there, that certainly does not seem to be the case with the onslaught of OSB capacity, which of course, you guys don't deserve any blame for, obviously. But as we see this capacity hit, it's going to take a bit of pain. And looking at your system, I know you've shut some plywood down, is it fair to say you have some odor, either, OSB or plywood capacity that you would have to take a look at?

Chip, this is Steve. We have taken some capacity out during the year early on as we saw the increased capacities coming on and what was going on with the Canadian dollar. We're constantly reassessing the profitability of our plants short-term and long-term. And in the just past quarter, we had a major outage at one of our biggest plants to help balance up our production against sales. So we're monitoring that as we are going forward.

Mark Connelly, Credit Suisse.

Thank you. Just a couple of things. You gave us a lot of color on the box business and I appreciate that. I'm just looking for a little bit better sense of where you guys think you are in that process. I know you've got a 90% utilization product and a way to go there, but I'm curious how front-weighted, back-weighted it feels right now.

Mark, this is Jim Keller. I'll take that. We began the activity of our reorganization at the first of this year by doing a couple of things. We had already evaluated some of our capacity and announced eight closures and a number of sales of facilities at the beginning of the year plus the curtailment of our operations in Plymouth, North Carolina.

We then, at the first part of the year moved into our reorganization efforts that I described as our supply and demand organizations, put the people in place through the first half of the year and then began the assessment of where we would come up with the benefits that I described in the outgoing two-year program that we had that were identified of $230 million of improvements. That took the first six months of new organization in place to determine where the accountabilities would be, what the programs initiatives would be, and what the targets would be for quick delivery of benefits in the system.

We're at the front end of -- we're finishing up the front end of the evaluation period. We continue to look at our plants and close two more plants this past week, but we're moving forward now with the initiatives on the identified improvements that were on page 9 of the presentation. We expect -- we've cut the head count already, we've started the process of reducing the warehouses, looking at transportation corridors and how we can improve that, so those are the type of things that are in those benefits. We're pretty much at the front end of getting those benefits at this time.

That's very, very helpful. Just two more questions. First is with respect to acquisitions of Timberlands, which you guys have talked about wanting to see, has the situation overseas changed in any meaningful way to make that a more constructive environment? We're hearing mixed things out there?

For us, overseas means South American Uruguay markets. The situation for us is we are acquiring bare land in Uruguay and planting it out into plantations. Certainly the competitive pressures have heated up down there, but it is still at an attractive enough value to us that we think with our forestry, we can create tremendous values in the future. So we're still out there looking for tracks that suit our cultural needs.

So the kind of increased emphasis there isn't derailing any of your plans?

No.

And with respect to charges that you may already be aware of for Q4, so we can start to factor that in?

This is Dick Taggert. We are not aware of any charges for Q4. We do our normal annual evaluation of both asset and goodwill impairment, which may result in something given the market conditions, we don't anticipate any at this time. We will have the positive charge of the return of the duties, which will be approximately a pretax gain of $335 million or after-tax of just over $200.

So the box plant closures, that's already taken care of? The ones that you --

The closure that is Jim have announced up to this time have been recognized already.

Okay, perfect. Thank you very much.

George Staphos, Banc of America Securities.

A couple of questions for Jim. Jim, as you've been implementing the new strategy and realizing your early days, has there been any unforeseen impacts as you've gone through the process, either internally or in terms of reaction from the market, or has it gone pretty much as you'd expected?

We really have our organization now working together in a different kind of way and we are seeing benefits coming from the new model. Some of them financial, some of them operational. Some of them are aligned with some of our customer's needs. But with any major reorganization of this nature, and a large number of plant closures that have occurred over this last year, moving the business from this plant to new plants, there are some bumps in the road. We recognize that some of these things are difficult at certain times, but we are working through those issues both with our customers and our employees as they start to occur and we're resolving them as quickly as we can. So overall, we're understanding what it takes and as surprises occur, we're dealing with them quickly.

So most inefficiencies either in manufacturing or the logistics as you've had a ship from greater as you're working tout various corridors.

George, could you restate the question, you're breaking up.

Sorry, Kathy. Is that better?

Yes, it is.

So basically, is it manufacturing inefficiencies at the box plants, or perhaps until you optimize the corridors, shipping from greater distances than you expected to initially?

Yes. We have programs designed, first of all, to work on machine productivity efforts as we bring in the business from the clothes plants to the plants continue to exist, we're working on on improving the machine capabilities, but we're looking at the complete logistics systems. When we had a plant-centric model, box plants really controlled their customer base and where they shipped to. We're finding many circumstances where we can actually move business to a plant closer to the customer that's more suited for that mix and reduce transportation while also improving the efficiency within the box plant. That's how we're looking at getting a number of these benefits.

Two last questions. One for Jim, and one for Dan. Jim, as you then become more efficient and you become a bit more focused, either by end market or by region, it suggests you're ultimately going to have a little bit more available capacity again. Wouldn't that suggest you're going to have to do more box plant closings? And Dan, given where we're term in backlog and a different cycle, how should we think about how to evaluate where the troughs and starts should be and where we should see your margins trough? Thanks, guys.

We constantly look at the mix of box plants we have as well as our containerboard mills. And as we determine that, based on the improved efficiency of other fits, we'll look back into the portfolio to understand where additional capacity can be rationalized to keep us moving towards that 90% utilization goal. Dan?

George, you asked a couple of questions. One is about the timing of the cycle, and as I pointed out, we're in different cycles in each of the markets in which we're operating. For instance, Houston and the Puget sound area have been relatively strong on a year-over-year basis, and our margins are higher this year than last year. In the other large markets in which we operate, southern California in particular, Nevada, Phoenix, we're in Washington, D.C., we're in a cycle that's moving down and actually we've been in that trough a little bit longer in the Washington, D.C. market.

We're starting to see stabilization there. We're still seeing some decline in the southwest. I think I pointed out before, our margins are still relatively strong. We ended up the quarter gross margins at 26% which reflects a balance across all our geographies and reflects the value proposition and land position we hold in our markets. Over the long-term, we would expect margins to cycle down and reflect a longer term over the cycle number of low 20s. But I can't comment on specifically when each of these markets are going to bottom out because I'm not able to predict that. It's a function of the buyers in the market and it's a function of what our competitors are doing.

Appreciate the color, thanks.

Next question.

Your next question comes from Edings Thibault, Morgan Stanley.

I actually have two questions. One, regarding the Uruguay business and the other to Dan. In Uruguay, are the plywood volumes that you referred to, Steve, there being reflected in the reported numbers? And can you talk about the profitability level of those operations relative to your North American operation?

Well, I'll comment in general. The plant is going through start up, it's just moving from a two-shift to a three-shift operation. It's start-up production has gone into the local Argentinian and Brazilian marketplace very successfully. With regard to the grades it's producing, it's an industrial plywood panel that's a combination of eucalyptus and pine with very good surface characteristics. Well-received in test markets so far, so the summary of all that is it's not in the statistics, it's gone through a very successful and safe start-up. It actually came in under-budget on construction. So we're extremely pleased with that, but you'll be seeing it appear in future numbers.

This is Dick Taggert. That plywood mill is owned within the joint venture that we have with Global Forest Partners in Uruguay and is a non-consolidated joint venture. So the revenue does not show up in our financial statements.

So presumably, going forward, it won't show up in your shipments either, is that correct?

That's correct. It is our goal as we've stated many times to be -- we will be the logical owner of that joint venture in the future, but at this time it does not consolidate.

Okay, great. And then a question to Dan Fulton. Just, Dan, as you talk about obviously this is a different kind of real estate market. Can you talk about some of these impairment charges that you're taking, perhaps give us a little bit more color on the specific projects, and then where you stand in that evaluation process? Should we -- are you comfortable with, based on where you think the trajectory of the markets are in southern California and Las Vegas that you're comfortable with your land position? Are you starting to look, perhaps at the Puget sound and Houston given the marginal deterioration there?

First of all, a little bit of background on the charge-offs for the third quarter. We recognized impairment charges on lot positions in Phoenix and in northern Virginia. The property in Phoenix is located in the southeast valley, the property in northern Virginia was in an outlying county and the response in both of these cases are part of an ongoing process that we have where we look at our entire land position and our project profitability. And based upon competitor actions in both of those locations, when we go through our analysis, we revised our product prices down and that causes us to reflect an impairment charge so that we can then reprice product and be competitive in the marketplace. And so in large part, it depends on what our competitors are doing.

If we look at the rest of the markets, we expect to see some further margin deterioration in southern California and in Las Vegas. It is possible that we would have additional charges either from impairment or charge-off of option positions, but we don't have anything identified today. If they were identified today, we would have taken the charges. We will continue to monitor that in the future. In the near term, with respect to the Puget sound area and Houston, we don't have any particular concerns, but I just emphasize that it's part of an ongoing process. One of the things you'd observed from our competitors is that there are significant charge-offs taking place both in the case of option deposits or impairments and to some extent the action of our competitors will affect pricing in the marketplace and we'll have to respond.

So just to clarify, you guys have not really yet walked away from your options. This is just reevaluating the value of the existing positions?

Well, the comment in Kathy's announcement was that in fact we had an impairment charge, which is a write-down of existing positions. We didn't talk about option deposits. In fact, we did charge off $2 million for the quarter of option positions we walked away from and a charge-off of preacquisition costs. Year-to-date, that number is $7.8 million.

Great. Thank you very much.

Mark Wilde, Deutsche Bank.

Just to follow-up, I know you guys have been talking about trying to expand your geographic footprint just by some organic growth in places like Portland and Sacramento. Is the slowdown in the markets -- what change is that making in that strategy?

In the case of Sacramento, we have acquired an initial land position, have been processing it, and we are on schedule to open sales in 2007 and we've got the same situation in Portland where we're expanding into that adjacent market for quadrant. We don't see any significant near-term impact on those plans. Obviously we're responding to local market conditions. Sacramento has gone through the same kind of a slowdown that the balance of California has. Could be that that works to our advantage, because we haven't been on the market this year. So our plan is to continue on the path next year and the pace of that growth will depend upon market philosophy and once again the action of our competitors.

Okay. And then, Jim Keller, the strategy that you've outlined for the box business, should we interrupt that along with the very large size of your box plants, which I think are the biggest in the industry on average -- should we interpret all that to mean that you are really going to be primarily focused on kind of large volume national accounts as opposed to small and medium-sized box businesses?

No, Mark, that wouldn't be a good characterization. First, you're correct about the size of our plants. On average, our plants are probably the largest in the industry. But that doesn't mean we're just focused on the large pieces of business. Our focus now is on each of the segments to drive the most profitable business from that segment into our system. So it isn't a target around national accounts, it isn't a target around local accounts, it's establishing targets around the most profitable mix as it relates to what's available to us. So we are not pursuing a national accounts strategy, if that's the direction you were looking.

Yes, okay. And can you just talk about the ability to kind of pass along cost increases at the box plant level over the last few years? It just seems to me like we're battling just to get containerboard prices through, but there have been a lot of significant cost increases just for both producing and then transporting boxes.

Well, I agree with you, Mark. We have seen substantial increases, labor increase, costs of benefits, the energy moves, chemicals, materials. We've been very aggressive in the price negotiations and the activities of the bidding process to identify with our customers, it's not just about paper anymore. It's about our ability to improve our margin, which means passing on the costs that are hitting us in the areas that I identified. So we're serious about moving our margin, our complete margin up in our negotiations as we take on new contracts or deal with bids and describing the reality of the cost structure of our business to our customers and saying it's not just about paper, it's about the total supply cost through the whole supply chain.

And finally, Steve, you mentioned Uruguay, I think you have about 300,000 acres down there right now. How big a plywood or Wood Products business can 300,000 acres support and could you use this structure you've got with global forest partners to maybe move into other markets in Latin America or elsewhere around the world?

Certainly we intend to grow beyond the base that we have in Uruguay, Mark. We're actively acquiring additional properties now. The ability to grow with Global Forest Partners or any other partner is really governed by the fund that they have available at the time and their desire to form a partnership. So taking in an existing partnership and going somewhere else in the world with it is probably not feasible, because they're usually closed out funds. But certainly joint ventures are things we can do and we're constantly on the lookout, for us, primarily in the temperate zones of the world, where we can grow both our soft woods and eucalyptus or other hard woods.

Next question.

Mark Weintraub, Buckingham Research.

I have some questions on the home building. Before that, just quickly, Steve, if you would, an update on the timber tax.

Sure. Everybody is outside Washington D.C. campaigning for the election themselves or for their friends in congress so there's nothing happening at moment and won't until after the election, but we've got a broad base of support in both parties and regardless of how the elections come out, we consider that we're in an excellent position because of the biparty and bipartisan support we've got for timber tax.

Where the bill resides right now, of course, it's been passed by the House. It's been in the Senate in various packages, but it's where it should be right now in what's called the Tax Extenders package, and that's the very first thing that the lame duck congress has to face when it comes back to D.C., because there are so many things in the extender's bill that if they don't move on it, the whole economy will be in an uproar, states as well as the Internal Revenue Service, they can't print their forms right now unless they get the tax extender's bill to give them the guidance of what to print. So we know there's going to be action. We're still optimistic and we have as our backing those 147 congressman and 32 Senators that are committed to seeing us through.

Okay. And then shifting gears to the home building side, Dan, just want to fully understand, when you talked about margins in the low 20s, was that your view of a bottoming, or was that your view of more normalized? And specifically, what margins -- where are margins now or what were the margins -- I thought you said something like 26% or 27% -- I wasn't quite sure what margins those were referring to? And then lastly, if that was what you were saying and I heard it right, can you in a nutshell explain the huge difference that obviously must have taken place in this business, when if we look back ten years ago and margins were obviously much, much lower than the low 20s and I realize there's been tremendous change, but if there's a way to communicate it briefly, why it's so different now than it was then?

Sure. When we quote margins, we're talking about gross margins, so that would be the operating margin that comes from the construction of the home itself, less period costs and so our margin for the third quarter was 26% and as we said, it was -- if you go back to last year, 33%. We've had a drop, talk about the low 20s, that's a number we expect over the cycle, and we go back to 2001, 2002 time frame when we think we were in a more normalized market.

Our margins have generally been higher than the average in the industry and it's primarily a function of the select markets in which we operate. So we're normally in more restricted markets with respect to entitlements. That's California, that's Washington, D.C., and then over time, there's been a change in the market in Las Vegas and that's become a more constrained market because of the way land is controlled there. So our margins are a reflection of the markets in which we operate. Also a function of the land position we hold back, and we take a longer land position than many of our competitors.

Peter Ruschmeier, Lehman Brothers.

Thanks, good morning. A question for Dick or Patty. You bought 5.3 million shares in the quarter, but your average shares are down about 1.3 million shares. Can you comment on the period end share count?

Pete, I don't have -- I'll look at that quickly, as you know the EPS calculation is a year-to-date shares outstanding, not a current point in time. I will get that number and get it back to you so you'll see the significant drop in the number of shares beginning in the first quarter of next year.

Okay.

Pete, I should just add that as we started to repurchase those shares, we were out of the market until we announced the Domtar transaction which was at the end of August. So the amount of shares that we repurchased were really outstanding for some period of that quarter.

Okay, very good. A question for Dan, is it possible to update us on the size of your current land bank and whether you'd care to comment on the percent of that land bank controlled through options and then I guess interestingly, whether you'd care to comment on order of magnitude of the value of those options.

I'll start with the last first. I can't comment on I'll start with the last first. I can't comment on the value of those options. The length of the pipeline, number of lots we've got under control now is about the same as it was last quarter. However, as we express it as a number of years because closing growth is slowing a bit, we would express that number today as about seven years and approximately 50% of that is owned and the balance is held under options for some kind of a long-term rolling takedown agreement.

Okay, that's helpful. And just lastly, I'll throw it up to whoever might care to comment. On the timber profits, many of the competitors have been reporting fairly weak timber profits, but very strong real estate profits and I'm curious if you'd care to comment on the split in the quarter or your outlook in those two segments of that business going forward.

Mark, this is Dick -- excuse me, Pete, this is Dick Taggert. Our land sales in the third quarter were $25 million less than in the first quarter and were slightly lower than our average quarter, which is 25 to $30 million. I think we're just under $20 million and we would expect to see them more at the normal level in the fourth quarter.

Next question.

Steve Chercover, DA Davidson.

Thanks, good morning. My first question is for Jim Keller, given your comments of the ten box plants you closed, you kept 75% of the clients. Could we extrapolate and say you should almost fire 25% of your clients across the board, or are they all profitable?

Well, Steve, we're chuckling a little here. I don't think our mix today would include 25% unprofitable customers. In today's market environment, the profitability across all the segments on the customer mix has improved as prices improved since the later part of 2005. However, going forward, as we look at our mix of customers, we're concerned about if the cycle were to move in a different direction, we want to be with customers where we can maintain our profitability through the cycle.

But the example of the ten box plants and 75% really relates to some customers won't fit the mix in the new plants that will take over the business and some customers won't fit from a logistic standpoint. And some customers across the board, not just in those ten plants, we weren't able to get the price increases we were expecting, and we moved away from some of that business as well. The 75% is just the retention rate calculation when we do close the plant and move the business make the choice of what customers come with us. And customers make the choice to do something else on their own.

But as you do more with less, you are willing to walk away from business?

Absolutely.

To walk away from business?

Absolutely.

And one other quick one, and I guess we won't be asking this question in a couple of quarters, but can you give us any color on what's happening in uncoated free sheet right now?

In uncoated free sheet, business has been very strong, but in recent weeks, a softening a bit.

Great, thank.

John Tumazos, Prudential.

Last quarter you provided a breakdown for the home builders segment of traffic by city or region. And as I recall, the traffic was up 20% in Houston and up 8% in Seattle. Are those regions are still up at similar rates and could you review the traffic by region as well?

John, this is Dan. Let me take the market that is you specifically asked about. The traffic in Houston has moderated from where it was a quarter ago, and so on a quarter to quarter basis, our traffic is roughly the same --

Same as a year ago or same as June?

Same as June -- actually, not very different than it was one year ago. In the Pacific Northwest, our traffic is off about 10%, and that's compared to last quarter and compared to last year, it's off about 30%. Look at the southern California -- I'm going to combine southern California and Nevada, off about 16% from last quarter, off 48% from a year ago. So the southwest markets have been more impacted recently.

We don't have -- traffic's about the same in Phoenix, we don't have year-ago traffic numbers for Phoenix because we weren't active in the market there and in the Washington, D.C. area, traffic was off 17% for the quarter as compared to last quarter and about 33% as compared to a year ago. So on average, as we've presented, traffic is off -- and we would expect it to not be very different in the next quarter or so until we start to see some bottoming.

Rich Schneider, UBS.

Patty, was wondering about your comment on the cellulose fiber and white paper segment. Pulp prices are going up, but you're saying that the profitability will probably be flat fourth quarter. Is that because of what was just alluded to that there was some softening in the white paper area?

Well, the markets in cellulose fibers do continue to stay strong and going up. I don't think there's a lot of softening in the white paper, possibly some. But we're also taking some additional downtime for maintenance in the fourth quarter compared to where we were in the third. So that's why the number is comparable as opposed to strong increases.

And Dan, how solid -- I don't know how you touch on this, but how solid is this 4.5 month backlog when you're looking at 36% cancellation rate?

Well, it's not as solid as it was a year ago, because the markets have shifted. At this point, as we get further into the down cycle, Rich, obviously we have a mix in the backlog of new sales and old sales. So the sales that were made six to nine months ago are somewhat more at risk because in the markets where there's been significant price declines, we've got buyers that are cautious about moving forward, plus we have buyers that are in some cases having difficulty selling their own home in order to move up into a brand new home. Recent sales, the backlog number is relatively solid, we age it and we think that as we look at the backlog today, it's probably more solid than it was three to six months ago just because we're starting to see some stabilization of prices. But for older sales, we are having to work on every single home and backlog to get it through closing.

How much would you put in the six to nine months category of the four-and-a-half month backlog? ?

I don't have that data

And on this $230 million target, that’s a 2 year target I guess, how much do you think you've achieved when you've taken out 900 people, or is it being offset by up-front costs?

The up-front costs of when we remove people deal with severance issues and COBRA, which can extend out to 12-18 months in some cases. We haven't really experienced the reduction in cost due to the reduction in works force at this time. The closed plants we've seen, the cost being removed, but relative -- and they'll start to really hit us going forward since most of the closures are now complete. Now the next round of the next two will be down in the fourth quarter. A number of those benefits will start to accrue early next year.

Rich, I would like to add to Jim's answer and just expand on the answer I gave the Mark Connelly regarding anticipated charges associated with this program in the fourth quarter. While we have recognized about the asset write-offs that will occur, as Jim mentioned, there's still additional reduction in employment that will occur and we have not yet recognized a severance for those people, as that is recognized at the time those people are notified.

Your last question comes from Rick Skidmore from Goldman Sachs.

Good morning, thank you. One quick question for Steve. As the Wood Products market deteriorates and prices are pretty low in that --

We lost the question.

Operator, could you get Rick back?

Hold one moment, please. Rick?

Yes.

Sorry, Rick, we lost you halfway through the question.

Okay, sorry about that. Just on the wood product segment, Steve, any change in your thinking with regards to growth in that segment given the difficulties in the marketplace currently might provide some opportunities going forward?

I can't speculate on our opportunities in the marketplace. Right now, I think you could say that we have our hands plenty full in managing through the market conditions and as we implement a similar type of program called iLevel in the Wood Products group. Having similar successes to what Jim has indicated for containerboard packaging. So my answer would be for you, for the near term, we've got plenty of things to do.

Thank you.

Thank you, everyone, for joining us this morning. I will be back in my office in about 15 minutes and so please, if you have any questions, you can reach me at 253-924-2937. Thank you very much.

This concludes today's conference call. You may now disconnect.