威爾豪瑟 (WY) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the Weyerhaeuser 2007 1st quarter earnings conference call. During today's presentation, all parties will be in listen only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded on May 4th, 2007.

I would like to turn the conference over to Kathy McAuley, Vice President of Investor Relations. Please go ahead.

Thank you, Steven, and good morning. Welcome to Weyerhaeuser's first quarter 2007 earnings conference call. This call is being webcast at www.Weyerhaeuser.com. The earnings release and material for this call can be shown on our website or by contacting April Meier at (253)924-2937. Please review the warning statement in our press release and on the presentation slide concerning risks associated with forward-looking statements. Forward-looking statements will be made during this conference call. I will now, turn the call over to Steven Rogel, Chairman, President and Chief Executive Officer of Weyerhaeuser Company.

Thanks, Kathy. And thanks to all of you for joining us. We have a lot to cover today, but before we review financial results, I want to briefly discuss a few important items, including our announcement that we are commencing a process to explore strategic alternatives for our Containerboard packaging and recycling business. I will then turn the call back over to Kathy McAuley to discuss our results for the quarter. Rich Hanson, our Chief Operating Officer, will cover the operational performance of our forest products business. Dan Fulton, our President and CEO of RICO, will discuss our real estate business in detail, and our newly appointed CFO, Patty Bedient, will provide an outlook on the quarter ahead. Finally we will open up the call to your questions.

As we demonstrated with the Domtar transaction, we can and will pioneer innovative solutions to deliver value to our shareholders. The Domtar agreement allowed Weyerhaeuser shareholders to participate in a $3.8 billion tax-free transaction including $1.350 billion in cash which the company will use for debt reduction. The new Domtar is a is a formidable competitor in the global market with additional growth opportunities. I am very pleased Weyerhaeuser shareholders have the opportunity to participate in the upside potential of this combination.

As we announced this morning, the Weyerhaeuser board of directors has authorized a process to consider a broad range of strategic alternatives for our Containerboard packaging and recycling business. The alternatives range from continuing to hold and operate the business to a possible sale, disposition, or combination. We have made great progress in improving the performance of this business, which today operates with a tighter, customer driven supply chain. The changes we have already made allow us to respond more rapidly to market cycles and changing demands. Tom Gideon, recently named as the new leader of this business, is focused on accelerating our progress. Containerboard packaging and recycling is a business comprised of outstanding assets and personnel, and our successful restructuring efforts position us to undertake a review of the strategic alternatives. We look forward to providing an update on our progress as soon as is appropriate. In the meantime, we will do what we have always done -- provide our customers with outstanding service and do it while working safely.

We recently opened an exciting new chapter in our legacy in innovation with an agreement with Chevron to assist the feasibility of biofuel production. Weyerhaeuser, as a leader in forest technology, is teaming with Chevron, a leader in its industry, to develop the potential of cellulose to fuel cars and trucks with non-food resources. I am excited about the potential of this project to unlock the additional value of our forest resources with innovative new technologies. Some of you have asked about the industry's ongoing tax reform efforts. This legislative initiative enjoys both industry-wide and strong bipartisan support in Congress. The passage of the Tree Act of 2007 will provide immediate value to shareholders and is compatible with many different business strategies. We will update you on any future developments. With that brief review, now let me turn the call over to Kathy to discuss Weyerhaeuser's financial results. Kathy?

Thank you, Steve. This morning Weyerhaeuser result first quarter 2007 earnings of $755 million or $3.22 per diluted share on net sales of $3.9 billion. The first quarter includes the following after-tax items. A gain of $756 million, or $3.22 per diluted share on distribution of the fine paper business and related assets to Weyerhaeuser shareholders. I will refer to this as the Domtar transaction. The gain includes a Canadian tax benefit of $74 million. A charge of $49 million or $0.20 per diluted share for asset impairment and closure costs associated with the intended sale of the Canadian distribution business and Miramichi New Brunswick OSB mill. These items totaled $3.02 per diluted share. Excluding these items, the company earned $0.20 per diluted share. A GAAP reconciliation of special items is available on our website along with presentation material for this conference call. Please note first quarter 2006 results have been recast to reflect the Domtar transaction and composite assets as discontinued operations. 2006 also reflects the application of a new accounting pronouncement which requires major maintenance costs to be expensed the quarter in which they are incurred. Finally, a reminder that first quarter 2007 was a 13 week quarter versus 14 weeks in Q4, 2006.

I will now review sequential quarterly business trends by segment, first quarter 2007 versus fourth quarter 2006. Please refer to chart four, changes in earnings per share by segment, net price realization charts five, six, and seven, and a new table containing real estate data on our website. Timberlands contributed $0.02 per share more to earnings in first quarter than in fourth quarter. Third-party log volumes declined 11% as a result of earlier damage from Hurricane Katrina as well as sourcing more volume internally to our mills. Domestic log prices, however, increased 4%. Export log volumes declined 3% due to one less week in the quarter and the export shipping schedule. Prices were stable but modestly lower than in the fourth quarter. Wood products earnings were $0.22 per share higher in first quarter than in fourth quarter. Adjusting for special items, the loss for wood products improved $211 million in the first quarter. Excuse me, let me repeat that. Adjusted for special items, the loss for wood products improved to $111 million in the first quarter compared to a loss of $186 million in Q4 2006.

70% of wood product facilities experienced curtailments to market conditions. Average lumber prices increased $11 per thousand board feet from fourth quarter levels. Volume declined 11%. Average plywood prices increased $24 per 1,000 square feet, but volumes were down 18%. OSB prices declined $9 per thousand square feet and volumes were 9% lower. Engineered i-joists and solid section prices and volumes were modestly lower. The cellulose fiber segment was formerly called cellulose fibers and white paper. The white paper business was part of the Domtar transaction completed on March 7th, 2007, and earnings through that date are recorded in discontinued operations. Going forward, the cellulose fiber segment includes 1.7 million metric tons of absorbent and specialty pulp production, our liquid packaging business, and NORPAC, a newsprint joint venture. Included in the cellulose fibers operating earnings of $22 million is $9 million of paper-grade pulp sale, which were part of the Domtar transaction. Cellulose fibers earnings were $0.10 per share lower than in the fourth quarter. This was attributed primarily to scheduled maintenance downtime at three mills. Rich Hanson will discuss this in more detail.

Average pulp price realization increased $27 per ton in the quarter. Containerboard packaging and recycling earnings were $0.01 per share lower than in the fourth quarter. Containerboard prices were $8 per ton lower (inaudible). Containerboard volumes rose 2%. Packaging prices were modestly lower, impacted by mix and the effect of the California freeze which also contributed to a 6% reduction in box volume. Old corrugated container prices were $53 a ton higher in March than in the beginning of the first quarter. On average, first quarter OCC prices were $29 a ton higher than Q4 and woodchip cost increased 3%. Real estate and related asset earnings were $0.72 lower than in the first quarter than in the seasonally strong fourth quarter. This segment's revenue was primarily from single-family home sales in the quarter. The average price of homes closed declined $46,000 to $480,000. The cancellation rate improved from 36% in Q4 to 16% in the first quarter. The backlog of homes sold but not closed increased from three months at the end of the fourth quarter to five months at the end of the first quarter. Dan Fulton will discuss this segment in more detail later on this call. I will now turn the call over to Rich Hanson.

Thank you, Kathy. Beginning with timberlands, the first quarter performance was very good. In spite of weak sawmill demand and low lumber prices, due to the weather-related industry log supply constraints, log prices remain firm in both the West and South, and our export log demand from Japan has been steady. In wood products, as was referenced by Kathy, after adjusting for special items in this case, it's primarily the Canadian duty refund. Wood products financial results improved over the fourth quarter. Channel inventory is very low but product prices continue weak. Minor price increases have occurred in lumber as buyers replenish stock, but managing the downturn to minimize losses has been challenging as we successfully kept our inventories in control but not foreclosed immediate sale opportunities. All of our facilities have been affected by the downturn and 70% have experienced significant curtailments.

While the wood products business is impacted by this nationwide downturn in home building, which Dan will describe, there are positive signs that reinforce our long-term wood product strategy. A year ago at our annual shareholders meeting, we announced the implementation of our residential wood product strategy. That was the integration of our major product lines, distribution system and customer solutions in one business we branded iLevel. Our products and service offerings such as whole-house design software and automated preparation of training materials for installation at the job site have shown solid gains with our targeted customers. In cellulose fibers, with the completion of the Domtar transaction, the focus of this segment on specialty fibers, primarily absorbent fibers from our Southern Softwood mills and premium towel and tissue from our Grand Prairie, Alberta mill. The absorbent pulp price trends continue favorable, with global pulp inventories at a five-year low of 25 days of operating rates of 97%.

The earnings were lower in the first quarter than fourth in this segment partly due to the reduction of pulp tonnage from the mills included in the Domtar transaction. Specifically, in the cellulose fiber business, the first quarter volume was 104,000 tons below the fourth quarter, with 54,000 tons of that attributed to the departure of the Domtar mills. The balance was planned maintenance outages and one week less in the fiscal first quarter. The annual outages we completed were at New Bern and Columbus in the first quarter with a loss of about 20,000 tons and outages are planned in the second quarter at Grand Prairie and Fort Wentworth with a similar loss of tons. In addition to our absorbent fiber mills, this segment includes our newsprint joint venture at Longview and the liquid packaging board facility at Longview, Washington. At Longview, the liquid packaging board mill outage stretched to 14 days due to the delay. The cost of this annual outage is no longer amortized over the year, as Kathy mentioned. The impact at Longview on that outage was $9.3 million negative, not including the lost production.

Containerboard packaging, although first quarter earnings were close to fourth quarter, the California freeze had a negative impact due to the loss of the produce box business. Realizations were down due to mix -- box realizations due to the produce business impact, and Containerboard price was impacted negatively by the market mix within export. We initiated, as you know, a $40 per ton price increase on Containerboard and corresponding box price increase in January. That was met with strong market resistance and prices have remained flat. There are some positive signs in the market that we may realize these increases in the weeks ahead and we need to recover margin loss due to higher fiber cost.

During the first quarter, Containerboard mill maintenance downtime was 20,000 tons compared to 44,000 tons in the fourth quarter. Second quarter planned mill maintenance outages will result in about 51,000 lost tons. Last quarter identified $100 million total cost and margin improvements from 2007 for this business, and that remains an achievable target. We are on schedule to obtain the mill and box plant cost reductions and realize $20 million of that portion in the first quarter. On the revenue side, it is proving to be a challenging market in which to reposition the business to improve margins. I will turn it over to Dan Fulton.

Thanks, Rich. Before I begin my remarks this morning, I would like to call your attention to a table we have included in today's webcast information, which provides history on four key operating metrics I have discussed with you in the past. In order to provide you with a bit more perspective on our operations, we have included quarterly data starting in 2005 for sales traffic, net new orders, cancellation rates and average home closing price. Traffic and new orders generally follow seasonal patterns and therefore year-over-year comparisons are most meaningful. In the case of cancellation and average home closing prices, quarter to quarter comparisons may be most helpful in understanding current market conditions. Now I will review results for the quarter. Real estate earned $58 million in the first quarter compared to $172 million in the same quarter one year ago. Virtually all of real estate's earnings in the first quarter of this year were generated from single-family closing activity, whereas the first quarter of last year included earnings contributions of $33 million from other related activities. The housing downturn first reported late in the year 2005 in select markets has now extended into 2007, expanding its reach more broadly into additional markets, creating a challenging business environment. Major markets across the country experienced the strongest run-up in pricing during the 2004 to 2006 time frame have been buffeted by a number of economic crosscurrents.

The traditional market bellwethers of steady job growth and low interest rates have been offset by an inventory overhang of both new and existing homes for sale, leading to a loss of consumer confidence in the near-term direction of home prices, as we were finally beginning to see some general stabilization in our markets early in the first quarter. Other factors, such as the upheaval in subprime mortgage markets seem to have caused further disruption. With unsold new home inventories on a national basis still hovering in the range of eight months' supply, and demand impacted by core consumer sentiment and a tightened credit environment, we believe there are a number of local and regional markets with more downside risk in the near term. However, as we have commented before, as we described RICO's business model, determination in market health is most effectively evaluated on a market by market basis.

With respect to our operations, our portfolio was focused on home builders, local value propositions and select high-growth markets. We started the year strongly in a comparative sense. Year to date through March, the new homeowners on a national basis were 22% lower than the prior year. Our own new orders increased 14%. We attribute this comparatively strong start to the year to the effectiveness of our targeted value propositions and the differential health of the key markets in which we operate. As local markets pass through the respective stages of the housing cycle and new communities become available for sale, we've experienced a modest shift in the distribution of new orders. In particular, the Puget Sound region of Washington has been remarkably strong with very favorable year over year traffic and sales in the first quarter. In contrast, Las Vegas and Phoenix are encountering very competitive conditions in the face of excess inventory and below trend level traffic levels, as buyers' interest is seemingly centered solely on the magnitude of price discounts. The Houston market continues steady, although traffic and sales are trending below the strong patterns of recent quarters. San Diego market is showing modest signs of across all price points, whereas Southern California's inland empire is active at lower price points, but is very competitive. Finally, the Maryland and Virginia suburbs of Washington D.C. started the year strongly. But market optimism has seemingly moderated in reaction to an increase in inventory.

We closed 976 homes in the first quarter, 16% fewer than the same quarter one year ago. Year over year decline in closings in the first quarter was expected given our diminished sales backlog position entering the fourth quarter. Sales in the fourth quarter of 2006 have been impacted by challenging conditions in key markets, global seasonal factors and unusually poor weather in the Pacific Northwest. The average price of homes closed in the first quarter was $480,000 which was a 9% decrease compared to last quarter and 1% decrease compared to the first quarter of last year. The average sales price of homes in backlog at the end of the first quarter was $474,000, representing a 4% decrease compared to last quarter and a 12% decrease compared to the first quarter of last year. Declines in average prices compared to prior quarters reflect changes in our geographic sales mix as well as some price declines in our most competitive markets. Real estate generated revenue of $487 million in the first quarter, a decrease of 29% compared to the first quarter of last year. With respect to single-family operations only, our reduced volume coupled with slightly lower average sales price resulted in first quarter revenue 17% lower than the first quarter of last year. I am pleased to note that one key market strength indicator reflects significant improvement across the spectrum of our operations. Contract cancellations were 16% in the first quarter compared to 36% last quarter, and 19% in the same quarter a year ago. Although our experience in the fourth quarter is likely an aberration, as buyers cancel their purchase commitments with us to accept deep discounts on completed homes from competitors, it's our belief that several successive quarters of contract cancellations below 20% signal that markets are once again approaching balanced conditions.

With the pace of new orders exceeding closings, our sales backlog has increased. Our current backlog represents five months sale comparable to a year ago at this time and an increase compared to the three month backlog at the end of last quarter. Based on our internal analysis we do not believe that the meltdown at the subprime mortgage market has had a significant impact on our operations. We estimate that less than 10% of our backlog is dependent on subprime mortgage products, either for our own homebuyers' purchase or in some cases, for the sale of our buyers' departure residence. We're monitoring the situation closely and as necessary working with alternative lenders to provide backup financing. As expected, single-family margins declined to 22% in the first quarter of this year compared to 24% last quarter, and 31% one year ago. With the continuing overhang of inventory in many key RICO markets, we expect our margins to deteriorate further next quarter. It's our sense that the prevalence of discounting is broadening after having been more targeted earlier in the year. Depending on prevailing pricing practices in certain markets, we may need to adjust our pricing further in order to compete effectively.

We are experiencing substantial challenges in several of our markets. To address these conditions, we continue to focus on steps that provide our operations with flexibility or which enhance our market position for future growth. First, we continue to monitor the effectiveness of our value propositions. By refreshing our product and service offering at the local level, we insure that our value propositions remain distinctive in the current competitive environment. We believe our favorable year over year sales experience in the first quarter is a reflection of our ability to adapt in a turbulent environment. Second, we made significant progress in reducing our standing inventory. Our completed and unsold inventory position of 293 units represents approximately 18 days sales compared to nearly eight months for the industry as a whole. In response to our lower backlog at year end, we started one-third fewer houses in the first quarter compared to the same quarter, one year ago. Third, we have slowed the pace of new land acquisitions to balance with forecasted closings. Virtually every land purchase obligation has been reunderwritten to reflect current market conditions, the resulting outcome being modified purchase price, modified terms or both. Fourth, our vendors and subcontractors are supporting our efforts to protect and capture market share by reducing costs. We are in a dynamic pricing environment and our subcontractors and vendors have responded to market conditions. Lastly we have taken steps to selectively reduce field staff to balance demand and capacity, but we do not believe we have compromised our ability to grow the business in the future.

As a developer of master planned communities in many of our markets, the principal driver of our profitability is the effective utilization of land, either internally for our own home building operations or as a seller of land and lots to others. For the past several years our single-family revenue has approximated 90% of total revenue. The balance coming from sales of lots, land and other real estate related assets. Sales of land and other real estate related investments are a consistent components of our annual operations, though specific activity in any single quarter may distort quarter to quarter trend analysis of our operations. Our principal operations have been and will continue to be single-family home building, but our valuable land position provides us with some additional opportunity to capture value in our business. I will turn the call over to Patty Bedient to discuss our overall outlook for the second quarter.

Thanks, Dan, and good morning. We expect the difficult market conditions in housing and wood products to continue throughout the second quarter. Strong economic conditions in our non-housing related businesses should yield improved earnings in our cellulose fibers and packaging segments. In timberlands we expect log prices to decline somewhat in the South as overall log supply increases. Our harvest in the South will be down from the first quarter in response to the increasing supply in the marketplace. In the West, domestic log prices may increase somewhat and volumes should be stable compared to the first quarter. Export volumes are anticipated to be flat. Non-strategic land sales will be down compared to the first quarter due to the timing of transaction closings. Overall earnings in our timberlands segment are anticipated to be slightly lower than the first quarter of 2007. In wood products, with close to one-third of our fiscal second quarter behind us, we have seen pockets of increased activity, but overall, spring construction activity has been weak. Structural panel prices have improved slightly from the first quarter, but remain low and continue to reflect soft demand for building products on and plentiful supply. In the first four weeks of April, the North Central 7/16 indicator price for OSB increased $5, or 3% from the first quarter average, but it remains well below what is needed to run mills profitably. Indicator price trends for lumber have been mixed and our average price realized for lumber is flat to first quarter 2007. Average weekly shipment volumes are up 8 to 9% for lumber and plywood and up 2% for OSB. Our engineered products are doing comparatively better with average weekly shipment volumes in April up between 11 and 31% depending on the product. Average prices realized for our engineered products have been flat to slightly down from first quarter 2007.

As Rich mentioned, we have adjusted operating postures in all of our mills to match production with demand and we will continue to do so. We are prudently managing our inventory position and further curtailments are possible depending on market conditions. Using our quarter to date experience as a guide, we expect second quarter losses in wood products to decrease from the first quarter. However, the market conditions remain challenging and we expect our losses to be significant for this segment. In our cellulose fiber segment, pricing for our absorbent fibers is very strong and is expected to increase in the second quarter. As we enter the quarter, the mills are running very well, and we expect manufacturing costs to decrease as a result of less scheduled maintenance downtime and improved operating performance in the second quarter compared to the first. As Rich stated, we plan to take maintenance downtime at two mills in the second quarter, one of which is our Grand Prairie, Alberta mill, where we will be bringing a new recovery boiler online at the end of the quarter. Although overall pulp volume will decrease as a result of the Domtar transaction, we anticipate earnings in this segment in the second quarter will improve substantially over the first. Shipments in our corrugated packaging business should improve seasonally over the first quarter. In addition, we do not anticipate a repeat of the adverse weather related impact.

Sale realizations for packaging should increase due to mix. Fiber costs for OCC, which increased throughout the first quarter, are anticipated to stay at high levels during the second quarter although they have moderated from their peak in March. Chip costs are also expected to remain high given the curtailment in the wood product mills that they are also moderating. As Rich mentioned, planned annual maintenance will increase during the second quarter compared to the first. As a result, non fiber manufacturing costs are expected to increase. This should be more than offset by improved productivity in our packaging plants as a result of running seasonally higher volumes and cost reductions from recently completed capital projects. We expect that overall earnings in the second quarter will increase compared to the first quarter of 2007.

In our real estate operations, we expect to deliver approximately the same number of homes in the second quarter as we did in the first quarter of 2007. However, as Dan noted earlier, with margins continuing to be under competitive pressure, we expect earnings from our single-family home building operations in the second quarter to trend lower. Although the exact timing of land sales and other related assets are more difficult to forecast, as compared to our home building operations, we do expect some additional earnings contribution from these activities in the second quarter. This could result in overall earnings in the segment exceeding first quarter 2007 results.

The Weyerhaeuser company budget for capital expenditures is $800 million for the year. Our first quarter spending level of $126 million is expected to increase during the coming quarters as activity towards for recovery boiler at our Red River Containerboard mill and some of our sawmill projects kick off. We also used $390 million of the $1.35 billion of cash proceeds from the Domtar transaction to reduce debt in the fourth quarter. We expect to retire debt with the remaining proceeds before year end. Now I will turn the call back to Steve.

Thank you, Patty. I would like to take a moment to extend my personal thanks and congratulations to Dick Taggart. Dick recently stepped down as Chief Financial Officer, passing the reins on to Patty Bedient. Our financial functions are in Patty's capable hands and I want to take this time to acknowledge Dick's significant contributions to Weyerhaeuser's growth and success. Dick is both a valued advisor and a friend. I know everyone at Weyerhaeuser as well as the shareholders and analysts who have come to know Dick join me in wishing him all the best in retirement. Much has been accomplished over the last four years while Dick has served as CFO, and there is still more work to be done. We have made fundamental changes to the way we do business to position Weyerhaeuser for success. We remain committed to further improving the company's financial performance and enhancing shareholder value. We appreciate this opportunity to update you on some important and recent events, review our performance and of course to address your questions. Operator?

(OPERATOR INSTRUCTIONS) Are first question is from Edings Thibault with Morgan Stanley.

Thanks very much. Good morning. Before I ask a question, let me echo your comments about Dick. He was a professional to work with and we appreciate his contributions.

Thank you.

And welcome to Patty -- out of the frying pan, into the fire.

Thanks, Edings.

Steve, I was hoping you could spend some more time talking about the decision to seek strategic alternatives or consider strategic alternatives for the packaging business. What were the triggers that led you to believe you needed to think about other directions for this business?

Thank you, Edings. I should approach the question from the strategic alternative side. We have been reviewing the alternatives for the corporation and for Containerboard packaging. This is the right strategy. We are positioning Weyerhaeuser to grow in areas that present the greatest opportunity for shareholders and employees. These businesses, the Containerboard packaging businesses, are operated by some of the finest employees in the industry and they've got some of the best assets to work with -- and they are continuing to improve the business during this process we are entering. We are looking forward to good success and we will be providing updates as we can do that.

I might just follow-on with the fact we're looking at a broad range of alternatives as it relates to our Containerboard packaging recycled business. As you think about that, the assets will be best, the value created from them will be best positioned if we position those assets in an area where they will succeed. And so we are looking at a broad range of alternatives which continues to be -- that we would continue to operate and hold them, that we would look at possible disposition and combination of assets. So we think that based upon the restructuring efforts we have made to date, that we are really in a good position in combination with the industry fundamentals to explore a broad range of alternatives.

A quick follow-on if you will, I remember in many ways a lot of this language does echo the comments you made on the paper business. At that time you said you really felt you struggled to generate returns in that business. I think at that time you had said that you really felt that you had struggled to generate cross-capital returns in that business. I'm not quite hearing that exact phrase in the Containerboard business but I wonder if part of this process may have been piqued by what I thought was a very attractive value that Weyerhaeuser shareholders got for that paper business. Is that a fair comment?

The company is looking to focus on the businesses where we can create the greatest shareholder value. We think that by looking for alternatives for the Containerboard packaging business, we might be able to create additional value for the Weyerhaeuser shareholder and still place that business in a position where it can succeed as well. Overall, looking at the alternatives that Patty just outlined seems to be the best course for us.

I think the comparison would be one that as we are looking at Weyerhaeuser Company, we're looking at ways that we can improve the return to our shareholders. So in that regard it is part of our overall strategic review. In the Domtar transaction, as you referenced, we were very pleased with the way that that transaction did unfold. It wasn't the result, as you've noted, of looking at a number of different ways to create value there. We will continue to look at a number of ways for our Containerboard packaging business, but we have made no decisions in terms of whether or not the same results will be what we ended up with in our fine paper business -- other than the result will be we will create more value for our shareholders and place those assets either within the Weyerhaeuser portfolio or in another position where they will best be able to continue to bring value to our shareholders here at Weyerhaeuser.

Next question?

Our question is from Richard Skidmore with Goldman Sachs. Please go ahead.

It is Bob Trout, in for Rick. A question about the downtime in the wood products business. You guys have indicated that you are willing to curtail production to better meet demand but we have heard from a couple of your competitors, particularly on the OSB side, that they are willing to run full to protect market share. Is that not something you guys are worried about?

This is Rich. We continue to look at that. I think a part of what you're seeing is people speculating on the length of this downturn. As I think I commented on the last quarter call, the costs -- particularly the Canadian capacity of closure -- is very large. You would have to have a view that this downturn is very lengthy in order to take capacity out potentially and not be able to bring it back. A lot of people are taking a wait-and-see attitude. We're looking at this, and as Patty mentioned in her comments for the outlook, we may be looking at further curtailments. It depends on taking a look at the cash cost of taking a mill down -- I guess your view of how long this downturn is going to last.

Thank you.

Next question is from George Staphos with Banc of America Securities. Please go ahead.

Good morning, everyone. Congratulations to Patty and Dick. Good luck with all the evaluations here. I have two questions, one piggybacking on Edings' line of questioning about Containerboard. Steve, you have been evaluating and working on the Containerboard business for a relatively long time and there has been some success. What are you looking for internally that perhaps could improve performance from what you have already achieved now? And I have a follow-on on home building.

Let's take the first question, George. From an internal perspective, we have been focusing on the value chain to the customer. We have been working hard to put that concept in place. It is beginning to work and we see improved results from that. But still, when you look externally at the business and at the Weyerhaeuser portfolio, we think the notion of looking at strategic options as we already outlined a couple times is the prudent thing for the company to do.

It suggests while you are going to look at these internal -- remedy's not a right term, but ways to improve performance -- you are leaning towards external solutions as probably being a better way to improve returns. Is that fair?

I can't speculate on what would be the best course of action which is laid out all of them and we're entering the process, so it would be --

Understand.

Can't speculate at this point.

I think what would be fair to say -- as part of our evaluation, we will look at the overall fundamentals of the business and the industry and that will be part of our consideration.

Understand. Question for Dan. In RICO, while price for homes declined 18% sequentially, the margin per home seemed to compress a lot more quickly. You enumerated a number of factors during the quarter. It seemed like you had to meet competitive activity as well, understandably. Were there a couple, three factors that really led to the profit compression, 1Q versus 4Q above and beyond normal seasonality? Thanks.

It is a combination of factors. It is both absolute price declines in some of the markets that had risen so much in the 2004 to 2006 time frame. It is a shift in mix in terms of geography. Where the sales and where the closings are coming from in which both reflect the price of the product and also the margins that we achieve in specific markets.

Next question?

Next question is from Rich Schneider with UBS. Please go ahead.

I was wondering if you could talk about how you plan on running the Containerboard business as you go through this process? Will you do anything different? Will you continue to pursue cost-cutting? Can you update us on where you are in pricing initiative? Will you continue to pursue that as this whole process unfolds?

Rich, we do to plan follow wholly the efforts that are underway. As I'm sure you know, Tom Gideon is a very experienced manager and he is going to lead that team through the processes we have already described. With regard to pricing and the like, Rich, would you care to comment?

On the pricing, as I commented, we initiated that price increase in January without success in the market. We continue to look at the market and we'll be there with that price increase when we feel we can make it work. As I mentioned, we certainly need it in terms of cost relief on the fiber side, both OCC and woodchips.

You mentioned the conditions were a little better also.

Looking at operating rates and inventories, if you look at perhaps some general market improvement going on through the coming weeks in the segments we're in, it is possible.

Second, on the cellulose fiber area, could you talk about the decline that occurred there? It seems much greater than I would have expected. I know you had a lot of maintenance downtime, but your earnings went from $56 million in the fourth quarter down to $22 million. Is that all? The maintenance issues? Or was something else affecting that?

We did have some operating issues in addition to that. And then couple that with the two maintenance outages and the difference in tonnage that you get to those kind of reductions.

Next question comes from Chip Dillon with Citigroup. Please go ahead.

Good morning. My first question has to do with the pulp segment. You mentioned how it would go up from $22 million even though almost half of the earnings came from Kamloops. If you could walk us a little bit through how it is going to jump so much? The real number we should use as the base is $13 million, but you say it will be up substantially more than $22 million. Can you walk us through that, please?

A lot of it has to do with the fact that we are not going to have the maintenance outages that we had and we were very negatively impacted in the first quarter from the maintenance outage at our Longview facility in our bleachboard operations. So just a reminder of what is in that segment in cellulose fiber. It includes Softwood mills, the absorbent fiber mills and also the Grand Prairie, Alberta mill that focuses on premium towel and tissue. But it includes as well our Longview facility that has our newsprint joint venture and the bleachboard operations.

Before my follow-up I wanted to congratulate Dick and thank him for being uniquely accessible as a CFO to analysts. My follow-up is the $22 million that came from operations in fine paper -- I assume that is the two months of results of the non-pulp business that is now part of Domtar Corporation, and that number seems light. Was there a lot of stuff in the first two months like downtime and maybe charges that are buried in there?

In terms of the tonnage lost, if I follow your question, a lot of that tonnage that went with Domtar would be paper-grade tonnage with narrower margin than the fluff tonnage. That could be explaining part of what you're asking about.

I think his question was about the fine paper operation for the two months that we had them, and we had some downtime as I recall in the fine paper operations.

Next question is from John Tumazos with Prudential. Please go ahead.

Congratulations on all of the progress. I went into some archives of mine and determined that the integrated steel industry had a minus 16% EBITDA margin in 1982 and the largest copper company in a strike had a minus 8% EBITDA margin in its worst year in the last 25 years. It fascinated me that a publicly traded OSB competitor had a minus 25% EBITDA margin in the first quarter in OSB. I want to congratulate you on just having a minus 5% EBITDA margin, although I am sure you're not drinking champagne over it.

You're right. We're not pleased with that.

I know you don't want to disclose profit by wood shape, but is OSB the only product in your wood segment with a negative EBITDA or cash margin? And could you talk a little bit about, for example, are i-joists and LVL still profitable? Your wood business has many product forms. And I was surprised that you shut just one OSB plant in your restructuring announcement today and I want to understand the context better.

John, I think I should start and talk a little bit about the strategy we have employed and the success of it. As we indicated in our remarks, iLevel was started about a year ago and it is a comprehensive delivery system of our engineered products to a customer. The fact that we can deliver a full package is very helpful to us. That package includes flooring products out of OSB in particular that help offset losses in more commodity OSB in our business. Rich and Patty, I think, each commented a bit on the relative success of the wood products components in iLevel. Patty, can you give us some background?

As Steve said, we do approach it from the value proposition of iLevel is a whole house package. That is the way we're focused on that. Having said that, though, and to the earlier comments about would we just run to take market share in OSB -- we're very focused on taking market share that is profitable. We have looked at our OSB operations, although they are negative, and taken some curtailments across the board and our Miramichi mill has been shut down and has curtailed indefinitely at this process. In the process of some of the modification of the operating posture because you're taking the highest increments of costs out of those when we've modified the operating posture -- we have come with some positive benefits from that. We're very focused on looking at how we are as profitable as we can be given the challenge of these market conditions. Our engineered wood business is better. It is differential by product line in engineered lumber. You're right, we don't disclose the details of that.

How much is the capacity of the Miramachi facility?

It was approaching 450 million to 475 million feet a year.

Next question is from Mark Connelly with Credit Suisse. Please go ahead.

Thank you. Two related questions. First, on lumber distribution and then on corporate overhead in general -- as you look at all of the supply chain changes that builders are going through and the housing pullback, I am curious if the platform you have for lumber distribution is going to need to change. Consistent with that, with Domtar gone, are there other elements of the overhead reduction on that you need to look at and maybe some opportunities to save some money?

Mark, with regard to distribution in wood products business, as I commented already, our iLevel approach has been very successful and we have seen significant gains with our projected customer base for those products. We don't see any necessity to make any serious changes to our form of distribution at this point.

Okay.

On your question about corporate overhead, Mark, we are actually still providing transition services of some level to Domtar and will continue to do that throughout the year, but we're looking at overhead as well and our spending across the company in terms of taking reductions out. You likely will not see as much early on reduction of the corporate overhead because we need that in order to provide those services, although we're also getting paid for those services by Domtar.

I think too, Patty, depending on the form of any transaction, the adjustments related to G&A of the company varies, so it would be unfair to predict what they might be at this point.

I wonder if I could follow John Tumazos's question. Some of your competitors are saying the OSB cost right now in the market is dramatically below cash cost. Do you agree with that?

Patty indicated that already this morning. Yes, Mark, we do agree. Thank you.

Next question?

Our next question is from Mark Wilde with Deutsche Bank. Please go ahead.

Good morning. I wonder if you could give us some help in understanding the size of the land sales both within the timberland business but also within RICO, either for the first quarter or what we might expect for the full year? And then Dan Fulton -- in the past you have given us some sense of the size of the land book within RICO and I wondered if you could help us do that now.

Dan, let's start with RICO. And then Rich --

I will start. We had very limited amount of land sales in the first quarter. As we mentioned in the call, we have had more of that in the fourth quarter. On average, I mentioned that we have about 90% of our revenues from single-family operations. Over the last two or three years, it's ranged from 88 to 92. And we expect that range to continue, but the timing of those sales is not as predictable as the housing. You would expect throughout the year that we would see some land sales from routine sales of lots from our master planned communities. We routinely build lots for other builders. We also, in some of these master planned communities, have multifamily lands or commercial lands we would sell to third parties because we don't build that product. With respect to our land pipeline, the size of our pipeline is about the same as it was at the end of the year. As a reflection of the number of years that that represents, because our volume is a bit off right now, that is up a bit. We have a little bit over seven years worth of lots under control. We own about 55% of that -- the balance being controlled under options.

A comment on the timberland. This is Rich. We have had, as you know, an ongoing program of dispositions and improving the portfolio in timberlands, always looking for higher better use opportunities to divest timberlands and to reposition timberlands or to divest of those that aren't strategic in terms of logistics or timber growing conditions. We have shared in the past that those kinds of transactions are routine and they have tended to average in the $100 million a year range.

As a follow-up for Steve, there is an enigma here. I think you have, if not the biggest box plants in the industry, some of the very biggest. And as you've mentioned, a well-invested mill system. But right now, the margins in the containerboard business are among the lowest in the industry. Can you help us reconcile that?

The size of the box plant statement is pretty accurate. If not the largest, some of the largest. Mark, the business mix that some of those plants, many of those plants are geared for high volume, large, fast moving, consumer goods customer. Those margins in our industry tend to be lower than other margins. One of the facts of business in that industry is the bigger you are and the more you get into that business, the tighter the margins that you have to operate on.

Next question is from Mark Weintraub with Buckingham Research. Please go ahead.

Thank you. Steve, you mentioned a couple times how you're going to focus on businesses where you're best positioned to create shareholder value. I want to ask you about some comments you made at the annual shareholders meeting where you mentioned -- I am quoting from the text -- that you have a record of success in creating and managing forests, cellulose fiber and land to the benefit of shareholders, etc. What struck me is there was no reference to Containerboard, but there was also no reference to your wood products manufacturing businesses. I didn't know whether the land was incorporating the notion of home building or not. Can you update us on your thinking in particular on the wood products manufacturing and on home building?

If I left out comments with regard to both of those business, I should correct that right now. We are very pleased with the results we have achieved through Dan's group in RICO on our home building business. We have indicated many times in the past, that is a growth business for us. Of course, we have expressed a high degree of confidence in our iLevel businesses and the progress they are making. Those are businesses that are very important to us.

Mark, I don't have the text in front of me but it could very well be that Steve's reference to cellulose fiber in that regard was not for the sale of fiber segments but rather to sale of fiber that comes from the forest. It is a broader statement -- it's a generic cellulose fiber, not the specific sale of fiber of Weyerhaeuser.

Understood. The Containerboard business -- would it be fair to say as you think through alternatives, one issue you have to wrestle with is that is has a low tax base?

Would you restate the question?

Does the Containerboard business have a low tax base? Would that be a fair observation?

That would be a fair observation as it relates to those assets. We have held them for some time. They do have a lower tax base as many of our assets do have a low tax base. It will be somewhat similar in that regard although not to the same extent as the paper assets were.

I should add a little bit too on the cellulose fiber thing. I was totally thinking in terms of the force. Cellulose fibers from the absorbent pulp sense is also business we think very highly of.

Next question is from Peter Ruschmeier of Lehman Brothers. Please go ahead.

Good morning. Congratulations on the progress. I was hoping to ask about your HBU land opportunity. It is not something often we hear a lot about. But we have seen competitors separating and in some cases spinning out HBU lands and even relatively small numbers of acres have been realizing some pretty high values. Can you update us on your thought process and the HBU opportunities within Weyerhaeuser?

Sure. The HBU process at Weyerhaeuser is something that has been part of our strategy for years and years and years. Each year, as we go through our portfolio, we identify lands that might be placed in other hands for better use, and as Rich indicated, we go through the portfolio to determine which of our timberlands are strategic or non-strategic and try to turn those over. Our process has ranged -- I will have to ask Patty for the numbers, but I believe it's in the $100 million a year range that has been going on for a long time.

That's right.

HBU is nothing new to Weyerhaeuser.

But no contemplation of splitting that out separately as a separate business?

No.

Second one, if I could, Steve, I know you continue to pursue the timber tax bill and you have been pretty clear on that. Perhaps you could address this question. If you make the assumption that it does not go through, are there still cases to be made, to remain in the sequel structure?

We are committed to creating value for the company. That is exemplified by Domtar and can include many types of changes to the portfolio. We're not in a position to comment on actions that are under consideration.

Next question?

Management, at this time, there is time for one final question. The final question comes from Steven Chercover with D.A. Davidson. Please go ahead.

Thank you. Mine was also along the lines of the timber tax reform. Clearly, you have been revising or analyzing your various options, not just for the Containerboard business. If the tax reform were to go through, does it basically negate the benefit? Does it equal the equal playing field to the point where there is no point in becoming a REIT?

The timber tax bill that it is submitted is very helpful to C-Corps. It's also helpful to REITs because there are REIT provisions in it. But it is our opinion that if enacted, it makes the form of ownership a different set of questions than a full economic set of questions.

Thanks and best of luck.

Thank you for joining us this morning. I will be available in about 15 minutes for any further questions. Thank you.

Thank you. Ladies and gentlemen, that concludes the Weyerhaeuser 2007 1st quarter earnings conference call. If you would like to listen to a replay of today's teleconference, please dial 1-800-405-2236 internationally at 303-590-3000 and entering a passcode of 11087925-pound. That phone number is 1-800-405-2236 or 303-590-3000 and entering a passcode of 11087925-pound. Thank you for participating in today's teleconference. You may now disconnect.