威爾豪瑟 (WY) 2007 Q2 法說會逐字稿

Good Morning Ladies and gentleman and thank you for standing by. Welcome the Weyerhaeuser 2007 Second Quarter Earnings Conference Call. During today's presentation all party's will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) . This conference is being recorded Friday, August 3, 2007.

I would now like to turn the call over to Kathy McAuley, Vice President of Investor Relation. Please go

Good morning. Thank you. Welcome to Weyerhaeuser's second quarter 2007 Earnings Conference Call. I am Kathy McAuley, Vice President of Investor Relations. This call is being web cast at www.Weyerhaeuser.com. The earnings release and material for this call can be found at our web site or by contacting April Meyer at (253)924-2937. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements. Forward-looking statements will be made during this conference call. I will now turn the call over to Steve Rogel, Chairman, President and Chief Executive Officer of Weyerhaeuser Co.

Thanks, Kathy and thanks to all for joining us today. Before we review the financial results for the second quarter, I want to provide some important updates, briefly discuss our strategy and provide a high level overview of our businesses. Kathy McAuley will then discuss our results for the quarter. Rich Hanson, our Chief Operating Officer is on the call this morning to discuss the operational performance during the quarter. Patty Bedient our Chief Financial Officer will provide our outlook for the quarter ahead. As always, once we've concluded our prepared remarks, we'll open the call to your questions. As you know, 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. The process is ongoing. In the meantime, Tom Gideon, Senior Vice President and his leadership team are hard at work improving the performance this business. The containerboard packaging and recycling business is comprised of outstanding assets and personnel. While the review of strategic alternatives is ongoing, we will continue to implement our new business model, safely providing customers with outstanding service and quality products.

As we discussed at our analyst meeting in June, Timberlands are core to Weyerhaeuser. Our analysis has revealed that given the industry-leading returns, we have consistently generated from this business, we are the best owners of Timberlands. Our board and management team are focused on ensuring that shareholders receive the full benefits of these valuable holdings. As you know, we are supporting the industry's ongoing tax reform efforts. The legislative initiative enjoys both industrywide and strong bipartisan support in Congress. Including both house and senate leadership and it continues to gain support. Passage of the tree act of 2007, will provide immediate value to shareholders and is compatible with many different business strategies. But our work here involves more than considering ownership structures for this business. We are applying strategies to add value today and in the future. I want to highlight a few of the exciting opportunities that we believe have potential to enhance returns for shareholders under any Timberland's ownership structure.

By taking advantage of our strengthened research, development and innovation, we see our biofuel alliance with Chevron as another means of extracting value from our forest-based resources. This alliance focuses on research, development, and commercializing the production of biofuel from Cellulose based sources. The alliance represents a significant opportunity to create additional value for shareholders while also helping meet the world's energy needs. In addition to our agreement with Chevron, we're actively managing our Timberland holdings to produce revenue from other sources such as oil, gas, and mineral extraction.

In the years to come, carbon credits also have the potential to be another source of revenue for Weyerhaeuser. We are repositioning our Timberland's portfolio in geographies with the most potential to enhance shareholder value. We recently announced Weyerhaeuser's strategic decision to sell our Timberlands in New Zealand and to focus our International investments on South America. This transaction will simplify our investment in management structure in Uruguay and maximize our flexibility. Weyerhaeuser has a strong track record of creating and managing Timberlands and we look forward to continuing to build upon this success in South America.

From a national perspective, the single family housing market continues to be challenging and clearly these difficult market conditions are affecting both iLevel and WRECO. However, we have long anticipated these challenges and have been proactive in positioning our wood products and home building businesses. At iLevel though, it is not yet evident on our bottom line but our customers have indicated strong support for our strategy. WRECO, our real estate and related asset company comprised 13% of Weyerhaeuser sales in the first half of 2007. Our focused regional approach at WRECO has helped us to perform somewhat better than the national average. This is due in part to geographic diversification, historically higher margins and conservative management. At WRECO, we've taken a steady approach to the way we build and manage our land pipeline. While we've taken some write-downs, our impairments to date during this cycle have been limited for a number of reasons.

First, the majority of our lots have been controlled since before 2005. Second, except in the Houston market, WRECO homebuilders don't build on spec, thus, enabling us to control inventories. Nevertheless, we're subject to competitive conditions in our local markets, competitor actions which may include impairment charges have the potential to impact our own pricing and pace of sales. Overall, we're pleased that our discipline approach has aloud us to maintain a relatively strong backlog as well as manage the challenges of the current environment for the benefit of our shareholders. During this challenging period in the housing cycle, we have taken a number of steps to increase the flexibility of our operations and enhance our market position for future growth. We remain confident in the long-term demographic trends that we believe position both iLevel and WRECO to generate solid returns over the cycle and create meaningful value for Weyerhaeuser shareholders as the market improves.

Finally, our Cellulose fibers business is building on its competitive advantage in specialty fibers through proprietary technology. With an even stronger focus now on specialty absorbent pulp grades, this business is capitalizing on Weyerhaeuser's commitment to R&D and technology innovation. We are pleased with the solid performance of this business. It's strong, competitive position and its prospects for continued success. With that overview, I would like to turn the call over to Kathy to discuss our second quarter financial results. Kathy?

Thank you, Steve. We have expanded the earnings information package available on our web site. It includes the price and volume data normally discussed. In the interest of time, I will not present this information. However, if you have questions, please contact me after the earnings call. This morning, Weyerhaeuser reported Second quarter earnings of $32 million (company corrected after the call) or $0.15 per diluted share. A net sales of $4.3 billion.

The second quarter includes the following after tax items. A charge of $30 million or $0.14 per share for asset impairments in the wood products and real estate and related asset segments, closures of wood products facilities and the sale of the Canadian distribution facility. A charge of $27 million or $0.12 per diluted share related to the early extinguishment of debt. A charge of $25 million or $0.12 per diluted share related to legal settlement and a contract termination. A charge of $5 million or $0.02 per share for additional costs associated with the fine paper business and related assets that were distributed to Weyerhaeuser shareholders in the first quarter Domtar our transaction . A net gain of $15 million or $0.07 per share in the sale of a previously closed box plant site in California and charges related to a fire and subsequent closure of a New Jersey box plant. Excluding these items, the company earned $0.48 per diluted share. A GAAP reconciliation of special items is available at our web site.

Please turn to chart 12 in the earnings information package which illustrates the key changes in earnings per share before special items between Q1 2007 and Q2 2007. First quarter 2007 earnings before special items were $0.20 per share. Increased volumes contributed $0.06 per share. Higher volumes in lumber, engineered wood products and containerboard packaging were partially offset by lower Cellulose fiber volume related to the pulp assets which were transferred to Domtar. Price and mix improvements contributed $0.19 per share as a result of mixed assessment higher packaging and containerboard price realization. Improvements in lumber and OSB prices and price increases in Cellulose fibers. Manufacturing costs were flat. Lower costs in the Cellulose fibers segment offset higher road and silvicultu costs in Timberlands and scheduled maintenance spending in containerboard packaging.

Real Estate and related assets contributed $0.06 per share. The apartment complex sale added $0.13 per share and was partially offset by asset impairment charges of $0.04 per share and lower prices on the single family homes closed. Other was a negative $0.03. It includes charges for fine paper discontinued operations, partially offset by foreign exchange gains.

Second quarter 2007 earnings before special items were $0.48 per share. I will now comment on WRECO's operating performance and Rich Hanson will cover the forest products business. Real estate and related assets pretax earnings were $64 million in the second quarter versus $123 million in the same quarter last year. And $58 million in the first quarter of 2007. The second quarter included a gain of $42 million from the sale of an apartment complex in California and impairment charges of $12 million. Single family home closing volume was down 28% compared to the same quarter last year. And up 9% from seasonably weak first quarter of 2007.

Single family gross margins were 17% in the second quarter compared to 26% in the same quarter last year that's Q2 2006. And 22% in the first quarter of 2007. Traffic in the second quarter was 20% lower than first quarter as well as last year's second quarter. Single family home sales were down 32% compared to Q1 2007. Cancellations rose to 25% in the second quarter and the average home closing price has dipped to $466,000. The backlog of homes sold but not closed remains at five months. I will now turn the call over to Rich Hanson who will discuss the operating performance of the forest products business.

Thank you, Kathy. During this second quarter, our businesses continue their focus on cost control, improving their operating performance and implementing our strategic initiatives to improve sustainable returns. Their progress in each of these areas is impressive and made a difference in our second quarter performance and positioning us for strong future returns.

But before I discuss those achievements and some of the market conditions affecting the businesses, I wanted to address a topic that we take very seriously at Weyerhaeuser and that is safety. As we've mentioned in the past, there is a direct correlation between safety and operational efficiency. Stable operating conditions reduced costs, they increase productivity and result in higher quality products while creating safer conditions. The fact that Weyerhaeuser's recordable incident rate is now the lowest in our company's history is a testament to the work of our employees to improve overall efficiency. Our Cellulose fiber business, which I'll comment on now is a good example of how our customers and shareholders benefit from this overall efficiency.

As you know, the completion of the Domtar transaction in the first quarter reduced our annual pulp capacity and you can see this reflected in the drop in our third-party sales. But what you can't see from those numbers is a 10,000 ton increase in production from our remaining machines and the improved operating rate of those machines. Compared with the first quarter, our absorbent machines increase their industry efficiency by 3.7% and if you're not familiar with the term, it measures both the quality of the product produced and the uptime on the machine. The more time they run and the less waste they produce, the higher the score. This efficiency flowed directly to the bottom line of the $0.07 per share improvement in this segment's earnings compared with our first quarter $0.04 came from improved manufacturing performance. Our focus on reliability and quality improvement to increase the efficiency of our Cellulose fibers business is producing results.

Meanwhile, in the wood products segment, our iLevel team is focusing on both the near-term situation and long-term opportunities to create the lowest cost production system in the industry. This work has involved three fronts. The first front is managing cash in the downturn. We have aggressively controlled inventories, matched production schedules to demand by aggressively curtailing production and reducing controllable manufacturing costs.

As an example, we operate at our oriented stranboard mills at just 76% of available production hours during the second quarter and inventories have remained in control despite the rapid deterioration and demand. An example of the cost control in that business also is that this system is running at a total cost that is 3.5% lower year-over-year. This despite higher prices for additives and unfavorable exchange rate and as I said earlier, running 24% fewer hours than the prior year period. The second front in the iLevel business involves adjusting the portfolio. We've been working on this for several years through a fixed cell close activity to ensure that our mills are strategically aligned and capable of first quartile performance. In this effort, we've closed, sold or announced our intent to close over 40 facilities in the last three years and we have significantly restructured our wood products distribution system. And the third front involves positioning for the upturn in the residential housing market. Consistent with that, we're investing $170 million this year and next to modernize our lumber mill system. The construction projects underway include new mills in Washington and Oregon that will not increase capacity but will allow us to eliminate existing obsolete capacity and improve logistics to our primary markets. These mills will be more than top quartile in the industry. They're designed to be the best-in-class for cost and quality.

Our third major lumber project is a new planar mill at our Grand Prairie, Alberta site. Historically, among our best mills, this upgrade will position it as one of the best mills in North America. More importantly, we continue to see evidence that validates our strategy to offer the best value to the large residential production builder by combining our strengths of product, breadth and technical competence into an integrated solution for the builder. Our customer base and the customer interest in engineered products components and software continue to increase.

Moving to containerboard packaging, this business benefited from higher packaging price realizations and a better mix of business during the second quarter. This produced higher earnings compared to the first quarter and the same quarter a year ago. We believe we will see some price improvement in the weeks ahead but our focus is on improving overall performance. The competitive environment in which we operate reinforces the importance of our containerboard packaging business and the importance it places on the successful implementation of a customer-driven supply chain strategy. As we've mentioned in the past, we're focusing on serving customers that are a match to our capabilities and then supplying those customers at least cost from our total system. Under this approach, we measure profitability at the market segment, the customer and the item level with a focus on serving the most profitable business. During the transition to this business model, we have improved our mix of customers and that showed up in higher price realizations. In addition, we have retained and in some cases, grown our business with specific customers who are aligned with our strategies. We fine tuned this approach as we have implemented the changes by improving the coordination of the sales and supply people specific to the market structure in needs of a specific region. We're now serving national, regional and local accounts in a tighter and more effective system.

In addition, our initiatives that were targeted at improving margins by $230 million over two years are on track. As we've discussed, these initiatives focus on improving prices, managing the mix of business and reducing costs. Based on our current results, we are set to deliver $100 million of that improvement this year.

I'll close my discussion of our operations with Timberlands. In addition to a one-time accounting change, our second quarter performance was affected by increased transportation and roading costs in the west as well as some higher seasonal silviculture expenses and fewer nonstrategic sales of land in both the west and the south. Price and volume movements did not have a significant effect on the change from the first quarter in Timberlands. In the west, log prices remain surprisingly sticky given the current wood products market. Southern prices, however, did show some softening and we expect to see continued softening of log prices in the third quarter as market pressures continue. Now, I would like to turn the call over to Patty Bedient.

Thanks, Rich. Good morning. The downturn in the housing market will continue to adversely affect third quarter operating results in our wood products and real estate businesses. We do anticipate improved earnings in our Cellulose fibers and containerboard packaging and recycling businesses. I'll begin my outlook for the third quarter starting with Timberlands. The effect of softening export and domestic log prices should be more than offset by the increased sales of nonstrategic Timberland. Sea harvest is expected to be down in the west and increase somewhat in the south. Overall earnings in our Timberland segment should increase slightly in the third quarter compared to the second.

In our wood products segment, sales realizations and shipment volumes are anticipated to be mixed. Soft wood lumber realizations will likely decline somewhat while volumes are expected to increase slightly. Oriented stranboard realizations, are forecasted to increase although shipments may decline. Engineered wood products and volumes are anticipated to be flat to down. As Rich discussed, we continue to focus on working capital management and matching our supply with demand during these difficult market conditions. This will likely result in continued curtailments, especially in OSB. Lumber manufacturing costs should decrease reflecting lower log costs and we estimate that OSB manufacturing cost will be flat. The disposition of our Canadian distribution business in the second quarter as well as our continued focus on cost control will reduce SG&A costs. The overall loss in this segment should be smaller in the third quarter as compared to the second quarter of 2007.

As I mentioned earlier, we do expect improved -- improvement in our containerboard packaging and recycling segment. Third-party containerboard sales realizations are expected to increase primarily due to price increases in Asia and Europe. We anticipate that the seasonal decline in packaging sales realization due to mix will be offset by price increases. Packaging shipments are estimated to increase slightly. We expect fiber costs for old corrugated containers to increase during the quarter, primarily due to increased demand from China. However, chip prices are softening, especially in the west. Non-fiber manufacturing costs are estimated to decline due to reduced scheduled annual maintenance down time and seasonably lower energy costs. Packaging costs should decline due to increased volumes and continued focus on cost improvements as Rich discussed earlier. Earnings in this segment are anticipated to increase in the third quarter compared to the second.

In Cellulose fibers, third quarter sales realizations are projected to improve due to continued strong markets, especially in absorbent grades. Operating costs should decrease due to reduced downtime for scheduled maintenance compared to the second quarter. This segment should benefit from seasonably lower energy costs. Overall, Cellulose fiber earnings in the third quarter are projected to increase significantly over the second quarter of 2007.

In our real estate segment, we expect to close approximately 10% to 15% more homes in the third quarter than in the second quarter. However, we anticipate margins from our single family operations in the third quarter will continue to trend lower in response to competitive pressure. Although the exact timing of sales of land and other related assets are more difficult to forecast, as compared to our home building operations, we estimate less earnings contribution from these activities in the third quarter. As a result, we expect that earnings in our real estate segment will be lower in the third quarter as compared to the second.

Our overall company capital expenditures through June were about $277 million. While the level of spending will pick up in the latter half of the year, it will likely be lower than our original annual budget of $800 million. With that, I'll turn the call back to Kathy to begin our Q&A session. Kathy?

Operator, could you please open the lines for questions?

Yes. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. (OPERATOR INSTRUCTIONS) . Our first question comes from Peter Ruschmeier with Lehman Brothers. Please go

Thanks, good morning. Just a few clarification questions if I could on some of the special items. Starting with the $30 million of after tax charge for wood products and real estate. Is that both -- in both the wood products segment and the real estate segment and can you provide the pretax -- the split between the two?

Pete, there is detail on that in the footnotes.

Ok. I'll look that up.

I can get back to you later with the specifics.

Ok.

The impairment was $12 million if that helps you.

$12 million ,

That's. (Inaudible)

Ok. I guess on the -- maybe a question for Steve. On the strategic review for containerboard, Steve, do you care to comment on how you think about the time line, do you have a time line in mind in terms of coming to some kind of definitive decision one way or another, any thoughts you can share on that would be helpful.

Good morning, Pete. As we've said, we have a process underway that takes a look at all of the various forms of transaction that range from keeping an operate sale to other forms of combination. We're going to -- this is a process that does take some time. I can't comment specifically on when that is complete. All I can tell you is that we're marching right forward to come to a conclusion on it.

Ok. And just lastly, if I could, you mentioned in your press release an accounting change in timber for oil and gas revenues and leasing of Timberlands. Just curious if you can provide some color on what that's about and implications.

Pete, that was -- that's a one-time change in Timberlands and how we account for our oil and gas leases and there really isn't any additional color to provide on it.

Does it get shifted to a different segment?

No, no. It is just really a difference of the recognition between cash and accrual. It is a one-time item. It is all within the Timberland segment.

Thanks very much. I'll turn it over.

Our next question comes from Edings Thibault with Morgan Stanley.

Thanks very much. Also, a couple of questions, detailed questions and I apologize for beating this a little. On the containerboard segment in terms of the guidance, on that business the Company's earnings are flat year-over-year. That's probably the worst performance in the industry. You're talking about up profits for the third quarter. I know there's a price initiative in North America but taking that aside, would you still anticipate higher profits? Is that included in the guidance?

We would still anticipate higher profits, Edings.

Would it be higher year-over-year? Can you do enough to offset the rising fiber costs because that would seem to be the one impact that's really hurting you guys. Is that a fair assessment with your relative exposure to the Pacific northwest?

Well, I think in terms of our guidance, the only guidance that we've given is that it will increase over where we are in the second quarter.

Ok. Thanks. Then just a quick detailed question on the Cellulose fiber business where your revenue -- your shipments were much higher than production. Is that likely to continue? I know there is an inventory draw down there going on. Is that also partly selling off some inventory that you had prior to -- from the old Weyerhaeuser fine papers business?

Well, it is a function of maintenance outages and of course that, will balance out.

Ok. So, you expect a fairly significant rebound in the production numbers there.

(Inaudible)

Got it. Thank you. Good luck.

Thank you. Next question?

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

Good morning, guys. It is actually Bob Trout in for Rick today. More of a big picture question for you, Steve. At the end of your prepared remarks in the press release, you mentioned that, meeting the challenges will require making tough decisions in the focus of every employee and I'm wondering if you can elaborate for us a little bit on that as to what it might mean. Is it going to be -- just more facility closures or head count reductions or any and all of the above?

Well, I would start off by saying any and all of the above. We're taking a look at every business to see where costs can be eliminated. We're specifically working on our SG&A as we pair up facilities, we have to bring it into line. We also have to decide what things, a Corporation that's reforming itself can afford going into the future. But it does include looking at every facility and every business to make sure that we have facilities set and businesses that are returning value to our shareholders.

Ok. Thank you.

Next question.

Our next question comes from George Staphos with Banc of America Securities. Please go ahead.

Thanks. Good morning, everybody. Congratulations. Decent operations, tough quarter. I guess looking at containerboard first, it sounded like for the third quarter, you expect pricing in containerboard in North America to be flat and that's a function of seasonal mix offsetting the price increases in the market. Did I hear that right, guys? And then separately, if I held seasonality and pricing initiatives flat, would the business model -- would your experience suggest, as you saw in the second quarter, that there would be further increases in realization as you're improving the mix on a going forward basis?

Yes, this is Rich. I'll answer that. That's exactly correct. You portrayed what we were trying to communicate there accurately. And specifically, the mix of business will have a positive impact on price.

Rich, is there any way and I know it is probably difficult to comment on this. On this kind of forum but is there any way to quantify what the opportunity from a mixed standpoint might be in that overall 230, perhaps you mentioned in the past.

Well, we have projections which -- I would be going into customer by customer detail which would not be appropriate but pretty significant.

Ok. Two last quick ones. Within WRECO, as we look out the next few quarters, relative to the backlog that you currently have, should we assume pretty constant ratios of closing relative to your backlog over the next few quarters?

Yes.

Ok. And last question, it didn't appear that you were buying back any stock in the quarter. And that the reduction was purely just the averaging for full quarter of the run rate from first quarter. Was that because you couldn't be in the market or just because you elected not to buy any stock back in the quarter? Thanks, guys.

Thanks, George. I'll take that. I think it is important to -- as we talk about our share repurchase to talk about what we have done and I'll just remind ourselves that we did have an original 18 million share authorization. To date, we have repurchased a total of a little over 11 million of those shares. In the quarter, we purchased 150,000 shares. And so that leaves us a little under 7 million shares to go and it is our intention to complete that authorization. But as it relates to the details around how we would complete it and when we would complete it, our policy has been to report at the end of each quarter what we have done as well as update you on our intention to complete the authorization and so I think that's all that I would say about this, at this point.

Understand. Could you be in the market today if you wanted to?

As I said before, in terms of what we will do going forward, and our look forward activity, I wouldn't want to comment. You do know that from the standpoint of our open market purchases, with our earnings release now being until today, being released, we were unable to be in the open market purchases because of our earnings blackout. But I wouldn't want to say anything more than that.

Ok. Thanks, guys. Good luck in the quarter.

Thanks, George.

Our next question comes from Rich Schneider with UBS. Please go ahead.

Good morning. I was wondering if you could give us a rough estimate of how much of your lots that you own, your land base in WRECO was acquired prior to or around 2005 or before. The percentage of your total holdings.

Yes, it is about -- north of 50%, somewhere around 50%, 60%.

Ok. And what would -- a big chunk that was acquired after 2005 would have been somewhat related to the Arizona acquisition?

Yes. Somewhat.

Ok. And could you -- briefly discuss how you look at taking impairments, how do you decide when there is impaired assets in the real estate area?

Sure. Well, as you know, we follow a pretty disciplined approach around that and we are guided in that approach by the accounting rules for when we can take impairments and we have been very consistent in the approach and in accordance with that. For the accounting gurus on the phone, that FASB Statement 144. And that determines whether or not we impair land position or an option deposit. And as I said, it is a very disciplined approach. Essentially, the value of an asset is re-examined when there is a change in a business strategy for either the asset or when the price or cost changes occurred that reduced the economic value of that asset to something below its book value. We aren't currently aware of any specific landholdings that meet those requirements for impairment in the third quarter because if we were, we would have taken them and that is what led to our 12 million impairment in the second quarter which we have booked. However, since the evaluation process is subject to future market conditions, and that includes the actions that our competitors might take, we can't speculate now if there will be additional impairment charges in the future other than to say that if we had them, we would have taken them. So, we're comfortable that we have reflected the appropriate level of impairments and will continue to look forward as market conditions change.

You also mentioned you had a reduced level in for nonstrategic Timberland sales in the quarter versus the first quarter. Can you give us an idea of what those sales levels were in each of those quarters?

Just a moment. Rich, why don't we look for that and meet.

Ok. And just last, on the containerboard area, your box price realizations went up 2.8% and I think, Rich, you were talking about improved mix. Was that also due to the fact that the AG season had a tough bout with you in the first quarter and you came back from that in the second quarter?

Yes. That was part of it, Rich. And then some carry-through on price. And then, as I said, overall mix of business. Which we see continuing.

Ok. And just lastly, could you describe what you've been seeing in the conditions in the market in the month of July, going into August in containerboard box area?

Yes, well, our inventories are in good shape and so is the industry. We believe that these price increases will be successful on a containerboard side. So, overall, the market conditions look firm and good and we believe we'll be successful in the continued increase in our realizations.

Terrific. Thanks.

As far as the question on the Timberlands sales in the first quarter, our Timberland sales were approximately $20 million. And in the second quarter, they were approximately $12 million.

Great. Thank you.

Next question.

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

Good morning. First, just a detailed question. There was also a charge for legal settlement and contract termination and I wondered if you could give us a little bit more color into what was involved with those.

Sure, Mark. They were several cases and they were not all related. Some related to a discontinued operation, a business that we no longer own and others were related to our hardwoods business and we can't really provide anymore color on that at this time.

Ok. And the contract termination?

The contract termination was a contract that we had with a service provider.

Ok. All right. That's fine. So, it is not a contract termination with any customer or anything.

No, it's not.

Certainly not. And it is just a one-time item, Mark.

Ok. All right. Another just bigger picture question for Patty and for Steve, to the ability you can comment on this, any impact so far from all of the turmoil in the Capital Markets in terms of your strategic review of the options for the containerboard business?

Our review continues forward and as we indicated, Mark, we're looking at all potential outcomes for that business including retention, sale and other forms of transactions. And we're proceeding the pace on it.

Would you say, Steve, that what we've seen over the last four to six weeks in the financial markets has led you to rethink any of your options or the likelihood of being able to pull off any of the options?

Oh, we constantly monitor what's going on in the markets but I can't speculate on what our strategic directions might result from that at this time.

Ok. Then the last question I have, you talked some more about the investment down in Latin-American forestry, it seems like you've wrapped up a lot of the relationships that you had with a team out here in the U.S. for kind of joint investment and some of the young plantations. I just wonder going forward, Steve, when you invest a lot of capital in young plantations that don't produce cash or earnings, for several years, and hence don't show up in people's projections of earnings and cash flow, does Weyerhaeuser, do the shareholders really get value for that? And how do we kind of -- how do we solve that going forward?

Well, first of all, I'm pleased to tell you that we have operating facilities now in Uruguay and we are in essence cashing in on that. The second point I would make is when you invest in South South America, the time to production is much shorter than in other regions of the world so that a period of time when you're investing without returns is much shorter. Then the third point I would make is we've had a great partnership with the team that you mentioned but now as we move into the production side of things, our strategic direction and theirs is evolving a bit and it is inappropriate time in the maturity of the relationship that we go our own directions.

Would you expect to use those kind of structures, Steve, going forward? I think you've done a great job down in Uruguay and created a lot of value but you're only starting to harvest now and you started to invest 15 years ago.

Well, we started to invest about 10 years ago and that's a fairly short cycle. And we have been taking some minor amounts off for thinnings and other incomes as we've generated. For example, in Uruguay, it was a big cattle growing region, there somewhere between 50,000 and 60,000 head of cattle roaming our timber. On a lease basis, we're not in the cattle business. [ LAUGHTER ] But when you get into businesses like this, with some time before return of cash, I think your investors understand it. And of course, we have tried to make that a shortened time frame as possible.

Ok. Very good. Thank you.

Our next question comes from Ross Gilardi from Merrill Lynch. Please go ahead.

Good morning, thank you. Just had a couple of questions. First on the real estate business, I wanted to clarify when you said lower earnings in the third quarter, are you including the $42 million gain from the sale of the apartment project in the base?

Yes.

Ok. And then could you just talk a little bit more about your priorities for cash flow? You had some comments on share repurchase but you're already at the low end of your capital structure target. So, if you could just talk about your attitude on acquisitions versus debt reduction and further buy backs.

Well, actually, as it relates to our capital structure, we're at the top of our range. Right around 40% which is the top of our range of our target capital structure. As it relates to our priorities for cash flow, I would say that they're very consistent with how we discuss them at our analyst conference in June. And that really is that we're committed to a disciplined allocation of capital both for maintenance of our businesses and some selected growth. We want to have our capital structure such that we do have access to the major financial markets. And we want to maintain our dividend policy and provide flexibility in returning cash to shareholders. So, it really is a mix of all of those opportunities. And we will trade them off to the best value that we think is in the interest of our shareholders.

Ok. Thanks. And then just wondering if you could provide just a -- some comments on your supply demand outlook for [fluff] pulp over the next year and any update you could provide on what you're planning to do with your Cosmopolis mill.

Rich, do you want to take supply and demand?

We see a very good situation going forward in the supply demand situation for pulp, especially looking at our specialty pulp in the fluff absorbent area. And we still have a live deal on Cosmopolis and look forward to getting that closed yet this year.

Ok, thanks a lot.

Our next question comes from Mark Weintraub from Buckingham Research. Please go ahead.

Thank you. I wanted to come back, Steve, to some of your opening comments where you indicated that the Company's records show it is best owner of Timberland and that you're focused on ensuring your shareholders to receive the full benefits of Timberland ownership. I wanted to ask you whether you think that the shareholders are receiving that full benefit today and if you do not, do you expect them to be receiving that full benefit before your scheduled retirement date?

Mark, I do expect our shareholders to receive the full benefit of our Timberlands. And we've talked a lot with you and with this group about tax relief, other forms of ownership and I think that if you stand back and look strategically, at what the Company has done, you'll see that we have done everything to enhance any of the potential outcomes in terms of the way we have an ownership and operating structure of the Company.

Ok. I think I got the point. The other two quick questions. One is would you -- thinking about the share repurchase, I guess that there are a lot of other things in motion and for instance, things like split-offs, et cetera, would those be thought through as equivalent to repurchases and so, therefore, given the amount of things that are in motion, we shouldn't necessarily hold you to statements or positions that were taken before things had developed the way they have. Is that a fair observation or not?

Well, I think what I would say in response to that, Mark, is that we're a pretty consistent in what we said as a result of our current authorization so we have 7 million shares left, a little less than 7 million shares left to go. And I think it would be premature to speculate what we may or may not do as a result of any future transactions.

Ok. And then lastly, implications on the Russian export tower. How do you think that might affect your business over the next couple of years, your log business?

Most of our log exports, vast majority go into Japan. And there, we compete primarily with European wood and logs coming in. So, I would say with the top end grade that we export, we're probably not going to run into too much competition. Can't hurt but it is not material.

Thank you.

Next question.

We have time for one more question. Our final question comes from Steve Chercover with D. A. Davidson. Please go ahead.

Good morning. Thank you.Two questions please. Rich was mentioning the investment in world-class sawmills in Oregon and Washington. Can you tell us what the -- how big a ticket that is and is that a $400 million board foot, $600 million board foot facility?

Yes, it is in $400 plus million. These are projects that will carry all the way out through 2008 as well.

So, I mean the actual cost of a mill of that scale would be $200 million, the full price?

Less than that.

Less than that. Ok. And second question, with respect to distribution, you've exited Canada and I think some select U.S. facilities as well. Is there a fundamental change in how you're going to market? Are there any implications for the larger U.S. system?

Well, I think that the iLevel approach is a change in the way that we're going to market. As we've indicated several times in the past, Steve. And the distribution system that is developed behind it is to support the iLevel strategies.

Ok.

And I just want to make sure, Steve, for people on the call, you were clear in your question and referencing Canadian distribution but that does relate to our distribution locations that we had in Canada. So, when you say we exited Canada, we still have, I would like to remind people, significant operations in Canada in the iLevel business. You were just referencing the distribution centers that we had in Canada.

That's correct. Thank you very much. Thank you.

Thank you for joining us this morning. If you have any additional questions, please feel free to call me at 253-924-2058. Have a good day.

Ladies and gentleman this does conclude the Weyerhaeuser 2007 Second Quarter Earnings Conference Call. You may disconnect and we thank you for AT&T teleconferencing.