威爾豪瑟 (WY) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Weyerhaeuser 2008 third quarter earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Friday, October 31, 2008.

I'd lick to turn the conference over to Kathryn McAuley, Vice President of Investor Relations. Please go ahead, ma'am.

Good morning. Thank you, Mitch.

Welcome to Weyerhaeuser's earnings conference call. I am Kathryn McAuley, Vice President of Investor Relations. Joining me today are Dan Fulton, President and CEO, Patty Bedient, Executive Vice President and Chief Financial Officer, Tom Gideon, Executive Vice President as far as products.

The call is being webcast at www.weyerhaeuser.com. The earnings release and material for this call can be found at the web site, or by contacting April Meyer at 253-924-2937. Please review the warning statement in our press release and on the presentation slides concerning the risks associated with forward-looking statements. Forward-looking statements will be made during this conference call.

This morning, Weyerhaeuser reported third quarter 2008 net earnings of $280 million or $1.33 per diluted share. This includes an after-tax gain of $303 million, or $1.44 per diluted share, on the sale of the container board packaging and recycling business to International Paper on August 4th. An after-tax gain of $158 million, or $0.75 per diluted share, on the sale of the Australian operation. Real estate and related after-tax charges of $144 million, or $0.69 per diluted share. An after-tax charge of $24 million, or $0.11 per diluted share, for asset impairments in wood products. An after-tax charge of $10 million, or $0.05 per diluted share, for restructuring activity.

Excluding these items, the Company had a net loss of $3 million, or $0.01 per diluted share. A GAAP reconciliation of special items is available on our web site in the information -- in the earnings information package. Please turn to chart four in this package as I will next discuss the water fall chart.

Chart four is the bar chart detailing the changes in earnings per share on a segment basis from the second quarter of 2008 to the third quarter of 2008. As noted in the first bar on chart four, in second quarter 2008, the Company earned $0.03 per share. Changes in Weyerhaeuser's segment earnings from the second quarter to the third quarter were as follows. This is proceeding from the left to the right across the water fall chart, beginning with the Timberland segment.

Lower prices in volumes in Timberlands were more than offset by income by oil and gas, minerals, land sales and lower transportation fuel costs, increasing Timberland earnings by $0.01 per share. Lower wood products manufacturing costs and higher prices offset volume declines, resulting in a wood products earnings increase of $0.06 per share. Operating efficiency improvements left scheduled maintenance downtime and higher pulp prices increased cellulose fibers earnings $0.10 per share.

The containerboard packaging and recycling businesses with sold to International Paper August 4, five weeks into the quarter. This resulted in a decline of $0.28 per share in earnings. A loss on a California land sale more than offset improved single family home prices due to mix, lowering real estate earnings $0.15 per share. Included in the $0.22 per share increase in corporate and other income, is a $0.25 per share benefit from an increase in the effective tax rate applied to the year-to-date loss. The final bar to the right of the chart is a third quarter 2008 loss before special items of $0.01 per share.

I will now turn the call over to Dan Fulton. Dan?

Thanks, Kathy.

There's little doubt we're facing extraordinary market conditions. Single family housing starts have dropped more than 65% from peak 2006 levels. Median prices of new homes are below September 2004 levels. Consumer confidence is the lowest since tracking began in 1967. And tight credit threatens any near term recovery.

Against this back drop, we stated this morning that we expect that the housing market will remain difficult. But to slow down effects and challenges, the majority of the businesses in our portfolio, and we are prepared to take the necessary actions that these unstable market conditions demand. Although the outlook is gloomy, we have worked hard to position ourselves to emerge stronger and more competitive than before.

Our strength begins with the very core of our Company, more than six million acres of Timberlands which we intensively manage in order to extract maximum value on a long term sustainable basis. In addition to the timber, we're tapping other revenue sources from this land such as oil, gas and minerals. We complement this valuable asset with a closely aligned set of businesses that leverage our core competencies in both some of the most efficient manufacturing operations in the industry. Even before the current economic conditions became widespread, we were working closely with our customers to ensure that our production met their demands without creating unnecessary inventory.

The recent $6 billion sale of our containerboard packaging and recycling business to international paper allowed us to strengthen our balance sheet and enhance our liquidity. This provides us with valuable flexibility to weather these turbulent markets. As announced last quarter, we're eliminating 1,500 corporate level positions and taking other steps to achieve $375 million in annual savings, which will further improve our financial and competitive position. As we managed through the downturn, we continue to look for additional and sustainable savings.

Our strength also positions us for a future where we use our trees and land in ways unimagined a decade ago. Today, we use these resources to produce wood products, build homes and produce cellulose fiber products. In addition, we've been generating increased revenues from mineral and energy resources on our lands, and are focused on creating new opportunities from biofuels, biochemicals and carbon credits.

There's no other renewable and sustainable resource that can do as much as a forest. More importantly, there's no Company in North America with the vision, commitment, capacity and technology to do as much with Timberlands as Weyerhaeuser.

We're facing unprecedented positions across the entire economy, and we expect these conditions to continue. We've taken actions in response to this downturn, and we're prepared to do more if necessary. We'll make those moves from a position of strength, a position based on the resource that's core to our Company, and enhanced by our strategies and competencies. We are prepared for the current tight times, but equally important, we'll be ready for the recovery.

Now to describe the third quarter performance of our Timberland and forest products businesses, I'd like to turn the call over to Tom Gideon.

Thank you, Dan.

During the third quarter, we continue to adjust to changing market conditions, while maintaining our excellent safety performance. As Dan mentioned, we do not expect market conditions to improve in the near term. In response, we continue to balance our production with demand.

This morning, I'll discuss the three businesses that comprise our forest products group, Timberland, wood products, and cellulose fibers. Patty Bedient will include real estate in her report.

Beginning with Timberlands, which is on chart five, earnings for the third quarter were slightly improved over second quarter. This was due primarily to an increase in oil and gas revenues, compared with the prior quarter. We also benefited from an increase in the sales of nonstrategic Timberlands.

In the west, log prices continue to soften, due to the sustained low levels of lumber demand in the California market. Although overall harvest levels were seasonably lower, we have continued to make progress in salvaging wood damaged during last December's storms. This is a complicated and dangerous task, but our crews are making great progress, and we plan to complete the salvage efforts in Washington by the end of the fist quarter in 2009, and in Oregon towards the middle of next year. We started on this work before others in this industry, and this headstart, combined with our long-working relationships with customers in Asia has allowed us to find markets for that wood.

Our export sales remain relatively stable, and log prices increased mainly driven by tight log inventories in the west. We are closely monitoring these markets to see how they are reacting to the global economic slowdown. In the south, great realizations were up slightly as less than the half of the timber came to the market.

In the South, grade realizations were up slightly, as less than the normal timber volume came to market. We also continued to see a solid contribution from our minerals group, primarily from our north Louisiana ownership. In both the West and South, we started to experience lower operating costs as diesel fuel prices begin to ease.

Moving now to wood products, I would direct your attention to charts six and seven. Overall, sales realizations were up across all major product lines, as our supply better matched our demand. However, demand continued to drop throughout the quarter, and that decline accelerated at quarter's end due to the weaker housing starts that Dan referenced. We noted on previous calls our aggressive actions to adjust production to our projected demand, and we are applying that same discipline and diligence on a realtime basis as we look forward.

We continue to focus on effectively managing our controllable costs, our operating efficiencies, and our inventories. For example, we reduced working capital by $324 million compared with third quarter of last year, with $53 million of that coming in the third quarter of this year.

Now turning to chart eight, our cellulose fibers business improved both its financial and operating performance in the third quarter. Several of our facilities set production records, as the segments industry efficiency measures increased to 90.5%, compared with 89.3% in the second quarter. This 1.2% improvement produces an incremental 130 days per ton across the cellulose fibers business. Sales realizations improved, and maintenance costs were favorable compared to the second quarter, as we had less scheduled maintenance down time. Increases in chemical and freight costs slightly offset these improvements.

Cellulose fibers is well positioned to adapt to the changing market conditions. We have a strong presence in fluff pulp, and continue to enhance our position in specialty fiber markets. We also have annual contracts with volume commitments with our key customers, and we continue to monitor our inventories closely to ensure we keep them balanced with our sales.

While we are in uncharted market conditions, we will continue to safely improve our operating performance by focusing on the business fundamentals, and balancing production against expected demand. We have made, and will continue to make, the necessary decisions to get us through this downcycle, and favorably position ourselves for the upturn.

I will now turn the call over to Patty Bedient.

Thanks, Tom, and good morning.

As Tom said, in addition to the fourth quarter outlook that I normally cover, I will briefly discuss the third quarter performance of our real estate operation. As I begin my comments regarding the real estate segment, please refer to chart ten in the presentation.

Our real estate operations reported pretax impairment of $235 million in the third quarter. In addition, an acreage transaction resulted in a pretax loss of $87 million. The loss from home building operations was slightly lower than the previous quarter, due to the mix of homes closed and lower selling expenses.

Despite the lower loss from our home-building operations, the housing industry continues to be challenged by a series of adverse market and economic trends. Declining employment levels over the last several months, a lack of consumer confidence, and the recent disruption in the financial markets are clearly evident, and are slow traffic and new order trend.

Home prices continue to decline in virtually every market. Vacant inventories are at record levels, and foreclosure actions are increasing, particularly in the weakest markets. Land values remain under pressure, with prices linked to trends in housing prices. In response, builders have reduced housing starts, resulting in a declining absolute volume of unsold new home inventory.

In recent months, sales of existing homes have increased year over year in Phoenix and certain California markets, driven by significant foreclose sales. While the pricing environment is discouraging, affordability is improving, and the market will ultimately benefit from the clearing effect as existing home inventories have moved off peak levels.

Our markets weakened throughout the third quarter. Home buyer prospects, scarce in number to begin with, seem to withdraw from active home search. A significant number of home buyers continue to have difficulty in selling their existing homes. In addition, buyers were discouraged by tightened mortgage standards. This was reflected in our contract cancellation rate of 36% during the quarter.

We entered the fourth quarter with a sales backlog of less than four months, compared to five months a year ago. We expect the number of fourth quarter closings to be comparable to the third, but at a lower average sales price realization. As a result, excluding the effect from impairment and land or lot sales, the real estate segment's loss from home-building operations is likely to increase in the fourth quarter.

Business conditions continue to be extremely difficult, and will likely remain so, until buyers can be confident that the home purchased today won't be worth less tomorrow. In response, our home building companies continue to right size their organization for expected market conditions, and remain focused on generating cash through operations.

Now I'll turn to the fourth quarter outlook for our forest products operations, and wrap up with some additional financial comments. Beginning with Timberlands.

Tree harvest is expected to decrease in the fourth quarter, as a result of weakening domestic markets, due to reduced mill operating postures and seasonal downturn. Realizations are also softening, especially for Southern grade-locks. Export markets in the West are still holding up, and should offset some of the weakness in the domestic market.

Overall, Timberland's segment earnings for the fourth quarter will likely be lower than the third. In our wood products business, we expect residential construction activity to decline in the fourth quarter. While the forth quarter is typically seasonally slower than the third quarter, we anticipate that the recent upset in the financial markets will further exacerbate the already depressed level of housing start, as I discussed earlier.

Average price realizations are projected to be down in most products, with lumber and OSB being especially affected. Likewise, sales volumes are also predicted to be lower than third quarter levels. While we may get positive improvement in raw material and manufacturing costs, we expect that the loss in our wood products operations will worsen in the fourth quarter, as compared to the third.

Home prices in our cellulose fiber segment are softening in response to weakening global markets and rising inventory levels worldwide. aper grade markets have been hardest hit, and there is now some reduction announced for fluff prices as well. The weakening Canadian dollar will offer some earnings benefit. Overall, we expect that earnings in our cellulose fiber segment will be slightly lower in the fourth quarter, compared to the third.

Now I'll wrap up with some financial comments.

During the third quarter, we use proceeds from our asset sales to pay off our short-term line and meet scheduled debt maturity. As shown on chart 12, as of the end of the third quarter, we had debt outstanding of $6.8 billion, and cash and short-term investments of $4.8 billion. In addition, we had no borrowings outstanding under our bank credit line. These lines represent available credit of $2.2 billion.

We have debt maturities of about $400 million in the fourth quarter, and about $600 million in 2009. In addition, at our recent board meeting, the directors declared the regular dividend of $0.60 per share, which will be paid in December. This amounts to just under $130 million.

In December, we will also have a large tax payment to make, primarily as a result of the containerboard packaging sale, and we expect this will be around $1.4 billion. Cash flow from operations, as well as capital expenditures, are not included on the slid,e but through the first three quarters of the year, Weyerhaeuser Company spent approximately $320 million for capital expenditures. We anticipate spending approximately $100 million in the fourth quarter.

Our strong liquidity position provides us valuable flexibility. In navigating these uncertain times, we expect to use this flexibility to create additional value for shareholders, as we evaluate and balance alternatives for returning cash to shareholders, debt repayment, continued restructuring and disciplined support for growing our operations.

Now, I'll turn the call back to Dan, and I look forward to your questions.

Thanks, Patty.

Yesterday, a return from a trip to Arkansas, where I met with the leadership of our Southern Timberlands and lumber organizations, spending time in the field, observing first-hand some of our Southern operations. There were a number of interesting aspects of the visit, but the most energizing was seeing the pride and determination of our employees.

On this particular visit, I met with people who, every day, lace up their boots, don their safety gear, and head into our woods and mills with the singular focus of safely maximizing the return from our resources. For them, that's not a term or slogan, it's a way of life. As I look at our challenges ahead, I gain confidence from the strength of our balance sheet, our liquidity, and what we've done to improve our competitive position as the economy recovers. These are important and critical, but most of my confidence comes from the people that I spent the last few days with, our committed employees.

Throughout Weyerhaeuser, we have employees focused on doing everything possible to ensure that our world-leading Timberland resource and manufacturing assets are managed and used for the benefit of investors and customers. This dedication will get us through these challenging times, and will create the exciting future we envision for Weyerheauser.

And now, we will open your call to your questions.

Mitch, could you please open the line?

Yes, ma'am.

Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS)

Our first question comes from George Staphos with Banc of America Securities. Go ahead, please.

Thanks, hi everyone. Good morning.

First, Dan -- or Tom, in wood products, in light of the economy and extended downtime we're likely to see in the mills, is there anything you need to do differently from a maintenance standpoint during this time of the year than you would normally do, and if so, are from any financial implications from that? Then I have a couple follow ons.

George, with respect to maintenance, I don't know if there's anything differently we need to be doing. As you know, we conduct our maintenance on an ongoing basis throughout the year, as it is appropriate to make the adjustments we need to make.

From that respect, I don't see anything usual occurring.

Okay. Dan, if we look, bigger picture, the sales of paper and containerboard look to be pretty well timed in light of the economy. That said, obviously, Rico and wood products are going through a very, very difficult periods.

Has your long-term view on the prospects for these businesses changed at all over the last year or so. If not, why not? If so, if you could share a couple of details there?

Thanks, George.

Long-term view has not changed. Clearly, the housing market that we find ourselves in is tougher than what we had predicted? I have used the term unprecedented a number of times in presentations and comments to employees, and I really do believe that the cycle we're in is unprecedented. We believe those businesses are both positioned to be leaders in their industries, and with recovery, their position to gain share.

So, our view is not changed. Clearly, we've been dealing with a really tough market situation.

Two detailed questions I'll turn over.

One, what do you think the operating tax rate was in the quarter? Two, what was the acreage sell loss of $87 million related to?

I'll take the fist one, George, and I guess I'll turn the other one over to Dan. The effective tax rate is just over 42%, and that is the rate that we used through the year-to-date operations through September, and we would anticipate that 42% would be the year end rate.

Let me remind you that 42%, when we're in a loss position, which is where we are from the loss from continuing operations, the bigger the tax rate the better, in terms of computing that benefit. Included in that benefit is the benefit that we will receive as a part of the capital gains rate differential that comes with harvesting timber as a result of the TREE Act.

Right, right. And the $87 million acreage loss?

George, that was a property that Pardee had been developing in Sacramento.

It was one that we initiated a couple of years ago, before the downturn. They had improved and partially improved lots. They'd actually opened up the sales in initial models, and as the market continued to deteriorate, we shut the project down, mothballed the project. The intent was to pull it off the market for several years until the market recovered. We received an unsolicited offer for the property, and determined that, you know, given the uncertainty of the cycle, it was an opportunity for to us monetize the asset, and so we elected to sell it.

Okay. Thanks, Dan.

Next question?

Comes from Gail Glazerman with UBS. Go ahead, please.

Hi. Dan, maybe going back to the answer on George's question. If you haven't changed your long-term view as the market downturn worsened, are you seeing any opportunities arise that would interest you in terms of growing the business, possibly?

Well, we are looking all the time, Gail. I think that there will be opportunities that will emerge.

Our focus at this point is to maintain as strong an operating position as we can with our existing assets. We still view the market as highly uncertain, so we're being cautious, although we are watching, but I wouldn't expect any sudden moves from us.

Okay. Just to clarify, obviously, given what's been happening over the last month, you are increasingly cautious.

Back in September, you had talked about, or hoped for a little bit of price recovery in wood products in 2009, and ending the year with hope for volume improvement at the very end. Has that been pushed out? Is it fair to assume?

Well, I can't give you a target quarter.

I think we were more optimistic when we spoke even six or eight weeks ago, because the credit markets have deteriorated more. We have seen a direct impact on, not only our housing sales, but sales across the country, and so that puts us in a more cautious position as we look to a recovery. I think we have to, in some part, look to Congress and the Treasury and the Fed, and see what actions they take in order to stabilize the economy, and perhaps provide some impetus for some recovery in housing.

But at this point, housing starts are significantly off, and I think the market has really moved to the sidelines pending some greater clarity.

Okay. This last question, can you give a little bit of insight into exactly what you're seeing, in terms of both supply and demand on the pulp side that's driving prices lower? I mean, obviously paper pulp is weaker, but how is that flying into fluff pulp?

Gail, as you know, we have a very strong position in the fluff pulp market. You've seen global economic conditions impact demand worldwide. You've seen the China demand diminish significantly, and so you've seen reaction to that, and you've seen a significant announcement across the industry in terms of market-related downtime.

We're well positioned with our key customers. We have a good standing history with them of providing quality product, long term. It is a growing market. We're positioned to grow with them. We're working closely with them as we go forward, and we're really pleased at how well our demand's held up with our key customer group.

Okay. But, is your sense of fluff pulp demand as followed, or seen the same type of contraction, the same magnitude of contraction that's happened in paper pulp then?

I think that the issue that you've seen in the marketplace isn't demand driven, it's where you might have some incremental supply that may be coming into the market from people who haven't previously participated in that segment of the pulp segment.

Okay. Okay, great. It's on the supply side. Thank you.

Next question.

Comes from Mark Connelly with Credit Suisse. Go ahead, please.

Thank you. Just two things.

First, when you look at the new revenue streams, oil and gas, and mineral rights, which are already there, and then some of the newer stuff you're hoping to develop, how much less volatile do those streams look to you, relative to the existing streams? Are we seeing a process of derisking in your business as we're seeing in ours?

And the second question is about your lumber customers, both on the industrial and retail side. Certainly across consumer retail, we're seeing big changes in terms between customers and suppliers. Are you changing your terms? Are you running into credit issues, or seeing terms change around you?

Tom, do you want to address both of those?

Okay. In terms of your second question, first on lumber customers, obviously it's a tough economic environment. We have not changed our terms. We're working well with our customers, and monitoring it, and we're comfortable where we are with respect to our positions with them.

In terms of new revenue streams, those are still in the potential to come out as you think about where we might be in the area of biofuels, where we might be in the area of biochemicals, as well as in the carbon credit arena.

Over time, that potential for that area will play out. As to what the risk factor of that may be, we'll have to understand that going forward. We're excited about the potential in those areas to augment and to complement what we're already doing in our main segments.

Mark, just to add a point. A lot of these new potential product streams are related to oil prices. And given the volatility that we've seen, there are surely some short-term concerns, but long term we have a view that oil prices are rising. What they do, is they do create a pressure toward shifting from some oil-based chemicals to some cellulose-based chemicals.

We think that simply adds and additional revenue potential that runs to the Timberland, and we view that as real positive long term. So, it gives us some greater flexibility, and it presents an opportunity for us, particularly in the biomass area, to perhaps harvest fiber off of the lands that today is just being left in the woods.

Next question?

Comes from Richard Skidmore with Goldman Sachs. Go ahead, please.

Good morning. This question's for Patty, specifically with regards to the pension.

As I look in the footnotes, it looks like you had a pretty material swing in your pension income and your post retirement credits in the quarter. And it looks like it's actually a bigger swing than what sort of inferred in the 10-Q for the second quarter. Can you talk about what drove that swing?

Sure. There's a number of things that are impacting those numbers, both on the pension and in terms of post -- It depends upon which period you're measuring, but just going back to the second quarter, you'll recall that we did make some changes in our other post-retirement benefits, primarily in our retiree medical, which reduced those liabilities.

As we come into the third quarter, we have the container board transaction that we executed at the end of July, first of August. The significance of that transaction did require that we revalue the assets at that time, and in addition and conjunction with that, transfer -- with that transaction, we also transferred some of the assets for one of our union plans, which was very overfunded, which was a requirement of the plan.

So, there's a combination of impacts that are associated with that. Both in terms of the retirement benefits coming from retiring medical, as well as the pension.

How does that look going into the fourth quarter? Should we expect the same level of sort of pension income and credits in the fourth quarter, or does that tail off in the fourth quarter?

I think that the pension income will be, from the ongoing operations, will likely be as significant in the fourth quarter as they've been in the third.

Okay. Thank you.

Next question.

Comes from Peter Ruschmeier of Barclays.

Thanks. Good morning. I wanted to ask a question, if I could, about the dividend. I believe your old payout ratio used to be 20% to 30% of operating cash flow over the cycle, but clearly the Company has changed. I was curious, maybe Dan or Patty, if you could help us think through -- what metrics should we be thinking about when we try to determine what that level of dividend is over the cycle?

As we've shared before, Pete, our policy has been to pay the range of 20% to 30% of cash flow over the cycle. As we've talked before, we are certainly in the downward portion of that cycle right now, with respect to our wood products business, our home building business, and even our Timberlands.

So the board looks at the longer term cyclicality of the businesses. We have received significant cash flow from the sales assets over the past year. That's been a factor in the board's determination of the ability to maintain the dividend at the current level. As you know, it's an ongoing board decision that is made, and at this point I can't give you further guidance as to whether or not that range would change in the future.

Fair enough. I was hoping I could ask a follow-up, in terms of your latest thinking on how you think about the REIT possibility, if you could update us with your thoughts there. On a related note, are there any technical reasons why, if you chose to pay out in the ENP distribution, why that couldn't be done this year, in essence in an effort to limit the tax leakage to just 15%? Or, said differently, are there any reasons why you would absolutely not want to consider that?

Pete, this is Patty, and I'll take that.

In terms of our current thinking, as we announced last month, we said at that point in time that, given the changes in our portfolio of our assets, that it might be possible for us to meet the retest in '09. We still think that to be the case, and in order to preserve our options and be able to do that, we have continued to move forward to position the Company to make the couple of technical changes that would be required for re-election. Those are the calendar year change, as well as the change in the legal organization, setting up a separate subsidiary for the non-requalified assets.

In terms of the payout of the ENP, you can pay out dividends to share holders at any point in time. The ENP would be, as we referenced in the past, as of the end of '08, we expect that would be about $1.3 billion in cash, if we elected to pay out 20% of it in cash. But indeed, the whole $6.5 billion would be taxable to shareholders.

As it relates to tax legislation, it is something that we are monitoring very closely, and there are a lot of moving parts, as we all know, both with changes in the possible administrations, both in terms of capital gains rates going forward. There are no announced changes for '09. It would be highly unusual for Congress to put in to place a tax change, and make it retro active, as opposed to prospective. So, I think we will have some visibility and some time to think about that as we put that into the mix with all of our other decisions going forward.

That's very helpful. If I could, just a quick one for Dan. I'll turn it over.

I'm curious, Dan, how you think about the Russian export log duty situation, and how that may feed into what you're actually seeing in the markets in terms of log export demand and pricing in Asia in particular. Thanks very much.

I'm going to let Tom address that one, Pete.

Yes, Pete. With respect to the Russian log teriff situation, as you know, they've announced that as of January 1, 2009 they'll go up to 80%. All indications are that that is still something that is going to occur. As we've reported last time, and it continues today, we've seen increased opportunities for our products in the international market as a result of that.

Particularly, if I just mentioned the export log situation, we continue to see improvements in our volumes going to both China, as well as Korea. It is an opportunity as we see it going forward.

Pete, I think the other potential in fact of the Russian taxes is that it should have the effect of driving up fiber prices for the Scandinavian pulp producers. So, that may provide some benefit to us.

Thanks so much.

Next question.

Comes from Claudia Hueston of JPMorgan.

Thanks, very much. Good morning.

I was hoping you could talk a little bit about the wood products business, in terms of how much of your capacity is down. And then, if you have any sense of how much of industry lumber capacity is down? That would be helpful as well.

Claudia, as a general overview, if you look at the most recent report I've seen, lumber production has gone down anywhere between 20 and 25 billion square feet since the 2006 period. It's been significant in our case, as we mentioned in our last call, we're at around 30% in terms of where we've been on our lumber, and more than that, in both our OSB and engineered wood products.

It's something that we continue to monitor. It's one of those things an ongoing basis. We need to ensure our production is meeting our expected demand. So we're adjusting as appropriate.

Thank you. I know it's a little early, but do you have any sense of what capital spending will be for 2009, or maybe any idea of what maintenance capital is now for the remaining businesses?

Sure, Claudia, as it relates to 2009, it is early.

We typically don't, till the end of the year, as we talk about our end of 2008 and going into 2009, but let me say we are looking carefully at capital expenditures in terms of the level that would be absolutely necessary to continue to meet the requirements of keeping our operations in good running condition, and will be cautious about starting new projects. However, that amount has not been determined at this point.

Okay. And then just a quick one on the corporate expense.

Do you have some sort of estimate for what we should expect there in the fourth quarter? It's jumped around a lot this year.

It does jump around a lot, because there are a lot of very unique items that all roll into that corporate expense number.

Ongoing, just expense, is probably somewhere in the neighborhood of $30 million a quarter, but again, having said that, there are a number of items that could change that significantly, a couple that just come to mind are variable stock compensation as stock prices move around for an exchange, et cetera, that also get wrapped into that.

Ok. Then, as your corporate overhead program comes into place, will the bulk of that benefit be in that corporate segment, or more in the operating segments?

Can you repeat the question?

As your $350 million in cost improvement program rolls in, will the benefits of that be more weighed towards the corporate segment, or in the operating segments?

That's more heavily weighed towards the corporate segment.

Great. Thank you.

Next question.

Comes from Chip Dillon with Dillon Research. Go ahead, please.

Good morning. My question, Patty, getting back to the REIT election, if you could do that.

Do you feel constrained with say, if you look at recent run rates of the income strains in the non-REIT eligible businesses? I would also assume that all of the debt of the Company would have to be in that taxable REIT subsidiary as well, except for about $1 billion.

When you think about the interest expense, the run rate of the combined three entities, pulp, wood products and home building, do you see that as a constraint, possibly, in 2009, or do you have ways you can overcome that?

Well, Chip, you've really touched on a number of moving parts as you think about looking at, specifically, 2009. As you reference, you would obviously want to put as much debt in the taxable REIT subsidiary as possible, because of the fact that it gives you the tax benefit of those interest payments. And also, I would remind you that not all of the timber income, that being some of the other value streams besides the actual harvest value of the income, would also go into the taxable REIT.

So, there are a number of mixes, both in terms of what it looks like in '09, what it looks like in terms of its timber income that certainly make it challenging to look forward with clarity about what will happen in 2009, and I think that's why we said that while we don't have clarity about those today, that we want to be in a position to be able to make that -- have the option to make that election, if indeed it does look like the best decision going forward. There are a number of other things, as you think about 2009, if we were to elect REIT status, any loss in the taxable REIT subsidiary would have to be carried forward, as opposed to carried back, against the gains of 2008.

That's why we've said we have not made any election about REIT status at this point. But, what we are doing is putting the Company in the best position with the most options available to create the highest value once we do have more clarity.

I got you. Just so I understand, that was very good clarification actually. If you didn't elect tax REIT status in '09, then I would assume there is some gain in '08 from the container board in Australian transactions that you could use to offset any tax losses in 2009 if you were not to be a REIT, is that correct?

That's correct.

Ok, I got you. Lastly, maybe you could address a little bit about what you're seeing in the housing area. Obviously, there's -- it's a tough call because the financial turmoil, but I know a few months ago you all were seeing maybe a little bit of daylight in the DC suburbs, and nowhere else. Would you say there's been any signs of any change?

I notice your average house price was up in the third. I didn't know if there was any second derivative changes you are seeing in the market that might indicate that the bottom's not far off.

Chip, we were seeing light in the Washington DC market. It seemed to have been stabilizing, in part, because resale prices had dropped enough that there was creating a bit of a balance between resale and new home prices. We were starting to see stability in the coastal markets and California, particularly San Diego, our longer term higher value markets.

What we've seen recently is buyers generally moving to the sidelines. With publicity in the financial markets over in the last, let's say 45 days, the impact on homeowners with their 401k's, their sense of where they are with respect to equity, challenges in reselling their homes. We've seen, as our numbers show, an uptick in cancellation rates. We are continuing to sell houses in every single market, but we are look at this every week, and it's very choppy. Our sense is that home buyers need to regain some confidence that the financial markets are stable before they really start to show up and make a purchase.

The other thing that we're seeing, at the low end, is continued challenges and qualifying for mortgages. So, higher down payments, higher required Fico scores, which make it more difficult for that fist-time home buyer. We're still expecting housing sales to be rough for some period of time.

I got you. Thank you, very much.

Next question.

Comes from Mark Wilde with Deutsche Banc. Go ahead, please.

Good morning. Dan, is it possible to talk a little bit about the write downs you have taken in real estate over the last couple of quarters? Where they've been at, and where you're at in the process of evaluating further charges?

Sure. I'll take that, Mark.

As we've explained before, we evaluate all of our real estate holdings on an on-going basis, and on a quarterly basis, we review the need for any potential impairments. We had been taking impairments throughout the market downturn as we entered this slowdown a couple of years ago. As I have shared before, we had generally higher margins in our properties, so we were cushioned from the initial downturn and drop in prices, but as prices continued to decline further and further, it impacts us, as home prices fall, and we re-evaluate our land position in each market.

Over the last quarter, most of our impairments were taken in California and Nevada, where we continue to see price declines, especially in the California markets in the Inland Empire, Las Vegas continues to be soft. As I mentioned, we've seen some greater stability in Washington DC. And on a spot basis, we'll still see impairments.

What we do is we react to the pricing of our competitors. So as prices may fall, we re-evaluate the absorption and the pricing required to build out a project. That may cause a need for impairments.

In the last quarter, roughly half of those impairments related to the need to reduce prices, reduce assumptions on absorption, and in some cases, redesign product. The other determination that we make in looking at impairments is the long term intent and strategy for the property. So, if we are building it out and selling homes, and we have to, in a sense, mark to market based upon the competition. If it's a longer term land position where we still may be going through an entitlement process and have a long title perspective, we evaluate the costs to hold and the likely value in the market when we would come to market.

So, the geography has shifted a bit over the last 12 to 24 months. As you know, we took earlier impairments in Arizona where we had purchased land in 2006, and now as we evaluate the portfolio every quarter, we are seeing impairments needed to be taken in markets, as I said California, Nevada, and we've taken some in the Puget Sound area.

Okay, that's very good. I wondered if I could just talk a little bit about whether you would be willing to participate in consolidation, and further rationalization over in the wood products area, to the extent that this housing downturn goes on longer. We have had a lot of capacity added in many of the wood products businesses over the last three or four years. Any thoughts on that?

Well, we evaluate the industry in all of the businesses that we're in. We're cautious at this point because of the uncertainty in the market.

We're also mindful of the asset and income test that we would face is we elect REIT status. So, that does impact our view of potential strategy moves in the wood product sector, or the cellulose fiber sector, or even the real estate sector. Not to rule them out, but that's part of the process that we use to evaluate longer term structural issues, as it may relate to our strategy.

Okay.

Finally, could you just tell us -- I see that some of the old TJ assets went with the sale of that commercial building products operation. What's really left from TJ, or as set another way, how big were those sales as a part of TJ?

Well, Mark, you're right. It was the commercial component of the TJ product line. It was a relatively small portion of the total sales that we have, with respect to TJ, we are in the full range of engineered products, which includes Parallam timber strand, Microllam, as well as our TJI Joists components.

So, we're fully going forward with those product lines as well. Anyway, we're going to continue to focus on the residential market -- has been our strategy.

Very good. Thanks.

We want to reiterate there, Mark, that we assigned a letter of intent, so we have not sold those assets yet, so we're still in that process. But, as Tom said, it is a really a very small part of the TJ business revenue of well over $100 million for the year.

Next question.

Our next question comes from Mark Weintraub with Buckingham Management. Go ahead, please.

Thank you. First, Patty, I wanted to clarify on the tax. Maybe I'm calculating this wrong, but when I was looking at chart one, it looked like the pretax income was minus $99 million.

So, if I'm going to have a net earnings of minus three, doesn't that mean I had a tax provision of plus $96 million? So, I didn't see how the 42% footed with that.

It does get a little confusing, Mark, so let me try and put some clarity on that.

Because you have not only the change in the tax rate going on and affecting the quarter, but we do need to catch up the tax rate used for prior quarters as well. So, if you were to go into our analyst package, you'll see that the loss year-to-date through September 30 is about $1.2 billion from continuing operations. You have to take, and add back to that, about $100 million, which was the gain in the second quarter from the restructuring of our Uruguayan joint ventures. The reason you add it back is there's no tax on that gain, because there's no Uruguayan tax, because of the forestry exemption there, and those are indefinitely invested in South America, so there's no US tax.

So, take the year-to-date loss, add $100 million, and take that times about 42%. So, this is just the year-to-date piece. Then we had, I think in the second quarter or earlier in the year, about $16 million or so FIN 48, one item -- discrete item, that needed to be added back to that.

That should get you pretty close to the 570-ish, I think maybe 574 that's in the analyst packet for income taxes year-to-dates through September 30. Then you've got to catch up the difference between what we had from income taxes through the end of the second quarter with what we have at the end of the third quarter. That difference all goes through the second quarter. That's why, when Kathy was walking you through the chart on page -- I think it's chart four, Kathy?

Yes, chart four.

That you see the big green bar in the corporate and other segment. That is all related to the tax rate.

Ok, I think I have it. But all that difference went through the third quarter, not the second quarter?

Correct.

Ok. So, basically it's 42% year-to-date. It was a much higher number in the third quarter, but that was catch up for the first two quarters?

Correct.

Got it. Okay.

Then for the fourth quarter, we should the 42%?

Uh-huh.

Second, on the real estate business, first I see you've now got long-term debt of $501 million. Is that recourse to Weyerhaeuser, or nonrecourse?

The $500 million is non-recoursed to Weyerhaeuser, it's Weyerhaeuser Real Estate Company debt, Mark.

Obviously, you paid down about $600 million during the quarter. Does that mean that you contributed a bunch of money from Weyerhaeuser to the real estate subsidiary? Can you help us out with the thinking behind that?

The capital structure today is we paid off -- paid down third party debt, as it was due,and then there is an advance to Weyerhaeuser Company to Weyerhaeuser Real Estate Company that makes up the difference to get us to a total debt position for Rico.

So in that $500 million is third party debt. Even going into the third quarter, Mark, we had intercompany debt from Weyerhaeuser to Weyerhaeuser Real Estate.

Okay. That doesn't show up on in balance sheet here?

Right. Right. If you want to walk through the details of that, we can do that. Give Kathy a call when we're done with the call. We would be happy to do that.

Okay. Thank you.

Next question.

Comes from Keith Wiley with Goldman Sachs. Go ahead, please.

Hi. When you say that you want to maximize the debt of the taxable subsidiaries, are you envisioning having that subsidiary issue new debt, or are you actually contemplating transferring the public bond issued by Weyerhaeuser into that taxable subsidiary?

We are not looking at refinancing that debt, so it is something that we are going through the process, in terms of how the reductibility of the interest would work as a taxable REIT subsidiary. The debt we would have going forward would be those public bonds would still be backed by the full credit of the total assets of Weyerhaeuser Company.

So you would guarantee the bonds essentially?

We're still looking through what the best form of getting to that result would be.

I got you. If you did guarantee the bonds, would you still then be able to spin off that subsidiary later?

Which subsidiary?

The taxable subsidiary.

Well, I think that we wouldn't want to speculate as to what we would do in the future about spinning off subsidiaries. We don't have plans to do that at this point.

The answer to your question would depend ultimately where we land with the changes that we are working through right now. That would be predicated on anything we might think about or speculate doing in the future. But, I hate to comment on that, at this point, since we aren't there.

Thank you.

Next question.

Comes from Ross Gilardi of Merrill Lynch.

Yes, thank you. I just had a couple of questions.

First of all, I noticed that you reclassified your international Timberlands into your timber segment from corporate. I'm just wondering, is that purely and accounting exchange, or have you changed your strategy of your view on your international timber assets and how they might fit into any future structured decision -- future REIT structure decisions that the Company might make?

It is not driven by any consideration of a REIT structure.

What it reflects is a change of the management structure that we have in place for our Timberlands. In the past, our Timberlands' assets in the US have been managed by Mike Branson, and before him, Tom Gideon. Our international Timberlands were chorded up through a separate organization which managed the assets that we had in Australia, New Zealand, as well as South America and now China.

What we've done is we've reorganized, with the focus we have on Timberlands, as a Company, determined that it makes sense for us to have all of the Timberlands fall under the responsibility of Mike Branson in one organization, and so that's why we've shifted the reporting.

I've got it. Thank you.

Can you just update us on your divestiture efforts? When might we hear something on the attempt to divest your rail and shipping lines. I think you suggested last month that you were seeing good interest in those businesses. Has anything changed there, given the more recent turbulence in the financial markets?

No change at this point. We continue to have strong interests in the assets. We are working through a process that is on schedule.

But I can't speculate, at this point, on timing or value.

Ross, we have time for one more question. Thank you, Ross.

Thank you. Our last question comes from Steve Chercover with D.A. Davidson. Go ahead, please.

Thank you. Given your balance sheet, and the benefits of the TREE Act, I was wondering if it put you in a position to get back into the market as a Timberland acquirer, particularly for lands that might be available in key areas like Washington and Oregon?

We look for opportunities all the time to enhance our Timberlands ownership.

A lot of it we do through 1031 exchanges, where we dispose of higher value properties and we purchase others. We continue to do that as a normal part of our business. Your comment about the TREE Act really would not impact that strategy, and with respect to our cash position, as Patty has said, we're maintaining a strong liquidity position at this point, because we think it's the conservative thing to do. We're preserving optionality around how best to use that liquidity as we start to see some clarity on the markets.

Patty mentioned in her comments, we're going to have some options to evaluate to include, how we look at share buyback, how we look at potential debt repayment, and also some disciplines, strategic moves. We're being cautious this time because of the uncertainty of the markets. It really doesn't impact the way we are viewing any ongoing Timberland's acquisitions.

Just on the line of capital, to the extent you have some bonds trading at significant discounts, might you take those out?

That is one thing, as I mentioned, Steve, in the mix of things that we are evaluating and consider, but we don't have any announcements at this point.

Great. Thanks very much.

Thank you. Dan?

I'd just like to thank everybody on the line for your interest and attention this morning. I wanted to close with just a few comments.

I started out in the comment period talking about unprecedented market conditions, and we sure are looking at conditions that we haven't seen before, not only in the forest products business, but in the overall US economy. We've made strategic decisions over the last couple of years that have positioned us well, and I believe have benefited our shareholders, and in this particular market that we find ourselves in now, we are value driven looking at opportunities to put our cash and resources towards the best options to unlock value for our shareholders.

We are maintaining a strong operating position, controlling the controllables in our manufacturing businesses, working closely with our customers, and preserving valuable liquidity. We continue to rely and benefit from the continued commitment of our employees, and our long standing relationship with customers. As we drive through these difficult times, I come back to my opening comments, we're confident in the resources that we have, in our Timberlands, in our operating assets, driving value from our wood products or high-tech cellulose opportunities and emerging carbon credits. Combination of our Timberlands, our strong balance sheet and our strong liquidity position, we believe positioned us well to work through these uncertain times.

With that, I thank everyone for your attention this morning. Obviously, follow-up questions can be directed to Kathy. Thanks very much.

Ladies and gentlemen, this concludes the Weyerhaeuser 2008 third quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 800-405-2236 or 303-590-3000 with the pass code 11120677.

Thank you for your participation, and you may now disconnect.