威爾豪瑟 (WY) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Weyerhaeuser 2009 first quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Tuesday, May 5th, 2009.

I'd now like to turn the conference over to Ms. Kathy McAuley. Please go ahead, ma'am.

Good morning, welcome to Weyerhaeuser's first quarter 2009 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations. Joining me this morning are Dan Fulton, President and Chief Executive Officer; Patty Bedient, Executive Vice President and Chief Financial Officer; Tom Gideon, Executive Vice President, Forest Products; and Larry Burrows, President, Weyerhaeuser Real Estate Company. This call is being webcast at www.weyerhaeuser.com. The earnings release and material for the call can be found at the website or by contacting April Meier 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.

This morning, Weyerhaeuser reported a net loss in the first quarter of $264 million or $1.25 per share on net sales of $1.3 billion. This includes an aftertax charge of $46 million or $0.22 per share for forest products closures, restructurings, and asset impairments primarily in wood products; an aftertax charge of $45 million or $0.21 per share for impairments and reserves for real estate assets; an aftertax charge of $17 million or $0.08 per share for corporate restructuring and asset impairment; an aftertax charge of $12 million or $0.06 per share for a reserve for an agreement in principle to settle the alder litigation. Excluding these items, the company had a net loss of $44 million or $0.68 per share. A GAAP reconciliation of special items is available on our website in the earnings information package.

Please turn to chart four in the earnings information package as I will next discuss this waterfall chart. Chart four is the bar chart detailing the changes in contribution to earnings by segment from the fourth quarter of 2008 to the first quarter of 2009. This is presented on the basis of contribution to earnings before special items, interest, and taxes. As noted in the first bar on chart four in the fourth quarter 2008, the company lost $213 million before special items, interest, and taxes. Changes in Weyerhaeuser's segment earnings from the fourth quarter to the first quarter were as follows. Proceeding from left to right across the waterfall chart, we begin the discussion with timberlands.

Timberland earnings were $21 million lower in Q1. This decline was the result of a lower fee harvest due to market conditions and lower log prices, particularly in the west. These factors more than offset improvements in fuel and horticulture costs. Q1 earnings included a $14 million gain on the land donation on behalf of the Weyerhaeuser Company Foundation.

The wood products loss decreased by $23 million in Q1. Costs were lower due to facility closures, cost control measures, lower raw material costs, and a decrease in SG&A. These cost reductions were offset by lower lumber and OSB prices and lower volumes in all product lines.

Cellulose fibers earnings were $33 million lower than in Q4. This decline was primarily driven by a $100 per ton drop in pulp prices which offset lower costs for fiber, freight, and maintenance.

The real estate loss decreased by $121 million in Q1. This change was largely due to a loss of $130 million on land sales in Q4. There were no major land or lot sales in Q1.

Corporate and other expense was $19 million higher than in Q4. An improvement in corporate overhead and lower foreign exchange losses were more than offset by lower pension income, a higher variable comp expense primarily due to a higher stock price, and a donation to the Weyerhaeuser Company Foundation.

The final bar to the right of this page is the first quarter 2009 loss of $142 million before special items. Please note chart one in the information package contains the actual Q4 and Q1 contribution to earnings by segment and the total of special items, interest expense, and taxes. I will now turn the call over to Dan Fulton. Dan?

Thanks, Kathy and good morning. When I first participated on this call as President of Weyerhaeuser Company back in February 2008, I commented that our real estate business was in for a tough year. That may have been the understatement of my career. Although we had already seen some weakening in our wood products business, no one expected the housing market to plummet to levels we haven't seen for decades and become mired in a downturn that continues today. In a moment, Tom Gideon, our Executive Vice President of Forest Products, will outline the significant action we've taken to address the challenges of this market, and although not readily apparent, these are extraordinary actions. Nonetheless, we know that additional measures are required and we will further improve the performance of our wood products business.

The same is true for Larry Burrows. Even though Larry and his management team have been through market cycles before, the depth of this downturn and the utter collapse of markets such as California have put their management skills to the ultimate test. They've responded by continuing to cut overhead and reducing and rebalancing land positions to improve performance. Larry will outline the actions of our WRECO team in his remarks this morning.

I wish the effects of the weakened economy had remained confined to those two businesses, but as we noted on last quarter's call, we began to see some deterioration in the fluff market during the fourth quarter due to the worldwide economic downturn. This carried over into the first quarter and is likely to continue into the second. Even our timberlands business, a traditional steady performer in our portfolio, is now deferring its harvest levels due to the cumulative effect of a weak housing market and the global economic slowdown.

In response to these conditions, every business has taken action to reduce costs and align production to meet lower demand. Across the company, we are reducing SG&A costs. Last May, we established a goal of achieving $375 million in cost savings over a two-year period. As of the end of the first quarter, we have already met that goal, but given the deteriorating market, we're committed to finding further cost savings.

And while we have faced challenging market conditions, we cannot use this as an excuse. No one associated with this company is satisfied with the results we've achieved. As I said in our release this morning, our current performance is unacceptable. We recognize that our past actions have not been enough and that our top priority is to improve our competitiveness. Every aspect of our operation is under review, and you have the commitment of our management and our board that we will take all actions necessary to improve our performance.

Weyerhaeuser will weather the current challenges. Our future is based on our timberland assets and the land that we own. I'm confident in the fundamental value of these assets and we continue to develop new revenue streams from these lands. In addition, our wood products, real estate, and cellulose fibers businesses have built strong customer relationships and hold leading market positions. But we must strengthen the ability of all of our businesses to succeed in this changing competitive environment by making fundamental changes to our cost structure. All of our businesses must be top quartile performers. That's my focus and we'll deliver on that commitment.

Now I'd like to turn the call over to Tom Gideon to discuss our forest products businesses.

Thanks, Dan. The first quarter was every bit as tough as we expected. The continued deterioration in global and domestic market conditions had a significant effect on the performance of our wood products, cellulose fibers, and timberlands businesses. In response, each business put on a full court press to reduce costs, to position them to improve their performance at these new levels of demand and pricing.

Starting with wood products, referenced in charts six and seven, we know the key questions are what are you doing to get to cash neutral and when will you get there? Let's turn first to what we're doing. Housing starts continued their decline during the quarter, putting significant downward pressure on pricing for our core products. Lumber realizations were 11% below fourth quarter levels, while OSB realizations fell 4%. As a result, sales were down 44% from a year ago and 25% from last quarter.

Despite these adverse conditions, our first quarter's performance was slightly better than both of these periods. While our performance still isn't where it needs to be, it is improving. During the quarter, we closed or indefinitely curtailed 10 operating facilities and five distribution centers. Lumber production was down 27% from Q1 2008 and 12% from Q4, representing an operating rate of 58%. The four lumber mills we curtailed during the quarter had 870 million board feet of capacity. OSB production was down 52% from Q1 of 2008 and 35% from Q4, and we operated at just 38% of capacity. We also took out 520 million square feet of OSB on an annual basis. We operated our engineered system at less than 20% of capacity during the quarter. The three engineered mills we curtailed had 17 million cubic feet of solid section capacity. In total, the mill curtailments and operating posture changes resulted in the elimination of 1,300 positions.

The total cost impact of the mill curtailments, changed shift postures, and reductions in SG&A is significant. Actual manufacturing and direct SG&A costs were lower by $54 million compared to the fourth quarter, and the March run rate indicates an even higher reduction. We estimate that the annualized run rate of these cost reductions will be in the neighborhood of $250 million. In addition, we moved to a core set of operations, which we are running more efficiently and at lower cost. As a result, we saw progressive month to month improvement in reducing our cash losses, even though our weekly sales were relatively flat throughout the quarter, and the full impact of these actions were not fully realized in first quarter results.

Regarding the second question as to when, it is very difficult to provide a specific forecast given that cash neutrality is primarily a function of price, volume, and cost, with the first two largely determined by the market demand and supply dynamics. What we can say is that we have positioned ourselves to take full advantage of the cost reductions already implemented and have made substantial progress in enabling system cash breakeven even at low levels of market demand. During our last call, I stated that our goal was to get to a core set of operations that can be cash neutral in this severely depressed market and can serve as the platform for significant operating returns when markets rebound. That is still our goal, and we are closer and encouraged by our progress. We are not satisfied with the results as they are not yet where they need to be. So we will continue to adjust the levers we can influence -- relentlessly reducing costs, ensuring we have the best balance between demand and supply, maintaining pricing discipline across all of our product lines, and constantly evaluating progress against our goal and taking the necessary actions to achieve it.

Turning to cellulose fibers on chart eight, realizations dropped by $100 a ton as global demand shrunk dramatically. In response, we flexed our production to better match this decline in demand. Through our cost reduction measures, we were able to partially offset these negative revenue impacts through improved fiber, chemical, freight, and maintenance costs. Inventories increased slightly in anticipation of planned downtime in the second quarter associated with an annual maintenance outage and a major boiler repair project.

Moving to chart five in timberlands, the full impact of the sharply lower housing starts and corresponding lower demand for wood products was reflected in significantly reduced harvest levels. Harvests were down 21% from the fourth quarter and 32% from a year ago. The harvest reductions were higher in the west, as we completed most of the salvage harvest by the end of the fourth quarter. Both domestic and export log prices declined during the quarter.

Our Asian markets have also been affected by the slowing global economy. Japanese post and beam housing starts are down 22% from 2008 levels, and as a result, we saw our log shipments to Japan decline by 5% year-over-year. Shipments to China and Korea continue, but at a lower and overall slower pace. While export log prices remain attractive compared to the domestic alternative, we experienced downward price pressure in all three Asian log markets.

I would like once again to recognize our employees for their outstanding safety achievement. 2008 was our safest year ever with a recordable incident rate of less than 1. So far in 2009, we have improved that record low incident rate by 50%. This industry leading performance is even more impressive given the market and operational challenges we faced this past quarter, and as we have mentioned in previous calls, we continue to see a strong correlation between improved safety and better operating performance. I'll now turn the call over to Larry Burrows.

Thank you, Tom. Good morning. The market conditions WRECO experienced in the first quarter were incredibly challenging. Macroeconomic conditions affecting our industry continued to worsen as consumer confidence declined substantially from the fourth quarter's record lows and unemployment rose to levels not seen since 1981. In California, our largest market, unemployment exceeds 11%. Such recessionary conditions reduced the pool of potential home buyers as prospective customers lacked the confidence to make sizable purchases.

At the same time, the wave of foreclosures continues. While inventory is beginning to clear, the consequence is continued price declines. The precipitous market contraction in the fourth quarter carried over to the first quarter. All of our markets struggled. Sales in Washington DC, the Pacific Northwest, and in Houston markets continued to decline. Phoenix, Las Vegas, and California's Inland Empire remain our most challenging markets.

These trends are reflected in our key indicators on chart nine. Comparing the first quarter of 2009 to 2008, traffic decreased 43%, sales declined 51%, while closings fell 49%. WRECO's financial results reflect these painful markets. We recorded a $96 million pretax loss in the first quarter, including $72 million in one-time charges. These charges include $4 million for restructuring, $13 million from terminating options on land in our California and Washington DC markets, $26 million from impairing investments, and $29 million from other impairments, primarily in communities where we continue to operate. These communities are located in Arizona, California, Maryland, and the state of Washington. Excluding these charges, WRECO lost $24 million on the first quarter operations.

In April, we began to see an increase in sales activity. However, we remain focused on adjusting staffing, reducing land spend, shrinking unsold inventory, shuttering communities, and substituting smaller and less expensive product. Cash generation remains our primary emphasis. Another action we are taking is land sales. During last quarter's call, I mentioned a strategic shift that resulted in WRECO impairing land in Arizona, California, and Nevada in anticipation of future sale. While we have not yet closed such sales, we are in active negotiations on many of these properties. These non-strategic properties represent approximately 10% of the 44,000 lots that we own. Of the lots that we own, approximately 50% are located in California and approximately 30% are in Nevada. The balance is split roughly equally among our Pacific Northwest, Washington DC, Arizona, and Texas markets. In addition, we control 72,000 lots through option agreements.

Our WRECO leaders and I are dissatisfied with WRECO's financial performance. However, I am confident that the initiatives we are taking place us on a path to generate cash and return to profitability as our markets stabilize. I will now turn the call over to Patty to discuss the outlook for the first quarter.

Thanks, Larry, and good morning. I'll give you an overview of the outlook for the second quarter and then I'll wrap up my comments with some remarks about financial items.

I'll begin with timberlands. As Tom has already described, we are operating at curtailed harvest levels. While these harvest levels are expected to increase somewhat seasonally compared to the first quarter, we do not anticipate this increase to be significant as we will continue to defer harvest in response to depressed market demand and soft domestic prices. Export pricing is also expected to weaken further in the quarter, as we continue to feel the effects of slowing Asian markets. We will likely have some severance charges in the second quarter as a result of curtailments, primarily in our Western operations. Before the impact of any severance charges, we expect that second quarter earnings in our timberlands segment will be comparable to the first quarter.

Our second quarter outlook for wood products anticipates some seasonal improvement in prices and volumes in most product lines compared to the first quarter, although to date we have yet to see any meaningful pickup. We expect that our operations will continue to have significant curtailments in all product lines, and depending on market conditions, further shutdowns could occur. Although we're not expecting much improvement in market conditions, the impact of our actions to date, including cost reductions in manufacturing and overhead combined with lower raw material costs, should result in lower losses from operations in the second quarter compared to the first.

Average sales realizations in cellulose fibers are expected to continue to weaken in response to depressed global economic conditions, resulting in decreased revenue in the second quarter compared to the first. As a result of our continued focus on cost reduction, we expect to realize some decreases in costs, primarily in the areas of fiber, chemicals, and energy. However, as Tom mentioned, we will be incurring significant maintenance expense in the second quarter as a result of extensive boiler repairs at our Columbus, Mississippi mill. This will be in addition to a planned annual outage at our Grand Prairie, Alberta mill. Shipment volumes are expected to approximate the same levels as the first quarter, as we have been planning for the extended outage at Columbus and we will be shipping out of inventory. This should result in decreased inventory levels at the end of the quarter.

Primarily as a result of the extended maintenance expense, we expect that cellulose fiber segment will incur a loss from operations in the second quarter. This does not include any benefit from the potential for alternative fuel mixture tax credits. We have applied for registration with the IRS to become qualified as an alternative fuel mixer and we began blending alternative fuel at our five facilities that could qualify during the first week of April. Through last week, we have used approximately 77 million gallons of fuel that we believe could qualify for the credit, subject to a number of uncertainties.

In our real estate segment, we expect much of the same economic conditions that Larry described to continue in the second quarter. Even so, we anticipate an increase in the number of single family home closings in the second quarter compared to the first quarter. However, the average sales price is expected to decline due to mix as well as weakness in pricing. Operating results in our single family home building business are expected to approximate the first quarter. Our real estate business continues to reduce costs wherever possible, including reductions in overhead costs and product repositioning. We do not anticipate restructuring and impairment charges to be at the same level as the first quarter, although this is subject to market uncertainties.

Now I'll wrap up with some comments on other financial items. Capital expenditures for our forest products business were approximately $68 million in the first quarter. This included $53 million in property and equipment and $15 million in timberlands reforestation. We expect total capital expenditures for the full year to be approximately $200 million.

In addition to funding losses from operations, other significant uses of cash for the first quarter included $53 million for dividends; interest payments of about $160 million, which was higher in the first quarter as this included our semiannual interest payment; and loans to the pension trust of $85 million. These loans reflect January and February benefit payments, which were higher than normal as a result of our corporate restructuring and downsizing efforts. These brings the total loan balance to $285 million. These loans have a six-month term and may be renewed. We had no borrowings outstanding under our $2.2 billion lines of credit and we are in compliance with all debt covenants.

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

Thanks, Patty. As you've just heard, we're taking action to respond to the current challenging economic situation. But we know that we must do more to position Weyerhaeuser to be competitive, regardless of market conditions. You have our commitment, and as we've demonstrated in the past, we will deliver on that pledge. With that, Kathy, let me turn it back over to you, and we'll open the call for questions.

Nicole, could you please poll the roster for questions?

Yes. Thank you. Ladies and gentlemen, at this time we will conduct the question-and-answer session. (Operator Instructions). Our first question comes from the line of George Staphos with Banc of America-Merrill Lynch. Please go ahead.

Thanks, hi, everyone, good morning. A few questions maybe on wood. First off, if you -- if we can look at the SG&A run rate that you're targeting, I think you said $250 million earlier in the formal remarks, when do you expect to get to that level in terms of the quarter? And if we hold pricing and volume relatively constant, I realize that's a big assumption, when would you therefore expect to get to breakeven either on EBIT or cash flow basis for the wood products business? Then I had a couple follow-ons.

Well, George, just to ramp the size, the $250 million of annualized savings that we have -- it's a combination of reductions in manufacturing costs as well as SG&A. So it's a total cost reduction that we have done.

Understood.

Quite frankly, we're not focused our business on operating at about 350,000 single family housing starts. So it's going to be very difficult for us to get to cash breakeven at those levels. Having said that, we've made substantial progress to enable breakeven status at these low demand levels, and we're going to continue to adjust the levers that we have available to us to get there. We're going to decide what we offer in terms of the volume and mix that we present to the marketplace, where we produce it, continuing to ensure that we operate our core operations at higher efficiencies and lower costs and also at the price at which we offer our products to the marketplace to ensure we're contributing to being cash neutral. So we're constantly evaluating and we'll be making continual adjustments to ensure we're operating our financial performance and improving our financial performance in reducing our cash position.

Tom, I guess a quick follow-on. And again I realize if you don't necessarily want to be pinned down to this, but if 300,000 housing starts isn't where you can be cash breakeven, given the actions you've taken, what level of activity would you need to see in terms of starts to get to cash breakeven?

Again, George, it's difficult to predict.

I understand.

And estimate what pricing and overall demand levels are going to be, because that's based on relative market conditions. All I can say is that we positioned ourselves to be cash neutral at levels that are well below, the high trend rates of $1.2 million to $1.5 million.

Next question.

Thanks, Kathy.

Thank you. Our next question comes from the line of Gail Glazerman with UBS. Please go ahead.

Hi. Good morning. Can you give an update, one, I guess, Patty on how you would look at potential REIT conversion, given the current operations in terms of some of the hurdles that have been -- that you've talked about in the past?

Well, Gail, what I would say is as you know, we made the changes at the end of the year in terms of structure to enable us to have the flexibility on a go-forward basis. As we sit here today, the first test from a REIT perspective would be the asset test at the end of the first quarter. Based on our portfolio, we believe that we did pass that asset test. As we go forward, I think there are a number of considerations in terms of the economic outlook, the need for purging the earnings and profits, a bond REIT conversion, as well as the performance in all of our businesses, but also in the timberland segment where we are deferring substantial harvest. So we have not made any decisions in terms of REIT conversion at the Board level, but it is something we continue to look at quite actively.

Can you offer an update on the status of the Tree Act, where it is in Congress and what type of impact if any it would have were it not extended, given your current operating position?

Gail, the current act expires on the 22nd of May, this month. And we've got active support, both in the Senate and the House, attempting to advance a bill that would provide an extension. Our primary sponsor in the Senate is Senator Blanche Lincoln, in the House, it's Congressman Jim McDermott, who is a leading member of the Ways and Means Committee. We're optimistic given the feedback that we've got from our Congressional representatives. But as you know, it's not over until it's over in Congress. In terms of the benefit that accrues to us, we did pick up a significant benefit last year. This year, given current operations, it likely has less immediate benefit, but the challenge for us is that we would like to see it extended and ultimately made permanent.

Okay. Thank you. And Patty, just one last question. Can you give any sense of your headroom under your existing covenants based on quarterly results?

Sure, Gail. In terms of our covenants, the primary covenants are in our bank credit line of which we have no borrowings outstanding under the line. As we sit here today, both Weyerhaeuser Company and WRECO can borrow under those lines. The Weyerhaeuser level, we have just under $500 million of cushion in the equity calculation, again, as we sit here today and WRECO, which can also borrow under those lines has probably just under about $1 billion worth of cushion.

Thank you.

Next question.

Our next question comes from the line of Richard Skidmore with Goldman Sachs.

Patty, Two questions for you. Could you just walk through a little bit more detail what the major items in the negative cash usage from operations was in the quarter? And on that point, can you just talk about the tax rate and would you expect that the losses you're currently incurring can be applied to the gains that you had, say, on the containerboard sale?

Sure, Rick. I'll give you an update, but I would refer you to page three of the analyst packet, which does have some selected information on cash flow for you. And we'll have the full cash flow obviously in the Q that will be filed either at the end of this week or early next.

In terms of the cash from operations, you had asked about the tax rate, and the tax rate is about 38% on an effective rate going forward. I think it was a little higher than that which is a benefit in the first quarter, given that we had some one-time pickups from state, I think, charges that were running through there, some benefit from that. But 38% is the right effective rate that you should use on a go forward basis.

In terms of the refund associated with that tax benefit, we do have the ability to carry that refund back in 2009 against the large gains that we had in 2008 as a result of the containerboard sale. I think as we have talked in the past that would be our intention, subject to anything that we might do in the REIT area I think as we've talked about on previous calls. If we were to convert to a REIT in 2009, we would have to carry those losses forward from the taxable REIT subsidiary, and would be precluded from carrying those back. So I hope that's helpful to you as you think about that.

Sure. And just to clarify, the net cash from operations on that page three was minus $436 million. How much of that was usage and working capital?

I think that there was a decrease in accruals and payables, if memory serves, of about $250 million or so. Receivables were basically flat to down. The tax receivable, though, is included in that number and that number is somewhere increased by about $200 million as a result of the tax benefit.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Peter Ruschmeier with Barclays Capital. Please go ahead.

Thanks. Good morning. Couple of questions. I was curious if you would be willing to comment and/or quantify any plans you may have on the land sale side for WRECO, either in aggregate acres or timeline, and whether your guidance for the second quarter includes or excludes land sales, and whether you'd be willing to comment on timberlands and whether that's something you're looking at, and what timeframe you would look to make more permanent decisions on that?

Sure, Pete, this is Larry. I think that I mentioned that we have a little over 4,000 lots. Of that, we are taking to the market. We have activity and interest in a little over one-third of those right now that we are negotiating. I don't know, just given [steady periods] and whatnot whether we'll see any consequential impact from those potential sales in the second quarter.

This is Dan. With respect to timberland sales, we have no comment on any activity.

Okay. And Dan, I was hoping you could comment, expand on your comments -- I appreciate the difficult conditions out there. I was hoping you could expand on your comments that performance is unacceptable, you plan to put in place competitive cost structure regardless of the cycle. And I believe that means more than just the $250 million of cost cutting that you're targeting. Can you perhaps share more of the process that you're envisioning and maybe lay out a timeline on when you think it might be reasonable for investors to expect more conclusions on that process?

Sure. Just to clarify once again, I think we might have created some confusion this morning around the comment about $250 million. That was a number that Tom used in his remarks and as he shared, the $250 million savings that he's identified in our wood products business is not just overhead. That's operating costs.

Going back to last May, after we sold or announced the sale of our containerboard business, we put together a program to address significant reduction in support costs at the corporate level related to the fact that we were selling the containerboard business and also we had exited the fine paper business. We needed to rightsize our corporate overhead structure for a smaller company. And that created the targeted savings that we identified last year of $375 million. We thought that it would take us two years to achieve the $375 million savings, and in fact as I reported this morning on a going forward run basis, we hit that number by the end of the first quarter.

Now what we're doing and have been doing for some time is looking at each one of our individual businesses, addressing their cost structure, so that they can be competitive in their respective industry. As you know, we've seen a significant change in the makeup of the forest products industry over the last five to 10 years as we've had land move in one direction and manufacturing facilities in another direction. Our historic competitors are very different than they used to be, and our challenge for each of our businesses is that they be able to compete at a top quartile level in their respective businesses, whether it's wood products, home building, cellulose fibers, or timberlands. And so the efforts that are underway on a continuous basis are to rightsize our support structure, our overhead, so that we can be best-in-class in each of those businesses. That's a process that's ongoing today. As I said, we completed the $375 million initiative, but we're going beyond that.

And just lastly, Dan, is it an ongoing process? Or perhaps you're not willing to share a specific timeline with us today, but do have you a timeline that you're working on to get to or is it really more of an ongoing process as you go?

It's an ongoing process, although we have already committed to some significant changes this year and we can provide an update on some of those changes when we get together in New York at the end of the month.

Very good. Thanks very much.

Next question.

Thank you. Our next question comes from the line of Mark Connelly with Sterne Agee. Please go ahead.

Question for Dan and Larry I guess. If you think about your distribution business from the perspective of a home builder, I'm just wondering -- we've seen you do iLevel. We've seen TJ try some new things. But I'm wondering with the changes we've seen over the last couple of quarters, they've been mostly incremental shutdown here or there. I'm wondering if you think the distribution model that you have in place is still the right one or could we see something more fundamental changing in the way Weyerhaeuser gets its product to home builders?

Thanks, Mark. You mentioned Larry's name. I'm going to direct that question to Tom.

Sure, Mark. We're evaluating all elements of our portfolio on how we're going to market. We have changed our distribution model over the last several years, moving from a broad based utilizing third party products into more focused on internal product distribution on a channel to the marketplace. And again, that's as we've talked, we did take out the [500 million OSBs] earlier this year and it's a component of our business that we're going to continue to evaluate to ensure that we're getting optimum return from it.

Okay. Thanks.

Next question.

Thank you, Mark.

Thank you. Next question comes from the line of Chip Dillon with Credit Suisse. Please go ahead.

Yes, good morning. First question is on the log prices. It looks like just doing a little math, if it is apples-to-apples, that your log prices were only down about 10% both in the west and the south year to year. And that seems to be a bit better than some the other timber companies out there. What would you ascribe that to?

Well, Chip, I haven't done an evaluation against what others have done. We continue to go to the market and the set of customers that we choose to maximize the return to our logs. Of course, we not only have good domestic partners both internally as well as externally, but we're also a significant presence in the international log market, and I'm sure that helps our overall valuations.

Okay. Okay. And then second question is you mentioned about 44,000 lots you owned throughout the system. And about half of those were in California. Could you talk a little bit about how many of those are lots you've owned for, say, a number of years, perhaps in the San Diego County area, roughly how much of those -- what I would imagine would be about 22,000 acres are there?

Sure, Chip. Of the land that we own in California is generally comprised of three regions. One, as you just mentioned, is San Diego. The majority of what we have there is that we've owned for quite a while. Another part of land that we own in California, the lots we own are in the Inland Empire. Some combination of lots that we bought over the last several years, but then again a lot of those also were long-lived. And then the other area that we have a presence in Southern California is in the LA Ventura area, and a large portion of what we own there we've owned for many years.

Thank you.

Next question.

Thank you. Our next question comes from the line of Christopher Chun with Deutsche Bank. Please go ahead.

Yes, thanks. Good morning. First of all, I had a couple questions on the cellulose business. Can you tell us how much more in maintenance costs you're going to have in 2Q than in 1Q?

Christopher, I don't know if I can give you an exact amount, what that is, but it will be in the several tens of millions of dollars compared to first quarter.

Okay. And then if we're trying to estimate what your price realizations are going to be in 2Q relative to 1Q, would it be appropriate just to look at published prices for fluff pulp? Or are there mix or timing issues that would not make that a great idea?

Well, I can't really evaluate for you how you ought to be thinking about that other than to say we're predominantly into the fluff and specialty market arenas in terms of our volume and our market focus. And those are the areas that we're going to continue to focus upon. So over 70% of our product goes into those product lines.

Okay. And then in the black liquor area, you guys mentioned 77 million gallons of fuel burned. Can we get some more information on exactly what period that covers?

That period, as Patty mentioned in her remarks, we began blending at five facilities that would qualify during the first week of April, and the 77 gallons that she identified was the amount from that beginning period, beginning of April, through last week.

Okay. So that's approximately four weeks?

Yes. It's about at the end of the first week of April to actually Sunday, I think was the cutoff that -- for the period that we used.

Okay. And then finally --

Four weeks.

Excuse me?

Four weeks.

Okay. My final question has to do with the land positions and the lots for sale again. I was just wondering what the pros and cons are of selling the lots that you are selling now? I mean, it seems to me that certainly a con would be that the prices are off significantly from a few years ago. So I was just wondering if you could give us some more color on exactly how much those prices are down relative to let's say three years ago? And then what the pros would be of selling them at this point?

Sure. I think that what I talked about at the end of last year, at the end of the quarter, is is that when we looked at the length of land that we own and we looked at actions that we need to take to generate cash, one of the steps and strategies and levers that we have was to look to rebalance our land position. We sold over probably about a little over 5,000 lots last year. We had been in the market and we had what we thought is an understanding of what -- how land may transact in this environment and we made the judgment as a strategy shift to impair these lots in anticipation of selling them. When we did that, we essentially looked at do we need the lots, are they strategic? How soon would we get to them and you really look to do a return to whole calculation and you're just making a cash flow judgment, are you better off with some cash today or are you better off holding them? Again, with a pretty deep land position in some pretty attractive markets, we felt that these lots would be appropriate to take to market.

Thanks, Chris and next question.

Thank you. Our next question comes from the line of Mark Weintraub with Buckingham Research. Please go ahead.

Thank you. Was hoping to get a little bit more color on your expectations for fee depletion this year and also perhaps what you think that number would be in a more normal environment, given what you see as your sustainable harvest?

Well, Mark, we're continually going to evaluate what we're doing in the area of harvest levels as we go forward. In a typical year, we would see a seasonal upswing in second quarter compared to first. This isn't a typical year. And so we're going to evaluate what happens in the market and what the prices are offered in terms of what we're going to bring to the marketplace. Normally, I guess you've seen the past harvest levels that we've seen over the last three to five years, and as we go forward, we would -- taking that trend average would be about what you might expect going forward for the next three to five in a normal, typical market, whatever that may be.

So close to 24 million cubic meters as a trend, if I look at the historical 23 million to 24 million. And so for this year, as a starting point, would 18 million or 15 million, or what might be a reasonable range do you think to -- understanding that you're going to be flexible, given market conditions, but given what you see today, what might be a reasonable range to guesstimate?

Well, I really can't give you that kind of an estimate. Again, you've seen what we've done in terms of the reduction that we've done in response to market conditions year-over-year and quarter-over-quarter. And we're just going to continue to adapt and adjust as appropriate to maintain the best value for the company and the shareholders going forward.

Thanks, Mark. Next question.

Thank you. Our next question comes from the line of Steve Chercover with D.A. Davidson. Please go ahead.

Thanks. Two quick questions, please. First of all with black liquor, is it $0.50 a gallon? Is that how we should look at it?

That's the number that's being used, $0.50 a gallon, Steve.

Great. Thanks. And secondly, couple years ago I think you gave us a number of $6 billion which was the legacy retained earnings. If you were to convert to REIT at the end of Q1, what would be the value of your historic retained earnings?

Steve, this is Patty. The earnings and profits, which is a calculated number in accordance with IRS regulation, so it's not exactly comparable to retained earnings. But as we've said in the past, that number at the beginning of the year is roughly $6.5 billion. So that is the amount of earnings and profits that we would have to pay out in 2009 if we were to convert to a REIT. As we have also said in the past, that it is possible to pay a significant amount of that earnings and profits through a stock distribution as well as cash. Others, when they have done the distribution, have used a combination of 80% stock and 20% cash. But those are all things that we continue to look at.

Okay. As a follow-on, if the tax treatment of dividends were to change, would you adjust the ratio?

Those are all things that we are monitoring as we're going forward in terms of how we are looking at that potential. Tax legislation certainly is an important element of that. The tax treatment not only from a Weyerhaeuser perspective, but from our shareholder perspective on that distribution is an important consideration -- not only as it stands today, but as it may change as we go forward. So all of those things are being considered. But I don't have any additional specifics to give you at this time.

Thanks, Patty.

Thank you.

Thank you, Steve. We have time for one last question.

Thank you. Our final question comes from the line of George Staphos with Banc of America-Merrill Lynch. Please go ahead.

Thanks. Hi, guys. Two questions. Back to wood if we look at the operations, is it possible to comment which, whether it's lumber or panels, is furthest right now below breakeven? And separately in pulp, if we exclude the repair and maintenance expense in Columbus I think you said for second quarter, would you be at above breakeven? Thanks, guys, good luck in the quarter.

With respect to wood, both of those segments go into slightly different market segments. The engineered component is much more heavily directed to the new residential housing, and we're more evenly split in terms of where our lumber goes. We have equal opportunities to go forward. As you know, we ran our engineered capacity at very low levels in the first quarter. We've taken some efforts to rightsize that, and we'll be improving our operating rates and our cost structure in those product lines as well. So they're both challenged. They're both showing improvement, and we're both taking -- in both situations, George, we're taking the same type of actions to adjust the levers that are controlled to improve their operating performance. And could you repeat your question regarding pulp again, please?

Just pulp without the repair and maintenance expense in 2Q, especially the repair expense -- I think you cited Columbus -- would you be above breakeven?

We would be much closer to breakeven if we did not have the maintenance expenses associated with the outages, that's correct.

Got it. Thanks, guys.

Thank you. I'd like to turn the call over to Dan Fulton for some closing comments.

Thanks. Just a couple brief comments as we close here. I want to reiterate that our priority as a company is to ensure a competitive future for this business and to protect shareholder value. For me, that means that we need to achieve top quartile results across the board, all businesses. We need to have a competitive tax status in which to operate in.

These are extraordinary times that we're operating in. And I believe we're taking some extraordinary measures in each of our businesses to rightsize them and to adjust our cost structure so that as we go forward, we will be able to be top quartile. Though economic conditions are tough, it's not an excuse for our performance, and our goal is to be able to be competitive in any market condition. And that's what our group is engaged in right now. We appreciate your support on the call. We look forward to talking to many of you later in the month when we're in New York. Thanks very much.

Thank you, ladies and gentlemen. This conference is available for replay. If you would like to access the replay system, you may dial 303-590-3000 and enter in the pass code number of 11130409. You may also dial 1-800-405-2236 and enter in the pass code number of 11130409. Again, those telephone numbers are 303-590-3000 and 1-800-405-2236 and the access code is 11130409. Ladies and gentlemen, that does conclude our Weyerhaeuser 2009 first quarter earnings conference call. Thank you so much for your participation. You may now disconnect.