威爾豪瑟 (WY) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Weyerhaeuser second quarter 2009 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 Friday July 31, of 2009.

I will now turn the conference over to Kathy McAuley, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning. Welcome to Weyerhaeuser second quarter 2009 earnings conference call. I'm 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 material for this call can be found at our website or by contacting April Meier at 253-924-2937.

Please review the warning statements in our press release as 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 for the second quarter of $106 million, or $0.50 per share on net sales of $1.4 billion. The loss includes the following after-tax gains and charges. A gain of $72 million, or $0.34 per share for alternative fuel mixture credit. We began mixing at our five US mills in early April. A charge of $36 million, or $0.17 per share for Real Estate impairments in preacquisition write-offs. A charge of $30 million, or $0.14 per share for corporate restructuring and asset impairment, a charge of $14 million or $0.07 per share for closures, restructuring and asset impairment, primarily in Wood Products; a gain of $14 million or $0.07 per share on litigation and insurance settlement; a gain of $13 million, or $0.06 per share, on the sale of the closed box plant we retained from International paper containerboard sale. Excluding these items, the company had a net loss of $125 million or $0.59 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 charges in contribution to earnings by segment from the first quarter to the second quarter of 2009. This is presented on the basis of contribution to earnings before special items, interests, and taxes. Changes in Weyerhaeuser's segment earnings from the first quarter to the second quarter were as follows -- beginning with the first bar on the left-hand side of the page, Weyerhaeuser lost $142 million in first quarter 2009. Proceeding from left to right across the waterfall chart we begin we discussion with Timberland. Timberland earnings were $31 million higher in Q2. This improvement was driven by more non-strategic land sale, lower harvesting cost and higher volumes, lower log prices partially offset this improvement. The Wood Products loss improved $29 million in second quarter, this improvement was driven by lower SG&A, lower manufacturing, and lower raw material costs, as well as some modest improvements in volumes. Cellulose Fibers earnings were $39 million lower in Q2, resulting in a loss for the segment. This is attributable to extended maintenance at two facilities and lower prices. Average pulp prices declined $45 from the first quarter. The Real Estate loss improved by $26 million in Q2, a favorable mix of business, land and lot sales, lower SG&A, and higher volumes drove the improvement. Corporate and other expenses were $34 million lower than in first quarter. This improvement was primarily contributable to foreign exchange gains and pension and post retirement credits. The final bar to the right of the page is second quarter loss of $61 million before special items. Please note chart one in the information package contains actual Q1 and Q2 contributions to earnings by segment and the total special items, interest and expenses and taxes. I will now turn the call over to Dan Fulton. Dan ?

Thanks, Kathy. In our earnings release this morning, I note that we have seen signs of improvement in the housing market, but I also cautioned that it's too early to declare victory. Despite the encouraging headlines about June new-home sales, and the turn around in the case show home price index, there are indications that the housing market will undergo some minor downturns on its way to recovery. This means that our Timberlands, Wood Products, and Real Estate businesses continue to operate in very uncertain market conditions, as we noted when we announced our dividend action earlier this month.

Later in this morning's call, Larry Burrows will share the hopeful signs we have seen in our Real Estate markets and some of the items tempering our outlook. As Larry goes through his explanation, it's important to remember we have multiple lines of business, and the timing of improvement will be differential, when home building starts to improve it will first benefit our Real Estate business then Wood Products and finally Timberlands. We welcome the positive signs we saw this week and we know that stronger markets lie ahead. Our future success lies in making lasting changes to our cost structure, work that has our full attention and commitment. Since second quarter last year, we've achieved a 34% reduction in SG&A after adjusting for the sale of our containerboard packaging business. This equates to approximately $450 million in annual savings. As both Tom Gideon and Larry will describe in a moment, we have achieved additional savings through operational improvements. These steps address the challenges of the current market, and create a more competitive cost structure that will provide significant long-term benefits in more robust market conditions.

To provide more detail on the state of our current markets, and the operational adjustments that we're making, I would like to turn the call over to our business leaders. We'll start this morning with Tom Gideon, who will provide details on our forest product segment.

Thanks, Dan. Second quarter market conditions continue to be challenging, while we saw some indications of market stabilization, the rate of recovery is uncertain. We continue to focus our efforts on reducing costs and improving our performance. Starting with Timberlands, referenced on chart five, second quarter earnings were favorably affected by non-strategic land sales and seasonably higher harvest levels. While the continued market slump put downward pressure on both domestic and export realizations these declines were partially offset by lower operating and SG&A costs. Although harvest levels did include -- did increase seasonally, overall harvest levels are down 30% compared with the second quarter of 2008. We expect harvest levels to decline further in the third quarter. I should point out that the decline in our harvest level varies by region. In the West, log prices are depressed because of the collapse of the California housing market. We reduced harvest levels by 35%, compared with second quarter last year, while we neared completion of the final (inaudible) of stands damaged by the December 2007 storm.

We also had higher export log sales during the quarter due to our close tie with Asian customers and determining marketing efforts. Our key Japanese customers improved their market share, despite lower post (inaudible) housing starts. In addition we have seen renewed demand for domestic quality Douglas fir in China. We have leveraged this opportunity to sell these logs at margins higher than we would have received from domestic customers. This is a prime example of the work we do to maximize the value from our logs. In the south, harvest volumes were 23% lower when compared to second quarter 2008. Most of this volume reduction is in grayed logs and we are anticipating additional grayed log deferrals in the third quarter. We are continuing our early thinning program to improve stand values and servicing fiber log customers.

Moving to Wood Products, please refer to charts six and seven. We continue to adjust the levers that we can influence, balancing our production against demand, controlling our costs, maintaining our pricing discipline, and taking appropriate actions to improve our cash performance. Today, we are running about half the facilities that we were at peak market conditions, and have reduced staffing by a comparable amount over the same timeframe. I should point out that over more than 1900 of those positions were eliminated this year alone. In the process, we are also making some fundamental changes to how we operate Wood Products business that we will carry into stronger markets. This includes lowering product inventories by $68 million in the second quarter alone, as we have affectively balanced production against demand, and applied lean manufacturing principals to lower inventory levels in our replenishment system. While we are still not satisfied with our results, we are making progress. Even in view of revenues being down 46%, and lumber realizations off by $58 a thousand, compared to second quarter of last year. We continue to rescale our business, and reduce all of our costs.

Earlier this month, we announced the permanent closure of our Tailor, Louisiana saw mill, our sixteenth saw mill closure since 2006. Given our losses in lumber, we will take significant further curtailments across our lumber system in the third quarter. We also initiated further staffing reductions in mid-June, which will eliminate another 300 positions by the end end of the quarter. Turning now to Cellulose Fibers on chart eight, second quarter earnings were negatively affected by an extensive boiler repair at our Columbus, Mississippi operation and annual maintenance outages at two other facilities. Realizations declined by $45 per ton, but were partially offset through improved freight, fiber, energy and chemical costs. The businesses continued to improve its competitiveness, by aggressively reducing input, manufacturing, maintenance and SG&A cost. This focus on cost reduction and operating excellence positions the business to capture optional -- optimum value when the markets rebound. I would also like to mention that once again we lead the industry in safety during the past quarter. This is a real tribute to the caring and commitment of our employees during these challenging times, and we continue to see improved safety translate into improved operating performance.

I'll now turn the call over to Larry Burrows.

Thank you, Tom. Good morning. Housing market conditions improved across all WRECO geographies during the second quarter. Record affordability, low interest rate, and modestly improved consumer confidence, combined with Federal and California tax credits induced home buyers to enter the market. WRECO Arizona, and California markets demonstrated the greatest improvement during the second quarter as they experienced increased traffic, had greater number of home sales and lower cancellation rates relative to the first quarter. The Puget Sound and Washington, DC markets also strengthened. Modest market gains occurred in Houston and Las Vegas. These trends are reflected in the key indicator's table on chart nine. Comparing the second quarter of 2009 to 2008, home sales increased 6% and our cancellation rate declined significantly. However, other metrics remain well below 2008 levels. Traffic decreased 33%, compared to the second quarter of 2008, and closings fell by 47%.

WRECO's financial results reflect the slightly enhanced market conditions. We recorded a $50 million pre-tax loss in the second quarter, including $52 million in one-time charges. These charges include $2 million for restructuring, $11 million from terminating options on land in the states of Maryland and Washington, $5 million of investments, and $34 million from impairments in virtually all of our markets. We also realized gains of $16 million from the sale of land, logs, and partnership interest located in California, Nevada, and the Pacific Northwest. Excluding the gains on land and partnership sales in the one-time charges, WRECO lost $14 million on second quarter operations. I have previously discussed WRECO's strategy to sell approximately 4,000 lots principally in Arizona, California, and Nevada. We closed approximately 20% of these lots during the second quarter and are in active negotiation on the remaining properties. Though we are somewhat encouraged by science of potential recovery, the housing market still faces significant headwinds in the third quarter. Consumer confidence remains fragile, it improves through much of the second quarter only to decline in June and July. Unemployment continues to rise.

Though the pace of foreclosures has slowed, the availability of foreclosed homes continues to place downward pressure on new home price. Fannie Mae and Freddy Mac's May 1st implementation of new appraisal standards, creates a potential disconnect between a home's contracted sales price and appraised value. Earlier this month, the State of California exhausted its available tax credit funding. Though the Federal credit is available through December 1, potential buyers of a to-be-built home must purchase soon to insure they can settle before the credit expires. The combination of these factors threatens to delay the housing market recovery. WRECO expects to incur a greater loss from home-building operations in the third quarter compared to the second. While we anticipate a comparable number of home closings in the third quarter, our mix will temporarily shift away from higher-priced California homes in favor of lower-priced Arizona properties.

In the second quarter, [PARTY] Home successfully sold and closed on much of its available California inventory, before building its backlog with sales that we expect to close late this year. In contrast, [Ameri-Log] Homes which had little standing inventory in Arizona, sold primarily to-be-built homes during the second quarter; these sales will be reflected when third quarter closes. We continue to adjust, reduce the quantity of model home, and pair down unsold inventory. We have cut land spending to a bare minimum. As Dan said, we believe that stronger markets lie ahead, however, numerous obstacles lie between current market conditions, and a full sustainable recovery. The actions we continue to execute are enabling WRECO to generate cash today and return to profitability as our markets stabilize.

I will now turn the call over to Patty to discuss the outlook for the third quarter.

Thanks, Larry, and good morning. While we believe that markets are stabilizing, we don't expect a significant improvement in economic conditions in the third quarter. Our focus will continue to concentrate on cost control, and disciplined matching of supply with demand. I'll begin the outlook with Timberland. As Tom has already described, we expect to be deferring additional fee timber harvest as a result of weak prices for logs. This is especially true in the south, where realizations for grayed logs are expected to soften.. Export price realizations in the west are also likely to weaken somewhat. We anticipate that per unit costs will be slightly higher due to lower volume. Excluding the impact of non-strategic land sales, we expect that Timberland earnings in the third quarter will be lower than the second quarter. In Wood Products, we believe that low demand levels will persist. While we may see some slight price improvements in selected products, we did not believe that it will result in significant earnings improvements. We continue to take additional downtime in order to balance our supply with demand. Tom has already given you an overview of some of the additional actions we are taking in the third quarter, especially in our lumber system. Our increased focus on working capital, and cost controls should result in lower losses in the third quarter, compared to the second.

In Cellulose Fibers we expect pulp prices to stabilize in the third quarter. Pulp production is expected to increase due to less maintenance downtime. This increased production and lower maintenance spending and input costs should result in improved earnings. We expect to blend slightly more alternative fuel in the third quarter compared to the second. Overall, we expect earnings in our Cellulose Fiber segment to increase in the third quarter compared to the second. Larry has already shared the third quarter outlook for our Real Estate business, where we anticipate the loss in our single-family home-building business to increase compared to the second quarter primarily as a result of lower average closing prices driven mostly by a change in mix.

Now I'll close my remarks with some selected financial comments. Our cash flow from operations improved significantly during the quarter, primarily as a result of improved operating results, receipts from alternative fuel tax credits and working capital reductions. Our capital spending for the quarter including reforestation was approximately $40 million for a total of $107 million year to date. We anticipate capital expenditures for the year to be approximately $200 million. At the end of the quarter, we had no borrowings outstanding under our $2.2 billion lines of credit, and we are in compliance with all debt covenants. We have debt maturities of approximately $400 million in the third quarter, and we will be making our semiannual interest payments of approximately $150 million. With that I'll turn the call back to Dan, and I look forward to your questions.

Thanks, Patty. This quarter was one of continued challenges for three of our businesses, and strong operational performance for the fourth. Our Timberlands, Wood Products, and Real Estate businesses are all feeling the effects of the weak housing market. In response, our Timberlands business is deferring products, while Wood Products continues to adjust its operations to match supply with demand. Real Estate saw some improvement across the board but expects to experience continued pressure on margins. Cellulose Fibers is our bright spot as this business is generating cash from both operations and from the alternative energy tax credit. As you have heard from several of us this morning we have made significant improvements in our cost structure, but we know more can be down and we continue our focus on identifying opportunities to further reductions.

And now I'll open the call up to questions.

Thank you, sir. We'll now begin the question-and-answer session. (Operator Instructions) . Our first question is from George Staphos with Bank of America, Merrill Lynch,

Thanks, good morning to you. I guess the first I had within Wood Products, if you think about the next two to three quarters, and eliminate the impact of seasonality and whatever trends we may see in the market per se, what kind of incremental benefit is possible to be seen from your own efforts within the business from an earnings power standpoint? Not next quarter but over the next two or three quarters.

Well, George, we have seen sustained progress as we rescaled our business over the course of the last six months, and we did see a significantly improved earnings from operation, as well as cash usage out there the second quarter. In fact I would note that for the month of June, we were still slightly negative from an earnings point of view, but with working capital reductions we were cash positive. One month does not a trend make, and that there is a lot of uncertainty still going forward, but July at this point looks similar to June, and we expect that we're going to continue to move forward across all of the actions that we have taken, and what we need to do additional as market conditions warrant. We're now waiting as others have mentioned for market conditions to improve or counting on that improvement, so we're going to adjust all of the levers that we have available to us to make this improvement on the curve, as we all know, sustainability is going to be a function of what price is, and of course, what we can to do to continue to reduce our costs. We continue to do the levers that we have, including far rest, including further curtailments in our operations. We announced the closure of our Tailor, Louisiana saw mill, and taking additional staff reductions of about another 300 individuals out there our organization, so our focus is going to remain on improving our cash usage, and we believe it is going to be on the basis of continued low levels of demand.

Okay. Appreciate the comments, Tom. First of all, how much were boiler and repair, outages, and the impact of those things in the second quarter within Cellulose Fibers?

Say, George, can you kind of repeat the question for me?

Yes, sorry about that. How much was the overall effect from, boiler repair and outages in the second quarter?

Are you talking about in terms of expense or --

Yes, exactly.

Okay. Well the expense for the Columbus boiler repair was approximately $30 million of maintenance expense spread out over a 45-day outage.

Okay. And then I guess the last quick one, just out of curiosity . The box plant that went to somebody else, which

George, that was our facility in Honolulu, Hawaii.

Okay.

One we had taken out early in the process of the transaction with International Paper.

Okay. Seemed like it was a good price you got for it.

George, one thing on the 45 days that Tom was on Columbus, we had 30 of that in the second quarter, and 15 of it will be in the third.

Thanks, Patty.

Sure.

Our next question comes from Mark Connolly with Sterne, Agee & Leach, please go ahead.

Thank you. Two questions. First, Tom, you talked about activities that go beyond -- beyond right-sizing, and you mentioned working capital. Can you give us a sense of those activities that are going to make the business look different when the volumes come back? Most of what you mentioned just sounds like it's right sizing. I'm just curious is there much going on beyond that to try to shift what this thing is going to look like when the recovery is here.

Sure. One of the activities we are doing across our organization is applying the concept of lean manufacturing to sustainable and predictably improve our performance. That involves looking across our supply chain, removing inventory buffers on a permanent basis, taking out waste wherever we can across our system, and improving our operational reliability, we apply that to our operating facilities as well as our business systems. So we believe we have made some fundamental sustained improvements on our business system going forward.

And that will take your working capital down then on a sustainable basis as well.

It will take it down, but we should recognize as markets improve and working capital goes up, we can maintain it at a lower level than it would have been.

Big picture question, when you think about your portfolio, and obviously this is a tough time in a lot of businesses, do you think that Weyerhaeuser needs to rethink its product digits verse indication? When we look at the old portfolio, maybe some of the businesses weren't great, but it was far more diversified that than what you have now. Those were decisions made over decades that have been pretty much reversed over the last two or three years. I'm curious how you are thinking about dealing with diversification as we get past this cycle?

Good question, Mark. Clearly, as we excited the fine paper business, and we exited the containerboard packaging business, we are more reliant on the US housing market, and as we look forward the Cellulose Fibers business gives us diversification away from the housing market, and also puts us on a global market situation where we compete all over the world. So that's a positive for us. As we look at our Timberlands, we have opportunities in our Timberland's business to diversify earnings streams that -- that emerge from our land. We have talked about that in some of our sessions, such as in -- in May, so that I think -- as we look at the Timberlands, we have got an energy potential in the future, and a bio products potential in the future. We have also potential to expand beyond our borders in our position in South America. We have a small position in Timberlands in China, so our focus will be to continue to build our Timberland capabilities and opportunities, and I think that's where we are going to find the diversification opportunities that will lessen reliance on the housing cycles in the US.

Very helpful. Thank you.

Thank you. Our next question is from Gayle Glazer with UBS. Please go ahead.

Hi. Actually maybe just taking the opposite side of that equation when you look at the portfolio and you start seeing markets recover, and you may have some more opportunity to sell, do you think you might consider further restructuring beyond what you have done?

Gayle, we continue to evaluate the performance of the portfolio on an ongoing basis as we shared before. Our foundational business is our Timberlands, which includes the land, the timber, the minerals and oil and gas rights that come with that, as well as what I mentioned in the conversation with Mark, biomass and energy potential. Our other businesses, the challenges that we have for them is that they operate on a top quartile basis. We have significant scale in our Wood Products business, and we believe that that has significant earnings power, and cash flow generation potential for us as the housing market recovers. Our Real Estate business has been a top quartile performer in the past, and as we come out of this cycle, our focus will be getting back to performance at that prior level. And our Cellulose Fibers business, as you know is focused on high value absorbent, but the goal for each of those is that they be able to perform at peak each of those is that they be able to perform at peak top quartile as compared to peers, that they be able to generate cash for the portfolio as well as for their own internal needs, and we have the ability on an ongoing basis to measure their effectiveness internally in the valued Weyerhaeuser company as compared to alternatives. So I think the message for me would be that we continue to evaluate the portfolio. We like the businesses that we have today, but our goal is for them to be top performing.

Patty how much cash did you actually receive from the fuel credits in the quarter. And can you give an update on the status of loans to the pension fund, I thought they were callable at six months or something like that or where that stands?

Yes. In terms of the alternative fuel tax credits, we received actual cash receipts in the quarter of right around $80 million, and the bulk of the remainder in the -- right after the end of the quarter, so in this month. In terms of the loans to the pension plan, there was no activity on those loans. We did extend the payment terms on some of them for another six months. I would expect that we would see some of that cash coming back late in the year, but probably the bulk of it after the first of the year.

Okay. And, Dan, or Patty, I don't know if either one of you want to comment on the decision to cut the dividend again, especially in right of the improved cash flow in the second quarter?

I'll comment, Gayle. The decision was made by the Board as we said, when we announced it to enhance liquidity, and provide financial flexibility in light of what we continue to believe is an uncertain market. So, the point we're making this morning, we're pleased with the activity in the second quarter, as we -- as Larry talked about, we saw a turn around in housing, started to see some improvement in Wood Products, but we are not convinced that it is sustainable at this point, and we think that we will have significant uncertainty during this recovery until we see unemployment peak and start to come down, and consumer confidence be restored, and we still have significant issues dealing with the foreclosed housing inventory that exists, and as Larry pointed out, and interestingly the boost that we got from the tax credit programs, both Federal and State can provide some disruption in the marketplace. So we benefited from it, but when those tax credits go away, as they have in California, then there's an adjustment. So the decision of the Board was focused on -- we continue to believe there's a significant amount of uncertainty in the direction of the recovery, and then couple that with -- the desire to have greater flexibility and liquidity as we move forward.

Okay. Thank you.

Thank you our next question is from the line of Mark Wilde with Deutsche Bank. Please go ahead.

Good morning. Had some questions around the Timberland. It is possible to get a sense of how much the gain was in the quarter on that -- the non-strategic land sales, and also where those sales occurred at?

Sure, Mark. As you know we have an ongoing land adjustment program, so we had a number of parcels that we look at to see if there's an opportunity to exchange or sell. We had some non-strategic turn-around sales this quarter. The bulk of that was focussed in a coastal region in Southwest Washington and was for about 14,000 acres.

Okay. And the gain on that, Tom?

Overall, what we had, we saw a -- the sales price for that was about $34 million for the 14,000 or approximately $2,500 an acer. This was property that was very heavily oriented towards Hemlock stands as opposed to Douglas fir. It was an area that had not only seen some salvage activity as a result of the December 7 storms which still has some residual impact they are still resident in the stands themselves, and it is also one that as an entity is significantly young in it's a age class. It only averages 24 years, so it's a significantly high percentage of pre-merge on that particular set of property. So when we look at everything and put all of that in to consideration, we thought it was overall good evaluations for us, Mark.

Couple of other questions, Tom, on the Timberland, I notice digging back in the details that your ourselves sales of Southern timber were up about 2.5 fold year on year, but when I look at the depletion in terms of kind of cubic meters in the south, it was down sharply. Can you help us understand what is going on there?

Well, in some respect that's the fact that we have looked at outside sales as we have reduced the usage internally, and it's just the balancing of that against our usage against what is available in the marketplace.

Okay. And then you -- in your commentary, you kind of leave open in Timberland the question of additional non-strategic sales in the second half. Can you provide us with any thoughts on what we might see there?

Yes, Mark this is Patty as -- I made the comment about excluding the non-strategic timber sales, as you know we have an ongoing program of improving our portfolio through Timberland sales and exchanges. And just to give you some color on that, I just in terms of giving you the guidance for the third quarter, I just excluded them. They are lumpy, so it just depends upon what we find in terms of good value where we look at potential to improve that portfolio, so we really, I think Tom has already taken you through the changes in the second quarter, and we really aren't forecasting what level it might be in the quarter.

Well, I guess to come right to the point, I mean, there were reports about six months ago about you guys having a lot of land for sale potentially in the Pacific Northwest. I think many of us have written about that, but aside from this sales of 14,000 acres, we really haven't seen much. I'm just trying to get a sense of whether we should assume much in the way of land sales as we look in to the second half?

Again, Mark, we just don't comment or speculate on rumors that are out in the marketplace regarding potential land sales. One thing I would like to go back and reiterate was when you were talking about the third-party sales, you might have been referring back far enough that when we sold CBPR, a lot of the internal sales, fiber logs have been transferred into third-part sales as a result of them going to international paper.

And finally, just a question on wood product, Tom, volumes are off sharply, we're all uncertain about when the housing market is going to recover. Would you consider in your Wood Products business things like, perhaps, creating some joint ventures, that might help rationalize things on the supply side, say in the engineered wood type business?

Mark, again, we're focused first and foremost on improving what we have, and what we have -- what we need to do in order to make the sustained improvements that need to happen, but, again, as Dan has mentioned, we will consider any opportunity that could potentially add value, and would be accretive to the return to our shareholders.

Okay. Very good. Thanks very much .

Next question? Operator?

I'm sorry. Next question is from the line of Chip Dillon with Credit Suisse, please go ahead.

Hi, good morning. First question was on the home-building unit. You used us, or you do tell us that your rough -- your tax basis for the Timberland is around $1 billion. What would be a similar number at this point for the home builder?

Our --

I think what we have said Chip, as it relates to Timberland is that our tax base is less than $1 billion. So it well under what our book basis and fare market value basis is. In WRECO, in our Real Estate business, our tax basis exceeds our book basis, primarily as the result of the impairment we have taken, we can't take those for tax purposes until we actually dispose of the land so it would be greater than book value.

And could that be by as much as -- looking at all the impairments, it would look like there could be as much as $1 billion gap in the other direction there?

Chip, this is Larry, I think when we chatted in New York a couple of months ago, we said that I think we had a book value -- and this is going back to the first quarter -- of about $1.6 billion, and there was about -- a little less than $1 billion in addition -- about $1 billion of impairments that we had on top of that.

Got it. Okay. So 2.5 for book -- for tax return purposes at this point.

Yes.

And I guess Larry you were mentioning the lot sales. There are about 4,000 lots you actively marketing in California, Nevada, and Arizona, and you have got about 20% sold. Are you getting what, roughly -- I mean it's like 10,000 a lot -- sort of where prices are moving right now?

It really varies greatly because of, not only to the location kind of the condition of the lots, so something in Arizona would be different maybe than something in Vegas versus Southern California, and also are they -- all of them are entitled. Some of them have land spend that is all ready part of it but some don't so it varies, and so something that is entitled in the raw, you get -- would be a little bit lower price than something that is entitled but also has some land development spending that has been associated with it.

Got it. Dan at the top of the call, you said that when we Dan at the top of the call, you said that when we see housing recovery, you expected WRECO to benefit first, and then Wood Products and then Timberlands, I'm just kind of curious. I always thought there was a bit of a lag in terms of the ability to get pricing up on houses, obviously the units would improve, is there a chance that maybe next year we would see Wood Products lead the way only because there's -- could be a better chance that repair and remodeling could lead the way?

Yes, my take on the sequential recovery is that we have had disappearance of a significant number of participates in the home-building business. The private builders, and as the recovery begins, the larger, well capitalized public builders, should have the capacity to take advantage of that first, because they have a land position and lots to build on, and they don't need a construction loan from a bank, and so, our experience is we'll start to see that uptick earlier, and then it will translate in to home -- in to Wood Products. Wood Products there's a bit of a lag, and more of an overcapacity issue in the Wood Products arena, and then wood products producers, they need to earn a margin on manufacturing, and that will ultimately then translate in to log values. And it will be differential I will market and very regional, but it's a general comment.

Got it. Okay. Thank you.

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

Thank you. Do you think that the Timberlands business, which as you noted tends to be lagged, as seen the full brunt of the effect of the downturn? Or do you expect that there will still be more downward pressure, particularly on private market values for Timberlands?

Well, Mark, as we look at it in terms of just the log usage and take away, I think Timberlands is reflecting what the markets have to offer. Again, what happens there will mirror the recovery that we see out there those components of our portfolio.

Okay. But so, as long as things don't get worst in housing, you think that Timberlands essentially have bottomed, though? Is that a fair characterization of what you just said?

I would say -- I was trying to say it is going to mirror that, and we're not able to pinpoint where we're at in the system, but I does appear we have seen some relative stabilization across demand going from housing through Wood Products and down through to Timberlands.

Okay. I may have missed it, but what did you say the gain on the FIA sale had been?

I didn't mention what the gain was. I mentioned that the total sales price for that sale was approximately $34 million.

And the gain, Mark, was just under $30 million.

Okay. Thank you very much.

Sure.

Thank you, our next question is line of Peter Ruschmeier with Barclays Capital. Please go ahead.

Thanks, good morning. Couple of questions. It is possible, Tom to share with us the amount of gains that you may have had in the first quarter and also in the year-ago quarter? I think they were much lower.

Peter could you help me out a little bit more about what specific gains you are referring to?

I'm sorry, the non-strategic land sale gains in the timber business.

Okay. And you are asking what we are year-over-year?

Well, in other words you shared with us what the gain was in the second quarter. I'm curious to be able to have an apples-to-apples comparison. I'm curious how much gain you may have had embedded in your reported numbers in the first quarter and the year-ago quarter for the Timberlands.

That's something that I just don't have re --

I'll get back to you, Pete, on that.

Okay. And I would also be curious Tom, if you could comment on your mix of harvest sought -- in terms of what you would characterize as saw timber versus pulp wood, and has that shifted over the last year or so?

Well, certainly over the last six months, we have started to see some reduction in our pine grade as compared to our fiber in the south, and we expect that that's going to continue, Peter as we take off our harvest deferrals going up a little bit in the third quarter.

Okay. And, Tom, also, you mentioned your -- some of your commentary on log exposures to Japan. I'm curious if you could comment on demand and pricing trends you are seeing for logs and lumber outside of Japan, and other Asian markets, whether it be China, Korea, or elsewhere.

Well, Peter, as I mentioned, we're starting to see some renewed demand in China, for domestic quality logs that previously wasn't something that the export market was looking for. So we're exploring that. And we think that that can move in to a very fruitful market for us as -- as things progress.

Okay. And just lastly, if I could, maybe a question for Dan. I'm curious, Dan, on -- would you be willing to share your thoughts on the timber deed structure announced recently. And I'm sure you have looked at every structure under the sun, but can you share any thoughts on whether that might be something applicable for Weyerhaeuser?

I'm not able to comment on that today, Peter.

Okay. Fair enough.

Thank you. Our final question is a follow up from Mark Wilde with Deutsche Bank. Please go ahead.

Yes, just a couple of cleanups. One it look like the tax rate came down quite a bit quarter-to-quarter. Can you comment on that Patty?

You bet, Mark. As you think about our tax rate in the first quarter our tax rate for the year we were looking at about 38%. As we look it now at the end of the second quarter, our effective tax rate is around 36. So you had about 2% or somewhere around $10 million of cumulative rate cleanup for the quarter -- or for the year-to-date that runs through the second quarter, and we had about $13 million, just over $10 million of discrete items in the quarter for some state tax -- deferred taxes as well as some FIN 48 charges.

Okay.

It's about going forward the tax rate for the year as we sit here today we're looking at just under 36.

Okay. And I also noticed it looked like SG&A came down sequentially about $24 million. Is that level we saw in the second quarter, is that a new sustainable level?

Mark, I think what you are going to see is a continued decline in SG&A, as I mentioned, in my remarks, on a year-over-year basis, our SG&A is down $450 million at -- at a run rate level, and we are continuing to take out costs, and so you should expect to see that number to continue to decline.

Okay. Very good, Dan. Good luck in the third quarter.

Thank you.

Thank you and there are no further questions at this time. I'll turn it back to management for further remarks.

Thank for joining us on the call this morning. Just a couple of wrap-up comments. I want to emphasize that we're doing business in a changing environment with varying degrees of uncertainty. Related to the economic situation, consumer confidence. And in addition the political environment. Our current focus continues to be to respond to market opportunities, while maintaining a focus on driving costs down for long-term sustainable benefit, and we believe that the -- in our portfolio, the building blocks that we have in our portfolio and in relationship to the new energy and climate-change policies that are being developed offer us, new opportunities for our biomass, and we believe we'll see benefits from our long-standing practices of sustainment forestry, and finally our strategic view of the portfolio of assets that we have, are well positioned to change advantage of that changing environment. I appreciate your attention today. As always follow up questions can be directed to Kathy. Kathy, any final comments.

No, I don't believe so, but I'll be back in my office shortly and I would be happy to take any of your questions. Have a good day.

Thank you very much.

Thank you. Ladies and gentlemen this concludes the Weyerhaeuser second quarter 2009 earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, with the access code 4100961. ACT would like to thank you for your participation. You may now disconnect.