威爾豪瑟 (WY) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Weyerhaeuser Q3 2009 earnings conference call on Friday, 30th of October 2009. (Operator Instructions) I'll now hand the call over to Kathy McAuley. Please go ahead madam.

Thank you. Good morning. Welcome to Weyerhaeuser's third 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 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 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 break-even results for the third quarter on net sales of $1.4 billion dollars. Significant after-tax items were a gain of $98 million or $0.46 per share on the sale of 140,000 acres of non-strategic timberland in northwestern Oregon, a gain of $74 million or $0.35 per share for alternative fuel mixture credits, a charge of $62 million or $0.29 per share for Corporate and Wood Products, asset impairments and restructuring charges. A charge of $33 million or $0.16 per share for Real Estate asset impairments and restructuring charges. A charge of $21 million or $0.10 per share for income tax adjustments.

Excluding these items, the Company reported a net loss of $56 million or $0.26 per share. A GAAP reconciliation of special items is available on our website in the earnings information package.

Please turn to Chart 4 in the earnings information package, as I will next discuss this waterfall chart. Chart 4 is a bar chart detailing the changes in contribution to earnings by segment from the second quarter to the third quarter of 2009. This is presented on the basis of contribution to earnings before special items, interest and taxes.

Turning to Chart 4, changes in Weyerhaeuser's segment earnings from the second quarter to third quarter were as follows. Beginning with the first bar on the left-hand side of the page, Weyerhaeuser lost $61 million in the second quarter of 2009. Proceeding from left to right across the waterfall chart we begin the discussion with Timberlands. Timberlands earnings were were $13 million lower in Q3. This decline was driven by significantly lower harvest volumes and fewer non-strategic land sales, excluding the 140,000 acre Oregon land sale.

The Wood Products loss improved by $55 million in the third quarter. This improvement was driven by higher prices for softwood lumber and OSB, manufacturing cost improvements, as well as lower lot costs. Cellulose Fibers earnings were were $51 million higher due to less maintenance expense in the third quarter, also pulp realizations rose and shipment volumes increased.

The Real Estate loss widened by by $11 million in Q3 due to lower average home prices, while total home closings increased from Q2, the mix of product in Q3 was generally at a lower price point, which decreased margins, also there was less earnings from land or lot sales in Q3.

Corporate and other expense increased by $6 million in the third quarter due to foreign exchange, lower earnings from Westwood Shipping and marking some equity compensation to market.

The final bar to the right of the page is the third quarter loss of $15 million, before special items also interest and taxes. Please note, Chart 1 in the information package contains the actual second and third quarter contribution to earnings by segment and the total of special items, interest and expenses, and taxes.

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

Thank you, Kathy. Thanks to all of you on the call for joining us today. As I begin my comments this morning, I'd like to first say that we're pleased this morning to report a quarter-over-quarter improvement. As a Company with three of our four business segments linked closely to US housing starts, however, continued to operate in extremely challenging markets. Throughout the year, we've begun to see signs of stabilization, and even slight improvement in new housing construction activity, but we continue to be confident about market recovery, the pace of recovery is still uncertain and the market feels tentative and sometimes fragile as we move towards year-end. The reinvigorated economy will benefit all of our business segments, but we're not relying simply on market recovery in order to improve our financial performance.

Once again, Tom Gideon and Larry Burrows join me on this call to discuss the quarterly performance of our Forest Products and Real Estate Businesses. Our CFO, Patty Bedient, will provide our outlook for the balance of the year. Patty will also report on financial details and additional actions taken to improve our financial flexibility as we prepare for a recovery, while positioning ourselves for a continued period of uncertainty.

Before I turn the call over to Tom, Larry and Patty, I'd like to discuss a few high-level points that I'd like all of you to take away from this call. Across the Company during the quarter, we continued to make operational changes in order to adapt to market conditions. In our Timberlands Business, Tom some will report on the sale of non-strategic land, as well as increased harvest deferrals, actions to position our land portfolio for long-term value creation.

In our Wood Products Business, Tom will share continued actions to adjust our operating posture to better match demands. At the same time we're making improvements across our Wood Product System to enhance cost competitiveness in any market condition. Tom will also discuss our Cellulose Fibers Business where we continue to focus on improved performance of our operating facilities.

At the same time we're taking steps for the future, as evidenced by our announcement this morning of our intent to build a new converting facility in Gdansk, Poland. When completed this new facility will process cellulose fibers from one of our southern US mills for use in hygiene products produced by Procter & Gamble. This provides us an opportunity to grow with one of our key customers in international markets.

Turning to our Real Estate Business, Larry will provide an update of our previously announced plans to sell non-strategic lots where we can capture significant tax benefits, thereby repositioning our land for the future, while generating near-term cash to further increase our financial flexibility.

In addition to these changes in our operating businesses, we continue making long-term improvements in our cost structure. Significantly reducing SG&A, adjusting head count across the Company and making long-term structural changes in overall employment costs. During the quarter, we also continued to take steps to improve our financial position, to assure our ability to deal with uncertain market recovery, as well as to maintain future financial flexibility. With all of this progress, we're in a better position today than we were at this time last year. These are not one-time efforts intended to get us through this market. These are deep and lasting changes designed to help us emerge a fundamentally different company, positioned to be much more competitive.

Before turning the call over to our team, I wanted to make one final comment about one other major influence in our current and future performance that we don't talk about very much, and that is public policy. During the past year, we've seen the effect of the Alternative Fuel-Blending Tax Credit on our Cellulose Fibers Business. Home buyer tax credits, both at the Federal level and in the state of California have in some measure, affected our Real Estate results.

As we look ahead, there is some potential effect related to extension and possible expansion of home buyer tax credits, of a new Cellulosic Biofuel Producer Tax Credit and potential payments related to the USDA's new Biomass Crop Assistance Program or BCAP.

Longer term, we believe the climate and energy bills currently under debate in Congress could significant affect how we manage and operate our extensive timberland holdings. We're convinced of the inherent value that our sustainably managed timberlands hold as part of a longer term solutions to climate change and the development of new sources of renewable energy. A mix of economics, science and politics will determine long-term management of these resources.

So, in addition to our focus on continuing improvement in operations, cost control and financial position, we're also engaged in monitoring these public policy discussions, and influencing them where we can make a difference. By executing on all fronts, we will continue to position ourselves to maximize shareholder value for all of our assets.

And now for the details, I'll turn the call over to Tom Gideon, our Executive Vice President for Forest Products. Tom?

Thank you, Dan. This morning I'll start by discussing the third quarter market performance of our Timberlands Business, followed by Wood Products, these are two business segments closely tied to the US housing market. I will close with Cellulose Fibers. During my discussion of each business, I'll also cover the steps we're taking to respond to market conditions and the benefits we're seeing from those actions.

In Timberlands, the primary driver of our third quarter performance was the sale of 140,000 acres of timberlands on the north coast of Oregon. This acreage was heavily damaged by 2007 windstorms and it was not well suited to Douglas Fir, the primary species we grow in the Pacific Northwest. Focusing on Douglas Fir improves the efficiency of our operation and helps us deliver better value to both customers and shareholders. As we evaluated this land, we saw an opportunity to adjust our portfolio to better meet our criteria for productivity, growing conditions and species mix. This sale produced a $163 million pretax gain for the business.

During the quarter, domestic and export realizations in the West strengthened somewhat due to lower availability. Export volumes were relative unchanged, compared to the second quarter and year-to-date, are only 13% below 2008, which included significant sales of salvage whitewood. In the South, prices for grade logs dropped from the second quarter reflecting lower mill demand. However, demand for fiber logs remains strong, resulting in a slight improvement in prices.

In view of continued depressed grade log values, we increased our harvest deferrals. Harvest levels were reduced 12% from the prior quarter and compared to the third quarter of last year we have reduced our harvest by 34% or nearly 2 million cubic meters. Regarding minimals, we elected to monetize royalty payments from some producing properties in the South, which were well-developed and where we had a firm understanding of their potential value stream. These sales generated an additional $6 million in revenue during the quarter. We still own the underlying mineral rights and land associated with these sales.

In Wood Products, sales are down 42% from the same quarter last year. Due to the steps we've taken, however, the performance of our Wood Products business improved in the second quarter resulting in a lower operating loss and improved cash flow performance. Compared with the second quarter, our cash usage improved $20 million and for the quarter we were just over over $10 million negative. Prices were a factor in this improvement as we saw stronger prices for softwood and hardwood lumber, as well as Oriented Strand Board. Sales volumes for those product lines, however, decreased from second quarter levels.

Engineered Lumber Products experienced an increase in sales volumes compared to second quarter levels. Also contributing to our improved performance was reduced manufacturing cost, resulting from lower log costs and improved operating efficiencies, as well as actions we took to match our supply to orders. We took 53 weeks of downtime across our lumber system in the quarter, in addition to reducing operating hours at a number of our facilities.

Any discussion of our improvement has to include giving credit to our teams' effort to significantly reduce SG&A costs. This hasn't been an easy task for any of us, but the work is producing bottom line results. SG&A costs for the third quarter of 2009 were $28 million less than for the same quarter last year. On the year-to-date basis, we've slashed SG&A costs by $85 million. The long-term result is a more competitive and productive segment that is positioned to provide strong returns when the market recovers. That being said, we're nowhere -- we know we're not out of the woods yet, as we're about to enter our seasonally slowest quarter.

Managing through the current market challenges will require continual vigilance to managing costs, improving efficiency and aggressively marketing our products, we're committed to continuing to improve our financial performance.

I'll end my portion of today's call by discussing Cellulose Fibers, where quarterly results from operations improved approximately $50 million from the second quarter. Approximately $43 million of this improvement came from lower maintenance costs and higher productivity due to fewer maintenance outages. As you recall last quarter, we had our annual outages in Grande Prairie, Alberta and Port Wentworth, Georgia. In addition, we had a major recovery boiler rebuild in Columbus, Mississippi, which was completed on July 15.

Without these outages, we were able to produce 61,000 more tons during the quarter. Our higher operating rate also means we will qualify for approximately $15 million in additional Alternative Fuel Tax Credits compared with the second quarter.

Higher average price realizations and volumes also contributed to the stronger performance for the business. Compared with the second quarter, pulp sales volumes increased nearly 14% and price realizations improved slightly.

Favorable costs for fiber and chemicals contributed to the remaining improvement in the performance of our Cellulose Fibers business.

I will now turn the call over to Larry Burrows who will discuss our Real Estate Business.

Thank you Tom. Good morning. High unemployment and fragile consumer confidence are contributing to the tenuous nature of the housing recovery. Market uncertainty was apparent during the third quarter as WRECO's traffic and sales declined from second quarter levels, despite near-record levels of affordability. Many markets are caught in a state of transition, as positive trends in housing inventories, home sales and pricing are counterbalanced by increasing foreclosures and mortgage delinquencies.

The positive momentum that developed in the second quarter began to erode late in the third quarter. We felt these effects in all our markets. Houston, the Puget Sound, San Diego and Washington, DC have held up better, while Las Vegas, the Inland Empire and Phoenix have slowed more. These trends are reflected in the Key Indicators Table on Chart 9. Comparing the third quarter of 2009 to 2008, traffic decreased 50%, closings declined by 30% reflecting the adverse sales environment early this year. However, third quarter home sales increased 12% compared to a year ago and our cancellation rate improved by 14 percentage points.

Our backlog of homes sold, but not closed, stands at 997 units. Our financial results reflect a housing market's continuing struggles as WRECO recorded a loss in the third quarter. Included in our $64 million charge to pretax earnings are $55 million in one-time charges. These charges include $13 million for restructuring, $40 million for impairments, primarily in our California, Nevada and Washington, DC markets and and $2 million for terminating options to acquire land.

Excluding these charges, WRECO lost $9 million on third quarter operations. At we ended the third quarter and thus far in the fourth quarter, the underlying fundamentals of the housing market remain uncertain, though national inventories of new and existing homes declined substantially in the third quarter, the number of seriously delinquent loans is on the rise. Foreclosures, which have continued at a steady pace in virtually all of our markets are starting to occur at higher price points.

We continued to experience disconnects between contracted sales prices and appraised values, particularly in Las Vegas, Phoenix and the Inland Empire. Also, lack of clarity regarding an extension or expansion of the Federal housing tax credit is keeping some customers on the sidelines.

WRECO continues to relentlessly pursue it's primary goals of generating and conserving cash. We have made significant adjustments to our staffing and to our land spending, and have substantially reduced unsold inventory. As previously discussed, we are divesting approximately 4,000 non-strategic lot positions in Arizona, California and Nevada. Year-to-date we have closed over 50% of these lots, and we are on track to meet our goal of closing 4,000 lots by year-end.

Though our financial performance is not yet where it needs to be, the steps we have taken and continue to take combined with the eventual stabilization in our markets will allow WRECO it re-emerge as a highly competitive, profitable home building operation that will deliver significant shareholder value.

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

Thanks, Larry and good morning everyone. While we reported significantly improved results in the third quarter, the traditional seasonal downturn, coupled with the continued uncertain nature of the housing recovery will put significant pressure on fourth quarter results.

I'll start the outlook with Timberlands. In the West, export sales volume is expected to be comparable to the third quarter, with a small increase in sales realization. Domestic sales realizations are also expected to increase, although volumes will be down. We anticipate that the harvest in the West will be down almost 20% compared to the third quarter and we expect that inventory levels will also decrease. In the South, log sales volumes will likely be down with staples sales realizationed compared to the third quarter. [Seed] harvest is also expected to be lower. We anticipate higher logging costs and seasonally higher silvicultural costs in both the West and South.

Mineral income should also be down in the fourth quarter, as we do not expect a similar sale of mineral royalties as occurred in the third quarter. In addition, we don't anticipate any significant sales of non-strategic Timberlands in the fourth quarter.

Overall earnings in our Timberlands segment is expected to decrease in the fourth quarter compared to the third. In Wood Products, we expect sales realizations and volumes to decrease seasonally, as the fourth quarter is traditionally the slowest quarter of the year. The largest volume decreases are likely to be in Engineered Wood Products, although lumber volumes are expected to be down around 10% compared to the third quarter.

We will continue to match supply with demand and anticipate that significant curtailments will continue, especially as we enter the holiday season. Although we will maintain our focus on reducing costs wherever possible, manufacturing unit costs are expected to rise as a result of lower production volumes. Given the fourth quarter slowdown, we expect the loss in Wood Products to be greater than that of the third quarter.

Cellulose Fibers continued strong demand in the global pulp markets is expected to increase sales realizations in the fourth quarter. The largest cost variation quarter-to-quarter is expected to be in maintenance downtime. We anticipate our Newburn, North Carolina mill will be down approximately 30 days and this shutdown should be completed by the middle of November. In addition to performing annual maintenance, this planned outage will enable completion of a capital project to rebuild the recovery boiler to increase it's through-put allowing for the shutdown of the existing, less efficient gasifier. This project should reduce the mill's dependence on fossil fuels and also increase it's reliability.

We are also likely to experience increased fiber costs and somewhat lower chemical costs in the fourth quarter. Overall, the increased costs including the effect of maintenance downtime are anticipated to offset the effect of improving sales prices. As a result, we expect that total operating earnings for our Cellulose Fiber segment in the fourth quarter will be comparable to the third quarter, excluding tax credits. We anticipate a slightly lower amount of (inaudible) credit in the fourth quarter compared to the third.

Moving onto our Real Estate segments. Unlike our Wood Products Business, the fourth quarter is seasonally our strongest quarter for closings in our single-family home building business. We expect that closings will increase significantly in the fourth quarter, compared to the third, with total closings in excess of 700. This compares to just over 500 in the third quarter. As a result, we expect that our single-family home building operations will be about break-even, compared to the third quarter loss of $9 million. This does not include the effect of land sales in the fourth quarter.

As we have previously reported, we are focused on optimizing the amount of our potential tax refund from the carryback of our current year net operating loss. As Larry just discussed, we are currently considering a number of land sales in the fourth quarter. For economic to do so, our focus is to accelerate transactions that generate tax losses into the fourth quarter and defer those that generate gains to next year. Given the preliminary status of the transactions, we don't have an estimate at this time of any potential earnings impact that might result.

Now, I'd like to update you on a few other financial items. Through the end of the third quarter, total capital expenditures year-to-date for Weyerhaeuser Company were approximately $152 million. We expect our full-year expenditures to be around $200 million, as we have previously reported. At the end of the third quarter, we had cash of $1.6 billion. During the third quarter, significant sources of cash included approximately $300 million from the sale of 140,000 acres of non-strategic Timberlands, as well as around $100 million from Alternative Fuel Tax Credits.

We also retired just over $400 million in debt in the third quarter. And the third quarter is also the quarter that we make our semiannual interest payments, so cash for interest pavements was higher than is otherwise normal.

Also, during the third quarter at our request, our banks agreed to amend our two existing bank credit lines. We reduced the amount of credit available under one line, which was to expire in March of 2010, from $1.2 billion to $400 million. We have maintained our other credit line at $1 billion and it does not expire until the end of 2011. In addition, our minimum network covenant, as defined under the agreement, was adjusted from $3 billion -- was adjusted to $3 billion, down from from $3.75 billion.

Looking ahead to the fourth quarter, we issued $500 million of senior unsecured bonds at a 7 3/8 coupon, these are ten-year maturities and proceeds are for general corporate purposes, which include working capital, capital expenditures and refinancing or repayment of existing indebtedness. Our scheduled debt maturities for the fourth quarter are only about $37 million. Although the timing of the economic recovery is uncertain, we have ample liquidity to meet our needs.

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

Thanks, Patty. Having provided an overview in each one of our businesses and also the financial overview that Patty has just been through, I'd like to now turn the call over to questions.

Carla, would you please open the floor to questions?

Thank you madam. (Operator instructions) Our first questions comes from Gayle Glazer from UBS Financial. Please go ahead with your question.

Hi, thank you. Dan, just digging into some of the government policy a little bit more, I guess there was some news out yesterday that BCAP might really try to be restricted to biomass and residuals. I'm just wondering is there any kind of a quantification that you can give us as to how many tons of residuals that you would have that you would be able to qualify as use of biomass increases?

Good morning, Gayle. I can't give you a number at this point. As you correctly point out, there is a lot of uncertainty surrounding this program. It's being administered by the USDA. There's questions around what would qualify. There's significant questions about whether it would be eligible if you were to transfer to -- let's say our own Timberlands into one of our own facilities and so, at this point I would rather not speculate. I can tell you that we are watching this very closely and are prepared to take advantage of it, should the opportunity arise.

Okay. And also just looking for a little bit more color on the pulp market and perhaps the decision to expand into converting it in Europe. What type of demand conditions are you seeing and can you give any sense at all, the price increases you've announced, what you think you have forming over the next few months and to -- to realize?

Sure. I'll have Tom answer your question Gayle

Okay, Gayle. With respect to what I think you mentioned, Poland. What we would like to say about that is we view this as a very exciting opportunity to expand our long-term relationship with Procter & Gamble. We are building a converting facility in Poland that will apply proprietory technology to the fibers that P&G will use in their hygiene products and it will allow us to convert closer to the end customer and participate in future international growth. So, that is a logical extension of our -- our strategy to continue to grow with our long-term customers. Could you tell me again what the second part of your question was?

Just current demand both for fluff and what you're seeing for commoditized pulp in terms of where you stand on price increases and realized pricing?

Well, Gayle, as you know, we've made some price announcements earlier this month regarding prices both for paper grade, as well as for fluff. As you know, we remain of the view that the fluff market is very attractive for us as we -- going forward. It's a market that's growing at 4% a year, roughly 150,000 to 160,000 tons per year. We're well-positioned to -- to do well in that market with -- with our mills in preferred locations in terms of wood baskets, as well as being able to supply both domestic as well as a wide array of international markets and they are highly competitive in both costs and efficiency. Along with that, Gayle, we have a direct sales relationship with our major customers who -- who see an experience, continued growth and who want us to grow with them. And so putting all of those things together we continue to think that absorbence is going to be an attractive market space for us and we continue to believe that we'll do participating in that market.

And lastly more current demand, do you think its being driven by actual consumption, are you concerned about inventory builds at the customer level?

I think, Gayle, as you look at that and you have a great observation from an industry perspective as well, obviously over the last few months we've significant increase in demand from China, that seems to have moderated and I think what we really need to do is to take and evaluate the difference between how much is demand-driven going forward and how much is due to supply constriction.

Okay, thank you.

Next question.

Thank you. Our next question comes from Mark Connolly from Sterne Agee. Please go ahead with your question.

Thank you. Two things. You set out in your New York meeting some new value propositions in your housing, better price points that would help optimize your profitability. I wonder if you can give us a sense of how well that is working and how much you are still playing around with it? And then secondly, we've been hearing paper companies talk about higher fibre cost given the wet weather. How much of the increase you saw in lumber prices would you ascribe to -- to weather conditions, if any?

Okay. We'll have Larry answer the first question, Mark, and then Tom will address your question about fiber costs.

Good morning, Mark. This is Larry.

Hi Larry.

As we talked about, all of our businesses have been looking for ways and have been successful in ways in reducing kind of our hardened construction costs in terms of costs of goods sold. Regardless of whether it's the -- a first-time home buyer or even a move-up customer. What we know is that customers today are kind of wanting more for less and the homes are probably a little bit smaller and less expensive and so we've had good success really across all of our businesses, in being able to -- to kind of achieve that and to continue to kind of reposition communities and also introduce and reproduce position product and have a little bit less expensive product.

Yes, Mark, this is Tom with respect to weather impacts, we have gained significant rainfall as you know across the South. It has had an impact and curtailed logging and silvicultural activities and has produced some out-of-log downtime at some of our facilities. Weather is very difficult to predict, but based upon what we know today and the position that we have, we believe that we can keep our facilities wooded for the remainder of the year, but due to the lower availability, it has increased prices somewhat for Fiber and it will have an increase impact in the fourth quarter.

Very good. Very helpful, thank you.

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

Thank you. First question was were you cash-flow positive from operations in the third quarter beyond your CapEx needs and dividend needs?

If you look at the analyst package, Mark, you'll see that our cash flow from operations was $34 million, our CapEx is, for the quarter was roughly around $50 million, I believe. And your other question was dividends? Dividends were --

That's great. I didn't realize that there was that $34 million number out there. I hadn't -- hadn't seen that.

Yes, and we will be filing the Q next week and you'll get the full cash flow, but there are some selected items in the cash flow. The one that's not in the cash flow is interest. We did have some additional, as I mentioned in my comments, additional interest payments in the third quarter because we'd pay semiannually on some of our interest payments in the third quarter and in the first quarter.

Thank you. And then -- and then when you were talking about potential land sales from the Real Estate Business, you talked in the past about monetizing lands which you had written down last year. It sounded like there were some other or additional possibilities that you were considering. Is that an accurate read?

Mark, this is Larry. I don't -- I don't think that that necessarily is the case. I think that when we talked about it, and when we had our strategy shift and we talked about it in the fourth quarter of last year, I think we identified a -- approximately 4,000 lots that we were looking to take to market. And so that's kind of what we're doing. But we -- we always continue to look and evaluate our kind of land portfolio, and will continue to make adjustments in terms of rebalancing it as we see opportunities to do so.

Great. And then lastly, Patty, you had mentioned ample liquidity to meet your needs. Does that statement cover the ENP distribution if you were to choose to go that route in the year ahead?

Well, Mark, as we have said, we want to maintain flexibility for consideration of conversion, if the Board were to select -- make the decision to do that. There is, as you know, questions around exactly how much that ENP distribution might be and so we are looking at all of those and taking all of those things into consideration.

Thank you.

Thank you. Our next question comes from Mark Wilde of Deutsche Bank. Please go ahead with your question. Mr. Mark Wilde, your line is now open, please go ahead with your question.

Maybe next question Carla.

Okay. Our next question comes from Peter Ruschmeier from Barclays Capital. Please go ahead with your question.

Thanks. Good morning. Dan, I was hoping as a follow-up to the previous question about flexibility on -- on the cash. As -- as you consider as one possible opportunity, a reconversion, I'm curious if you can share with us from a timing standpoint you've shared with us that 2009 for a lot of reasons doesn't make sense. But as you approach the Board can you share with us reasons why it would make sense to have discussions earlier in 2010 versus waiting as long as you can in 2010 to -- to assess what you think the right outcome is?

I don't want to get ahead of our Board on this one, Pete. This is an issue, as you say, we -- we've made comments in the past about 2009 not being value-creating. And I think in listening to Larry this morning you get a sense of we're taking land to market, we're taking advantage of our tax position this year, and -- and for the reasons that we shared before, 2009 is unlikely. We're maintaining flexibility with respect to 2010. We can continue to monitor any potential changes in operating conditions, as well as tax law and so I can't prejudge at this point timing of any kind of a decision with respect to 2010.

Okay, okay.

We need to discuss it with the Board and, as I say, we're maintaining the flexibility. The actions that we're taking in 2009 put us in a position to to maintain that flexibility into 2010, both with respect to our operations as well as our financial position.

Okay. That's helpful. For 2009, I believe you indicated that the harvest in the quarter was down, I believe, about 35% year-over-year. I'm curious if you can share with us, for full-year, is that about right? And how does the harvest for 2009 compare to your sustainable cut? And I guess related to this do you have a preliminary outlook for 2010 as to whether it would be up.

Well, Peter, as you know, we don't give guidance beyond the quarter that we're talking about. In terms of our harvest deferrals in totals -- our biological ability to harvest would be slightly higher than what we're doing today, but of course we're taking a look at what makes economic sense both now and in the long term in terms of what is the best return, we will see continued harvest deferrals as Patty had mentioned and I will just say that we'll be at about the numbers that you referenced in your remarks.

Okay. And then just lastly, I'll turn it over, Tom I was hoping that you could help us to provide some color in the Pacific Northwest, some of trade publications have shown a pretty steady climb, month after month after month on -- on log prices and I'm curious if you could just help us to understand some of the moving parts, whether it's the impact of the Canadian Dollar or beetle kill in BC and the impact its having, whether it is an export issue or domestic demand. What are some of the drivers that you are seeing in the Pacific northwest today?

Well, Peter, I guess the best way that I would say that is that we've seen some firming of log realizations in the West, a combination of lower supply and for us, of course, it is a continuation of good export takeaway and so it is really just a combination of what is available against the demand that is out there.

Okay. Very good. Thanks.

Next question.

Thank you. Our next question comes from Mike Roxland. Please go ahead with your question. Mr. Mike Roxland from Bank of America. Please go ahead with your question. He appears to be offline. Next question from Claudia Hueston from JPMorgan. Please go ahead with your question.

Thanks, very much. I just really had a quick question on the corporate expense, I wondered what sort of base should we be using and how should we think about the impact of fluctuations in foreign exchange on your stock price and is there anything else that caused the volatility lately?

Hi, Claudia, it is Patty. I'll take that.

Hi Patty.

If you look at page four of the the statistical information we presented, you'll see some additional color on the corporate and other segments that's included there. As you think about the impact of foreign exchange, we pull that out and isolate it for you because, as you noted, it does tend to fluctuate and this is where that gets booked. And so in the quarter, the impact of foreign exchange was about $17 million positive. That compares to positive in the second quarter of $21 million. So, a pretty big impact in that segment.

The other thing that runs through there in addition to just ongoing corporate expense is the impact of our pension and other post retirement benefits, which have been running credits as we amortize over in accordance with accounting rules. Its non-cash, but you'll see that isolated separately on that same page. If you think about just ongoing corporate expense, the way to think about the expense is about $25 million to $30 million a quarter, give or take. But, it's difficult to see that as you look at the package, unless you look at the detail because corporate segment is where all of those other items get included.

In addition for this quarter, we also have the large restructuring charge that we have pulled out as a separate item for some asset impairments in the corporate region as well as the impact of the pension settlement charge, which was also non-cash.

Okay, great. That's helpful. Thank you very much.

You bet.

Next question.

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

Good morning. I wondered if you could give us a little more color in the Wood Segment on the benefit from lower log prices there?

Mark, during the quarter I think log -- overall log benefit was roughly about $9 million favorable. Of course, if you look in what we did, that was about a third of what we generate in terms of improved manufacturing costs.

Okay. And then I -- I just wonder also in this business, it looks to me from kind of the numbers that I've run that your unit losses in the Lumber business are larger than average in the industry, yet from my experience you've got very well-invested assets so what do you think the issue is here?

Well, Mark, I -- what I will just tell you, we look at our business, we do think that we're very competitive, that we run well, we look at all attributes of our cost, including not only what we do from a gross margin point of view in operations, but also in terms of what is our SG&A that is associated with that and as Dan has mentioned on a number of occasions, we're diligently working on all of those cost, not just manufacturing, but also the SG&A costs that are attributable to the business and so -- and we continue to go forward. We also have some ongoing costs that are related to the fact that we have some indefinite curtailed facilities and that has an impact each quarter as well.

Okay. And, Tom, in the international Timberlands you're still running just a small loss there, I wondered do you have any idea when International Timberlands will start to be a positive? And also I think most of those Timberlands are in Uruguay, which has become a much more popular location for the industry over the last few year. I wondered if this increases your options for what you can do down in Uruguay?

Well, Mark, when you look at international Timberlands from a operational point of view we're actually doing better if terms of being cash and earnings positive, but we're also in the process of completing the buildout of our second line at Las Pikas and that ends up to being some of the cash negative that you see. We do some see some improved pricing that we think will come from European panels going forward in the fourth quarter and so overall we expect to see some improvement as we go forward through the year.

Okay. And then finally, I noticed that your R&D spending was down quarter-over-quarter and year-over-year, and I wondered whether you had didn't some downsizing there or whether there was something else in the numbers?

Well, Mark, as you know, we have already looked at every facet of our cost structure going forward trying to make sure that we're focused on those items that we get the best return from and, yes, just like other areas of our Company, we have taken some staffing reductions in the technology organization, and so we will continue to look at that and monitor that. At the same time we believe we've maintained our fundamental core competencies and ability to take advantage of our technical -- technology expertise as markets recover.

Okay, thanks, Tom. I'll pass it on.

Thank you. Our next question comes from Richard Skidmore of Goldman Sachs, please go ahead with your question.

Good morning. Just wanted to follow up on the Wood Products business. You had talked about trying to get the free cash flow to breakeven in that business by year-end, if I recall correctly. Could you talk about what additional steps you can take in the Wood Business to narrow the cash burn? You've made pretty good progress there, but any additional steps you can take original or that you see?

You are right. We have made significant progress despite sales being down 42% year-over-year, realizations being lower than what they were in 2008. We've continued to significantly reduce cash usage as well as improve our earnings. The real focus will be on continually better executing our business fundamentals and so what we -- as I mentioned during our Analyst Meeting in New York, in May, we continue to have a -- our weekly Friday meetings with our entire lead team and we continually assess at each one of those sessions our market conditions and trends. We evalue evaluate whether each mill is cash positive and contributing to fixed costs and we examine all opportunities to increase margins and reduce all costs, whether it is SG&A, manufacturing or working capital and then we initiate real-time adjustments considering what needs to be done.

And so we're basically continuing to execute appropriately against what the market conditions are. I would say as an example of that process, we mentioned that we made decisions to take out 53 weeks of lumber downtime in Q3. What that translated to is that 18 out of 21 of our sawmills experienced at least one week of downtime, but yet two of them were down for six weeks and so we used this weekly process to, as we say, make real-time adjustments to what market conditions are and continually true to do what we can to reduce our cast usage and quite frankly, we do not want to just be cash positive as soon as we can, we want to be in the earnings positive realm as well.

All right. Thanks for that. And then maybe then just as you think about the -- back-to-trend in housing, do you -- in your discussions with Larry, has there been any change with regards to how you think about the -- the run-rate long term normalized housing level given both the depth of downturn and the pickup in foreclosures and any other -- the other factors that might impact housing such that you need to maybe reassess the footprint again?

I'll take that one on, Richard. Our -- our view of long-term trend numbers for housing, total starts are really consistent with numbers generated by the Harvard Joint Center of Housing. So, we would be looking at a $1.7 million to $1.9 per year. That's a trend number and it's going to take us a while to get back to that point. The recovery has been slow and as Larry shared, even in the past quarter we saw the market becoming more tentative. And so we believe we've got a footprint in our Wood Products facilities that serve that recovering demand, the footprint of our Home Building Business is such that we'll be able to ramp up to meet that demand, but we are managing our operating posture today based upon the starts that we have and then we'll respond and move up accordingly.

All right. Thank you.

Next question.

Thank you. Our next question comes from from Chip Dillon of Credit Suisse. Please go ahead with your question.

Yes, good morning. Could you just talk to us about how much of the Timberland that you are harvesting this year is going toward your own converting facilities and how that might compare to earlier in the decade?

Well, it's kind of changed given the portfolio changes, Chip. As you know, we used to have a significant amount of our fiber that was going into our containerboard facilities and, of course, those are now going into IP. But I with say that for this year we've actually seen a slight movement quarter-over-quarter into more third-party volumes and again at -- all of them are down because we've done harvest deferrals, but again the relative strength of the export market has actually increased our third party sales compared it Q2.

Yes and I was thinking more just in terms of the Wood Products plants, is it fair to say that half your harvest used to go into your Wood Products plants and maybe because of the weak market it may be a greater proportion because you are deferring this year, say versus years past.

Chip, I'd have to take a look at that. I think we've been fairly constant in terms of the amount of fee versus non-fee on average over the last four to five years, some periods it can go up more or less, but on average I think we've maintained a fairly representative cross-section of fee where it made sense and outside purchase where it was the best value opportunity for us.

And then just a follow-up, really more for Patty. Patty could you just confirm for us what the -- I know the ENP, if it is made next year, it's based on the beginning of the year level and I'm not asking you to predict the fourth quarter, but if we froze the third quarter, where would that still be, would it be about a $1.26 terms of cash on the total? And then if you can review for us what your ability is to carry back losses? I believe that you would only be able to continue carrybacks was you are a REIT in the TRS. Is that all correct?

Chip, what we said is as we came into 2009 our total ENP was about -- just under under $6.5 billion. What we've said about the end of 2009, or the beginning of 2010, is that we would expect it to be under $6 billion. And, as we said, that will depend on a number of factors, in terms of what we do in the fourth quarter -- a number of other alternatives, so that's the total amount of ENP. Now, we have also said that a significant amount of that ENP can be distributed in the form of stock. Others, as they have converted, have used 20% cash and 80% stock and so, that's where we get to the -- the over $1 billion number. So, it's -- it's a computation of the ENP that is made as of the beginning of the year in which you convert. You have until the end of the year to make the actual distribution.

Then in terms of your ability to access your tax loss carrybacks?

Oh, sure. Thank you. I knew there was a second part of the question.

Right.

We can N2009, as we said that it's very unlikely that we would do a conversion in 2009, and I would underscore very unlikely, because the ability that we have to take our net operating loss back against 2008 where we have the very significant containerboard packaging gain from the sale of that business, if we were to convert in 2009 then we would have to take that loss forward. So, you are correct in terms of the NOL upon a REIT conversion, it would have to be carried forward, not carried back.

And then one more quick one. What do you see capital spending next year at?

Well, we have not given guidance for capital spending for 2010. We will do that on our year-end call. Having said that though, given the uncertain nature of the -- of the recovery, we will be very disciplined about capital expenditures going forward.

Thank you.

Next question.

There appear to be no questions at this time. Please continue with any further remarks you wish to raise.

Okay, thank you, I'll -- I'll wrap up the call. As I started the call, I made the comment that we've got three of our four business segments that are closely linked to US housing starts. And though we believe that housing recovery is underway, its pace is what I would characterize as highly uncertain. And so, we're positioning ourselves for the recovery, but we are taking steps today to manage through this time frame.

We're focused, as I mentioned earlier, on continuing to drive down our SG&A costs. That's a function of head count, it's also a function of employment costs including not only current compensation, but we've made a number of adjustments for benefits and post-retirement benefits.

In our businesses as you look forward to the next quarter, our theme would be in Timberlands we're deferring harvest at a relatively high level in response to demand conditions. The good news is our export volumes are steady.

In our Wood Products Business, our operating posture is to match production with profitable demand.

In our Cellulose Fibers Business, our operating posture is to meet continued strong demand, though in the fourth quarter we have our outage at Newburn to deal with and then in WRECO our focus for the next quarter is an elevated level of closings, which is consistent with this time of year and then completion of the land sales in order to take advantage of our -- our tax position

And then as I commented, we're closely monitoring a number of public policy issues. There is the Home Buyer Tax Credit, which has an impact on -- direct impact on WRECO and indirect impact on our Wood Products Business. The Alternative Fuel Blending Tax Credit has a direct impact on our Cellulose Fibers Business, as does this potential Cellulose Biofuel Tax Credit. We talked about the BCAP allowances earlier, that would have an impact on our Timberlands business and likely our Wood Products business and finally the Climate Bill, it is being debated in Congress and has a potential to have a significant impact on our Timberlands activities. So, that's our focus.

We appreciation your attention this morning, all your questions and as always, we know that you have got opportunities to follow up with Kathy. I thank you for your attendance and attention. Thanks very much