威爾豪瑟 (WY) 2009 Q4 法說會逐字稿

Good morning. My name is Thia and I will be your conference operator today. At this time I would like to welcome everyone to the Weyerhaeuser's fourth quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. (Operator Instructions).

Thank you. I will now turn the conference over to Ms. Kathy McAuley. You may begin.

Good morning. Welcome to Weyerhaeuser's fourth 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 the website or by contacting April Meier at 253-924-2937.

Please review the warning statement in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. This morning Weyerhaeuser reported a fourth quarter 2009 net loss of $175 million or $0.83 per share on net sales from continuing operations of $1.5 billion. For the full year 2009, Weyerhaeuser reported a net loss of $545 million or $2.58 per share on net sales from continuing operations of $5.5 billion. Significant after tax items in the fourth quarter were a benefit of $77 million or $0.36 per share for alternative fuel mixture credits, a charge of $67 million or $0.31 per share for real estate asset impairments, closures, restructuring and other charges. A charge of $57 million or $0.27 per share for forest products, asset impairments, foreclosures, restructuring and other charges. A charges $19 million or $0.09 per share for the early extinguishment of debt.

Excluding these items, the Company reported a net loss of $109 million or $0.52 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 discuss this waterfall chart. Chart four is a bar chart detailing the changes in contribution to earnings before special items interest and taxes. Changes in Weyerhaeuser's segment earnings from the third quarter to the fourth quarter were as follows. Beginning with the first bar on the left hand side of the page in the third quarter of 2009, Weyerhaeuser earned $15 million before special items, interest and taxes. Proceeding from left to right across the (inaudible) chart we will begin the discussion with Timberland.

Timberland's earnings were $30 million lower in Q4. This decline was driven by significantly lower harvest volumes and fewer sales of nonstrategic timber land. Higher logging costs more than offset improvements in price and mix. Wood products earnings were $31 million lower in fourth quarter significantly lower production due to the weak seasonal market demand resulted in higher per unit manufacturing costs. Average lumber prices declined 3% from the third quarter average. OSB prices were 6% lower and engineered wood products prices were flat. Sale of fibers earnings were $10 million lower in Q4, an 8% increase in average (inaudible) prices was more than offset by higher fiber, maintenance and energy costs. Real estate earnings were $20 million higher than in the previous quarter. This improvement was driven by higher margins and a 54% increase in closings. Corporate and other expenses increased by $25 million, due primarily to foreign exchange and lease adjustments for transportation assets.

The final bar to the right of the page is the fourth quarter loss of $61 million before special items, interest and taxes. Please note chart one in the information package details the Q3 and Q4 pretax contributions to earnings by segment before significant items as well as consolidated results. And now I will turn the call over to Dan.

Thank you, Kathy. Good morning. In our earnings release this morning I voiced confidence in our ability to deliver significantly improved operating performance, despite the unacceptable 2009 financial results, and continued challenges as we enter 2010. I'd like to spend my portion of today's call providing more detail and color to the items I outlined in my statement because it will help set the stage for the comments from our team that follow me. Although I will discuss each point individually you should think of them as interconnected and encompassing our strategic approach to meeting the current challenges while positioning us to rebuild our revenue and earnings. Just to remind everyone, the areas of focus I outlined in this morning's release involve cutting costs, reducing production to meet demand, generating cash, deferring our harvest, improving long-term competitiveness across all business lines, growing with strategic customers, and announcing our decision to convert to a real estate investment trust.

I started my comment in the release by noting that we had cut costs, and that is a good place to open my discussion on this call. As we said repeatedly, we must reduce our SG&A costs to make us more competitive, and by the end of 2009, we have cut those costs by nearly $300 million. Our overall head count is down 26% because of the SG&A changes as well as reductions in operations. We made significant cuts in other expenses as well. This included redesigning our compensation and our benefits package for both active and retired employees. Each of our businesses has also aggressively reduced costs. Wood products for example is making fundamental changes that will carry into stronger markets. This includes lowering product inventories by applying well-known lean manufacturing principles to lower inventory levels in our replenishment system. Closely coupled with the need to reduce costs is our strong focus on generating cash and maintaining liquidity. We ended the year with $1.9 billion in cash, and strong liquidity. With the home building and remodel markets at record lows, demand for our products has dropped significantly.

As I mentioned in our earnings release, we responded by deferring our harvest to preserve the long term value of our timber lands and we have reduced production to meet demand. In some cases, this involves changes to our operating posture, such as eliminating shifts, in other cases, we have used this opportunity to eliminate noncompetitive nails from our system to create a more efficient system that enhances our ability to capture the benefits of stronger market conditions.

While meeting current market challenges is a keen focus, we continue to invest in growing our businesses. When I mentioned growing with strategic customers in my comment this morning, one example of that was our announced plans to build a new cellulose fibers processing plant in Gdansk, Poland. But there are other opportunities as well. The world is demanding green solutions for energy, and we have significant opportunities with our bio mass initiatives. On Tuesday, we announced that we are collaborating with Mitsubishi Corporation to explore the possibilities of a strategic solid bio fuel venture. Catchlight Energy our joint venture with Chevron to develop liquid fuel from biomass remains on track.

Finally, I want to touch on our decision to convert to a real estate investment trust, the final item that I mentioned this morning. As we said in December when we announced our intent to elect REIT status, this represents a positive step in executing our overall strategic direction. The REIT structure best supports Weyerhaeuser's commitment to maximize our timberland returns by allowing us to become a more tax efficient and competitive owner, manager and buyer of timberlands.

As I said in my statement this morning, we face challenging markets as we enter 2010, because of the actions we have taken over the past year, and will continue to take, I am confident we will deliver significantly improved operating performance. I would like now to turn the call over to Tom Gideon, who will discuss the fourth quarter performance for timberlands, wood products and cellulose fibers.

Thank you, Dan. Our forest product businesses experienced a difficult fourth quarter as the effect of the traditional seasonal downtime turned -- further compounded the challenges created by a weak housing market. I will start by discussing our timberlands business referenced on chart five.

Timberlands revenues declined in the fourth quarter compared to the third as moderate improvements in Western log realizations were offset by a significant decrease in sales volumes in both the west and the south. Harvest levels declined 21% versus the third quarter, as we elected to defer additional volume to preserve value. Harvest levels in our southern operations were also reduced due to weather. Export realizations were unchanged from the third quarter while volumes were down modestly. On the cost side, per unit logging and trucking costs increased as a result of lower harvest volumes and higher diesel prices.

Minerals revenue declined in the fourth quarter compared to the third as third quarter included a one-time sale of mineral royalties, our strongest minerals activity remains concentrated in the Haynesville shale region. We had no significant sales of nonstrategic lands in the fourth quarter. Fourth quarter included $15 million in impairment charges, primarily associated with our joint venture saw mill in Brazil, excluding those one-time charges, the segment earned $28 million on fourth quarter operations.

Harvest deferrals had a significant effect on our timberland segment in 2009 as our US harvest volumes declined 33% compared to 2008. We strongly believe that these deferrals remain an important way to preserve value for our shareholders and we will continue to defer harvest in 2010. I will now turn to wood products referenced on charts six and seven. Revenue for the segment declined 13% in the fourth quarter compared to the third, as the normal seasonal slow down placed downward pressure on sales volumes and realizations. Volumes declined across all product lines, with engineered wood products down approximately 20% quarter-over-quarter and soft wood lumber off 5%. Realizations for engineered lumber held up well throughout the quarter. Average quarterly realizations for most other products declined compared to the third quarter though realizations did climb as the fourth quarter progressed.

Ongoing efforts to balance production against demand resulted in 79 weeks of down time across our lumber system in the quarter, representing 29% of available operating hours. We also increased down time across most of our non lumber facilities. Although we have continued to reduce overall cost of production, unit manufacturing costs rose in the fourth quarter, compared to the third, due to low production volume. This was particularly true for our soft wood lumber facilities. Fourth quarter earnings for the wood product segment included $85 million in one-time charges, primarily for impairments in our engineered wood products and soft wood lumber segments. Excluding those one-time charges, wood products lost $123 million on fourth quarter operations. These are unacceptable results even though with we have dramatically improved our cost structure from where it was a year ago.

Comparing the full year 2009 to 2008, per unit manufacturing costs for soft wood lumber have declined year-over-year, despite a 29% drop in sales volume. We have held unit manufacturing costs for OSB flat in the face of a 40% volume decline. SG&A expense has decreased by $103 million or 25%. Total wood products head count has declined by 29% or nearly 3,100 positions versus this time a year ago. So encouraging these improvements are not sufficient, and unless we double our efforts to reduce expenses and increase margins throughout our operating system, moving into 2010, we will continue to match supply with demand improving operating deficiencies and carefully scrutinize every use of cash.

Finally, I will discuss our cellulose fibers business, referenced on chart eight. Cellulose fibers revenues increased 4% in the fourth quarter compared to the third as average price realizations improved by $53 per ton. However, this additional revenue was more than offset by increased cost of production. Fiber costs increased substantially, rising by $20 per ton in the fourth quarter as adverse weather in the US south reduced availability of pulp logs and saw mill residuals. Energy costs also increased.

Our New Bern, North Carolina mill completed an extended scheduled outage in the fourth quarter to perform annual maintenance and completed capital project to rebuild the mills recovery (boiler). This contributed to an increase in maintenance expense, which rose by $8 million in the fourth quarter compared to the third. Cellulose fibers results included $113 million in special items comprised primarily of $115 million in alternative fuel credits. Excluding special items the segment earned $34 million on fourth quarter operations.

I will close my portion of this mornings call with some brief comments about the Biomass Crop Assistance Program or BCAP. On February 3, the US Department of Agriculture discontinued approval of new matching payments for BCAP. Our southern and western Timberlands began delivering eligible bio mass to third parties on February 15. Prior to the February 3 notice we had filed for BCAP matching payments of approximately $1 million, based on one month of BCAP operations. However, the level of any future benefit will depend upon receiving further clarification on final program eligibility rules. I will now turn the call over to Larry Burrows to discuss our real estate business.

Thank you, Tom. Good morning. Though housing markets in some WRECO geographies show signs of stabilizing, others remained extremely challenging. In each of our markets conflicting forces are influencing both the supply and the demand for housing. On the demand side, potential home buyers balance record affordability and the benefit of an extended federal tax credit against high unemployment and economic uncertainty. Though customer traffic is low, the buyers that come into our sales offices are highly motivated. On the supply side, the declining inventory of homes for sale is largely offset by additional foreclosures, creating further pressure on home sale prices. These trends are reflected in the key indicator's table on chart nine.

Comparing the fourth quarter of 2009 to 2008, WRECO sales increased 31%, despite a 40% decline in traffic. Our cancellation rate improved by 14 percentage points to 27% and our backlog of homes sold, but not closed, increased modestly to 650 units. However the average price of homes closed declined by almost 4 percentage points versus one year ago. With respect to specific WRECO markets, Washington DC, Houston and the Puget Sound began to firm in the fourth quarter as both employment, and pricing showed early signs of improvement. While Los Angeles and San Diego have held up better due to our positionings within each market, they're not immune to southern California's overall economic conditions including above average unemployment.

Phoenix began to lose momentum towards the end of last year reversing the improved sales velocity observed in mid 2009. Together with the inland empire in Las Vegas it remains one of our most difficult markets due to high unemployment and pricing pressure from accelerating foreclosures. Our financial results reflect the continued uncertainty in our markets. Earnings before special items improved in the fourth quarter compared to the third. However, that improvement was more than offset by increased impairment charges. Included in our $89 million fourth quarter charge to pretax earnings are $100 million in one-time charges. These are primarily attributable to a single large impairment in our Washington, DC market.

We also realized a loss of $10 million from the sale of land and lots located in Phoenix, Las Vegas and southern California. Excluding a loss on land and log sales and the one-time charges, WRECO earned $21 million on fourth quarter operations. I have previously discussed actions that we are taking to improve our operating performance and generate cash. Although WRECO's overall financial results are unacceptable I am proud of our employees accomplishment in those two focus areas. In 2009, we reduced land spending, staffing, work-in progress, standing inventory, and costs of construction. We also successfully executed our strategy to divest approximately 5,000 lots. This combination of operating cost improvements and sales of non-strategic assets yielded over $100 million of pretax operating cash flow in 2009, including positive cash flow from our core single family home building operations. 2010 will not be an easy year but our improved cost structure better positions us to manage the changing market conditions we will continue to experience. I am optimistic that our cost discipline combined with the eventual stabilization in our markets will allow WRECO to remerge as a highly competitive profitable home building operation. I will now turn the call over to Patty to discuss the outlook for the first quarter.

Thanks, Larry. Good morning, everyone, although overall market conditions continue to be difficult as we enter the new year, they're much improved compared to a year ago. As we compare the first quarter outlook with the most recently ended fourth quarter, there continues to be much uncertainty surrounding the strength of the recovery. I will begin the outlook for our business segments with Timberland.

Domestic wood prices in both the west and south are expected to increase slightly over the fourth quarter, as industry log supply tightens especially in the south due to unusually wet and cold weather. While fee volumes may be up slightly as compared to the fourth quarter, we are continuing to defer overall harvest. Export volumes and prices are expected to be similar to the fourth quarter. We will likely have increased (cultural) spending and somewhat higher fuel costs in the first quarter. There were no significant sales of nonstrategic lands in the fourth quarter and before considering the effect of any sales that may take place in the first quarter, we anticipate that overall timberland earnings will be comparable to the fourth quarter.

In wood products, sales realizations in volumes are expected to increase in the first quarter driven primarily by improvements in both lumber and OSB. Engineered wood realizations are likely to be similar to the fourth quarter, on improving volumes. While we are seeing strengthening take place early in the quarter, it is hard to forecast the sustainability of the improved markets given the uncertainty that exists in the overall economy especially around housing. Raw material costs are expected to increase somewhat primarily due to rising log costs. Unit manufacturing costs should be lower as a result of improved operating rates.

Losses in our wood products business are expected to be much lower in the first quarter compared to the fourth quarter. Sales realizations and our sale of fiber segment are anticipated to increase in the first quarter. The low inventory situation that we saw in the fourth quarter is expected to continue leading to increased prices.

On the expense side, fiber costs are expected to increase for our southern softwood mills as the wet weather I referenced earlier could affect fiber availability. In addition we anticipate increased costs associated with the first quarter maintenance outages compared with the fourth quarter. We expect that maintenance combined with rising fiber costs could offset the increase in sales realizations, and as a result, earnings in the first quarter are likely to be comparable to the fourth quarter, after excluding the effect of alternative fuel mixture tax credit.

Moving on to our real estate segment, the first quarter is traditionally the slowest quarter of the year for home closings. Closings on our single family will be significantly lower in the first quarter. We expect to close less than 400 homes this quarter, compared with the 778 closed in the fourth quarter. We also anticipate that margins will be lower due to lower average home price, driven primarily by mix. As a result, we expect a loss in our single family home building business in the first quarter. However, we anticipate that this loss will be more than offset by the sales of two commercial partnership interests, that contributed $33 million to earnings in the month of January. Therefore excluding any asset impairments, we expect the real estate segment to be profitable in the first quarter.

Now I will conclude with overall financial comments. Capital expenditures for Weyerhaeuser Company for the full year were $215 million. For 2010, we expect that net capital spending will approximate $200 million. This includes expenditures for reforestation. We ended the year with cash and short term investments of approximately $1.9 billion. During the quarter we received $138 million from the pension trust as partial repayment of previous loans. The remaining $147 million is scheduled to be repaid in the first half of this year. In October, we issued $500 million of ten year bonds, and retired over $400 million of debt. Our scheduled 2010 maturities are only about $40 million and are not due until the fourth quarter.

In the first quarter we expect to spend approximately $150 million for our semiannual interest payments as well as capital expenditures of over $50 million. We will be filing for our tax refunds of approximately $550 million and we could receive those funds late in the first quarter, or early in the second. And now I will wrap up with some comments on REIT conversion.

On our December call, I mentioned that our earnings and profits, which must be distributed for our REIT conversion, were estimated to be around $6 billion as of the beginning of 2010. We are finalizing that number, but it may be somewhat less than $6 billion. In addition, the IRS has issued an extension of the revenue procedure that allows REITs to pay dividends with 90% stock and 10% cash. That extension is for two years, 2010 and 2011. While the Board has not decided how much to pay in cash, at 10%, the cash dividend required for 2010 earnings and profits distribution would be less than $600 million. We do need shareholder approval to issue the additional shares for the stock portion of the dividend and the request for that approval will be included in the upcoming proxy statement we filed later this month. As we have previously stated, the earliest and most likely date for a conversion would be this year. We don't have any further information to provide on this call, but anticipate providing further clarity as the year progresses. With that I will turn the call back to Dan and I look forward to your questions.

Thanks, Patty. As we open the call for your questions this morning, I am going to turn the call back over to Kathy McAuley, and Kathy will lead the Q&A.

Thank you, Dan. If you would open up the call for questions.

(Operator Instructions). We will pause for just a moment to compile the Q&A roster. Your first question will come from Peter Ruschmeier with Barclays.

Thanks. Good morning. Patty, I was curious if you could confirm if all of your gross debt resides in your legal structure, your taxable REIT subsidiary?

Well, Pete as we talked about before, when we did the restructuring at the beginning of 2009 end of 2008, the primary debt that we hold at Weyerhaeuser Company is with our bond holders, and the taxable REIT subsidiary that was set up was primarily our manufacturing assets, assumed the obligation from Weyerhaeuser Company to pay those bonds, so while the debt actually resides at the Weyerhaeuser level in terms of the original bond issuance, the obligation to pay that debt is the obligation of the GRF.

Understood. Okay. And just to clarify, Patty, is it true that your E&P for 2010 assuming a 2010 conversion that that is calculated from the year end financials of '09; is that correct?

That's right. So we will be able to finalize that number, here shortly. It is a taxable -- it is a tax regulation calculation. So it is not like our retained earnings on our financial statement. And that was the number that I was referencing will be likely under $6 billion.

And recognizing there's lots of uncertainty on the specifics of what you may do this year, can you help us with a time line of expected actions, for example, I think there's a shareholder vote in April, right but are there other time lines you can help us with as to when you may consider paying E&P and what you would expect?

Sure. Let me go back to the beginning of the year as we talked about. So finalizing the amount of the earnings and profits, and then we will need the shareholder approval for the additional shares to be issued, the Board will need to make a decision if we convert in 2010 or payout the E&P in 2010, what the mix of stock and cash might be. The new piece of information that I shared this morning different than the call was traditionally, when people have converted they have used as low as 20% cash for that dividend, and we do now have the flexibility to use 10%. The Board will have to make a decision as to what amount of cash they would authorize in that particular distribution. The distribution itself needs to take place for a 2010 conversion -- needs to take place by the end of 2010. So, the Board is carefully considering what that might be and the timing. In terms of the year end we would also need to make sure that we put that conversion in place, the mechanics for the conversion in place, probably no later than the end of the third quarter beginning of the fourth quarter even though you have until year-end to pay it out, we will need to send out information to our shareholders about the amount of cash and stock in that distribution. They have the ability to make an election.

Thank you, Patty. I will turn it over.

Thank, Pete.

The next question will come from Chip Dillon with Credit Suisse.

Yes. Just one -- two questions. The first one is you announced the other day this new dissolving pulp substitute, Pearl 429, and what I wanted to ask you is is this marketing a reentry into the specialty dissolving market? I know you had exited I think it was Cosmopolis a few years ago, and how many tons could you see this ramp up to?

Well, Chip, we did announce that the introduction of our Pearl 429 which as we indicated is primarily going to be used in (inaudible) and it can partially replace developing grade pulps that are traditionally higher cost. We are still in the very early stages of marketing this, we're encouraged by the customer response. But we expect that the markets for this will be relatively modest in size but it will be a specialty niche market that we think will create value and increase margins. We look at this introduction of this product as just an ongoing part and example of the new specialty solutions we that bring into the marketplace that we believe will add value not only to ourselves but also to our customers.

So you are saying maybe less than 100,000-tons?

At this time I wouldn't want to speculate where that would go. We are in the very early stages of it but we're obviously encouraged by the initial response so far.

Okay. A last quick question is patty thanks for the update on how the E&P might work. As you have gone through your shareholder list, obviously, if you are an individual, or maybe even a mutual fund with a low basis, and your owner is in a high tax bracket you are basically going to force them to reduce their proportion of ownership in the Company if you just do a 10% pay out but that may be for the greater good if they're a relatively small portion. Have you done into the analysis and can you tell us how you think about whether it is going to be 10 or 15 or 20%, specifically about how much of your shareholders would be impacted by only getting 10%?

Chip, I couldn't give you any further clarification, in terms of how many of the shareholders might be impacted by that, and certainly it would take place at the time that the distribution would be made. What we have said in terms of the combination of cash versus stock, while it would be true, that at 10% cash you would have to have additional cash to pay the tax, if you are taxable, those dividends would be taxable at 15%. You will also if it is at 10% be getting more shares than you would at a 15% cash distribution. Differently than some other distributions because of the taxable shareholders will have full tax basis in those shares. So they could elect to sell those additional shares, take the cash to then pay the tax that would be due on the cash or on the total distribution. So it will -- it is difficult to say what portion of the shareholder base is taxable, and what decision shareholders might make as a result of that. But their net out of pocket at the end of the day, cash perspective would be the same, whether we did 10% cash or 15% cash because they will be getting more stock if we did 15%. Or less stock if we did 15% than they would if they got 10.

Thank you.

The next question will come from Mark Connolly with Sterne Agee.

Thank you. Two parts to my question. The first is with how weak timber business has been in terms of log sales over the last couple of years and these increased deferrals, is this enough to affect your timber rotations, and do we need to think about your wood mix any differently? In the past you have made some strategic changes in the rotation. I am just wondering if this cumulative effect since 2006 might be big enough that we should start thinking about your wood mix differently?

I think that, Mark, over the long hall, it won't have a material impact as we go forward. We have obviously had deferrals in light of what the economics are. In terms of harvesting now as opposed to deferring for a few years. So potentially if this was to continue for a very extended time we might have to relook at that. But at this point in time now we don't anticipate making substantial changes to our silver cultural additions.

If I could ask a quick follow up your cancellation rate obviously in the real estate business is better than it was in 2009. Can you think of that as stabilizing or improving at this point?

I would hope, Mark, that certainly that we are stabilized and we would hope that we would see some small improvement.

Thank you.

Thanks, Mark.

The next question will come from George Staphos with Bank of America/Merrill Lynch.

Thanks. Hi everyone. Good morning. Just wanted to confirm when we look at the free cash flow, obviously, from very, very low levels, you more or less showed progressed it would appear that you are modestly positive on free cash flow and it doesn't look like there was much effect or benefit from the receipt of the alt fuels tax credit. I just want to confirm that to start.

Yes, George. This is patty. We had just under $30 million of receipts of alternative fuel tax credit in the quarter. The remainder of those funds will be received in conjunction with the tax return.

Okay. Thanks. Second question, around free cash flow, again, do you think there is further opportunity within the operating businesses to bring working capital down further or have you hit as much productivity and optimization as you will see at this juncture. Said differently, can you maintain more or less free cash break even given the markets and holding pricing constant with current levels into the first several quarters of 2010?

Hello, George, this is Tom. We did over the last few years, we have gone through this downturn really worked our working capital as well as reducing our operating costs. We did make potential reductions in our working capital over 2009 compared to 208, it doesn't necessarily have the same level of opportunity going toward, but it is still an area that we are going to continue to work diligently.

Okay. So, should we then assume just to conclude that that you can stay more or less around break even from a cash standpoint from here on out barring changes many the market?

Well, again we are going to take a look at what we need to do against what the market does and the demand that we can apply profitably and that will dictate whether or not we stay or get to pass break even across the entire porous product segment.

Okay. Last question, and I will turn it over, a similar type of question, Tom, for you if we hold price constant and given what you are seeing in terms of your conversion markets, do you think we are at a point where the wood products business can get to break even or better by the conclusion of 2010? And what are some of the parameters around that occurring or not as you think about them? Thanks very much. Good luck in the quarter.

Well, George, we are encouraged by what we are seeing obviously so far in January, but again the first four weeks don't necessarily determine how the remainer of the year will go. We are pleasantly surprised by the level of volume and demand as well as price appreciation particularly in lumber and OSB. We think we have done a good job this year in reducing our cost and positioning ourselves to take full advantage of these improving markets, and if we look at it compared to 2008, our sales were down 43% or nearly $1.5 million, and yet, even despite those really difficult conditions, we actually improved our operating year-over-year by reducing our costs of goods and our SG&A. We are going to continue to work those things. We are going to take advantage of the market, that has been presented to us, and as I say, the watch word is stay, let's continue to watch our operations as appropriate, and make sure that we are optimizing our core set of operations and mention supply against demand, and we are going to continue to rigorously reduce costs where we can out of our system. With that, no guarantees but we feel much--.

Understood.

--we feel much better about this time last year than going forward.

All right. Thanks very much. Good luck on the quarter.

Thanks, George.

The next question will come from Gail Glazerman with UBS.

Tying on to that last comment for a minute, can you talk a little bit more about any theories you have and what you are seeing in terms of the strength in wood part of markets, it's obviously fairly unusual for this time of year?

Well, Gail, as we look at -- we think what we saw during 2009 was -- besides just great volatility, was a lot of destocking of the inventory channel throughout the system. That wasn't just at the producer level but that was all the way through the distribution channel all the way to our customers, and it took a long way for that to work itself out. So at this point in time what we think we're seeing is basically what we think as a more -- maybe whatever normalized might be -- replenishment of inventory as product is sold where people are buying on a more consistent basis, but at this point in time we're not willing to speculate whether or not we've seen any core underlying demand increase at this point in time. So we are taking a watch and see approach.

Okay. And then one last question, on asset sales, particularly land sales, lots and real estate and the timberlands in the west that you've been marketing, can you give us an update on how the marketing on the timberlands is going and what your plans might be for lot sales in 2010?

We will start with the timberlands and then we'll move it to Larry after Tom's comments.

Yes, Gail, we had announced earlier that we were releasing explore and the potential sale of 88,000 acres of nonstrategic timberlands in the west. We have been evaluating bids from interested parties and again, what we will do is we'll take a look at those as they come forth and if the grades are appropriate and they are values that we feel good about then we will consummate the sale. That's basically the status of where we are in that process for those lands.

And the interest in good or too early to say?

Say again, Gail, please.

Has the interest been good so far or too early to say.

We have good v good interest, we're still trying to evaluate what that does in terms of how that translates into the kind of values that we think are appropriate for the quality of lands that we're offering for sale.

Thank you.

Gail, as it relates to WRECO about a year ago we had talked about having kind of a change in some of our assets and where we had kind of defined them as moved them to, nonstrategic and we talked about approximately 4,000 lots that we were looking to sell. And in my remarks this morning, we accomplished that had and we actually did a little bit more as we went out to the market. As we think think about 2010, we have always kind of been long in land and we have been rewarded for that and we think that in a market where you are seeing some land-like builders there may be an opportunity at some point in time for us to be thinking about selling lofts on a profitable basis and I'm not saying if the markets come back and demonstrate that yet but that's kind of what we're thinking about. Again, we will also be looking at our inventory in land and if we can improve it one way or the other and if it means that we may have some other asset sales we will kind of look at that as we get further into the year.

Okay. Thank you.

The next question will come from Mark Wilde of Deutsche Bank.

Good morning. I just wanted to ask some questions mainly around Timberland, is any of that drop off in the fourth carer, was any of that weather related or was all of that really just a financial decision?

Well, it was a combination as we went forward. Some of it was a financial decision, some of it was the fact that we saw -- experienced lower demand, which required less volume coming forward and in the south, we did have weather restrictions somewhere in the magnitude of about 250,000 cubic meters that were strictly due to the poor weather conditions.

And then I am just curious, Tom, it seems like not only you but a lot TMOS and private land owners have been holding timber off of the market because pricing and demand has been so weak. How do you think about sort of potential pent up supply coming into the market when things start to pick up? Is this going to be an issue.

I can't really speculate on that, Mark, going forward. But what I can focus on is -- the real question for us is how do we position ourselves for potential market recovery. What we do is we are ensuring that we have a broad base of both internal, as well as third party customers both domestic as well as international that allow us to flow our lots in the best value. So for example, in this year we have actually reestablished grids to all the markets to China where volume that they haven't been taken in recent years. So in addition to that we are maintaining our core set of harvesting capabilities that allow us to keep harvest as demand in values warrant. So we are positioning ourself based on what we know, and against a customer base that we've established going forward.

And understanding that it is only early February, do you have a -- just a ball park estimate for kind of what your harvest volumes are likely to do in 2010 versus '09?

We don't forecast out beyond the quarter. We will see -- for the first quarter we will have seasonally improved volume compared to the fourth quarter but it will be down from 2009 first quarter.

Okay. And then finally for Larry, I just wondered if you would be willing to comment at all on an article that was in the Wall Street Journal I think yesterday just on consolidation and potential consolidation in the home building market, and I am particularly interested with you guys, if you can give us anymore color on how big the land book is, particularly around San Diego and Los Angeles for you guys?

Let me talk about Mark kind of on land. We had said that we have talked about -- we own or control around 100,000 lots, about 40% of those are owned, the others -- the other roughly 60% are controlled through options. Of the 40,000ish lots that we own about half of those approximately are in California. And the majority of throes are split between, I would say probably we have about 25% in the LA venture area and then the balance is split roughly even between San Diego and the inland empire.

Okay. All right. That's very helpful. Any thoughts on that article?

I mean not -- I really don't want to get in a position of speculating what may or may not happen in terms of consolidating and what other guys might do.

Okay.

We're focused on what we are doing.

As you should be. Thanks.

The next question will come from Claudia Hueston with JPMorgan.

Thanks very much. Good morning. Just a couple of questions. One, I was just curious, if you have a housing outlook, how does that forecast that you are working from for 2010, and then maybe how that has changed or if it has changed from last quarter?

I will address that, Claudia, we -- I don't want to share our internal outlook. We have an internally generated forecast, we look at other sources of information, we are expecting improved conditions in 2010 versus 2009. We are expecting a slow steady recovery, and that is informing decisions we make in our home building business as well as our wood products business, and our timberlands business.

Okay. Thanks. Then just shifting gears, your corporate expenses moved around a lot. I was wondering if you have any guidance just on a normal range for that and then also any update on pension expense and any potential contribution for 2010?

Sure, Claudia. This is Patty. In term of the corporate segment, it is as you think about forecasting it, difficult to forecast because it is where a lot of moving parts end up like foreign exchange, variable comp, and our transportation assets are in that segment as well. But if you think about going forward, I would say something around the 15 million to $20 million a quarter, certainly at that level as we think about the first quarter is probably a good rule of thumb. I think you also asked about pension. Looking at pension, and other post retirement benefit we don't have the final number yet, for the year of 2010. But I would expect that we will have a like pension credit and we will have other post retirement expense probably likely to offset each other as you think about it so I would probably just keep that as a flat number. In terms of contribution that we look for for the pension of 2010, speaking to the minimum contribution that we would be required to make I think as we sit here today with the preliminary estimates that we have in, it looks like we may need to make a minimum contribution to one of the plants in the level of about $30 million, now that will be for the year of 2010. But we have actually until the fall of 2011 to make that contribution. We are also looking at whether or not we may want to make some voluntary contributions into those plants. So I hope that's helpful.

It is. Thank you very much.

The next question will come from Mark Weintraub of Buckingham.

Thank you. Dan, last call you had finished up saying that the climate bill being debated in Congress has the potential to have a meaningful impact on your timberland activities. Any update on that?

Well, as you see what has happened with health care quite frankly it is hard to speculate, Mark. Our view is that there's some renewed energy, around attempted passage of a climate bill. We are keenly focused on what the outcome may be, as I mentioned in the call last quarter, there is potential impact on the operation and management of our timberlands, as we look at that resource, we have certainly the potential for carbon credits, there are critical definitions around biomass, that become addressed in both climate and energy bills. So we are tracking closely but I cannot handicap Congress at this point other than to say we are engaged in the process. We are strongly representing the interest of our assets.

Fair enough. And just, a few clarifications so the $550 million tax receivable, that you are expecting to get, in March or April, that, does that include the benefits from the alternative fuel?

Yes it does, Mark.

Okay. And so the $600 million that's on the balance sheet, does that, that also I take it then doesn't include the alternative fuel mixture credits?

Yes. And the difference between the $600 million and the $550 million is a combination of state refunds as well as some foreign tax credits that will be freed up, that we will have to file amended returns to get. So those, the remainder of that will likely come in over the remainder of the year.

Okay.

We would anticipate getting almost $550 million, again at the end of the first quarter, at the earliest, but at the beginning of the second if not then.

Okay. Bringing two prior questions together, I don't know if you would be willing to give an assessment on what type of housing start environment you think is necessary for your key businesses to be in balance where you presumably can start seeing profitability?

The goal in each of our businesses is to be profitable with the housing starts that were dealt, Mark. So we've made significant improvements across our wood products business over the last year to drive down costs, to be more competitive, as Tom said to match our production with profitable demand in the case of our real estate business. We have come through this downturn. As Larry noted we had profitable, single family operations in Q4 and Patty talked about first quarter activity and as you know in the first quarter starts are relatively low and so you see a typical seasonal falloff but we are projecting an increase in activity in 2010. And our goal in both of those businesses is to be profitable at the level of housing starts that we see in front of us.

I want to make sure I heard that right. So you think it's a realistic goal to potentially be profitable in the wood products, as well as the first home building business in 2010?

I'm not making a projection for profitability for the year, we provide guidance one quarter out. Our goal in all of our businesses is to be producing products at a profitable level, we certainly had our challenges in this downturn so I can't project for the year. But we are -- making changes that we need to make in order to operate in the conditions that we find ourselves in.

The next question will come from Steve Chercover with D. A. Davidson.

Just a couple of tough quick ones. First of all with respect to Pearl 429, will sales prices and margins be similar to those (inaudible), can you give us a sense?

What we anticipate is that they will be in margins that will be enhanced above the product that we currently have in the marketplace.

Then with respect to the REIT, is it your opinion that it is important to have a dividend that's competitive with the peer group?

The Board is carefully considering what the appropriate dividend level should be, as we convert to a REIT. That's a significant focus for us this year, as Patty said we have a shareholder growth that will occur at our meeting in April regarding the issuance of shares, and so we are actively engaged in carefully considering what the appropriate dividend is going forward. It's going to be critical for us that we communicate that at the time that we announce the timing of the conversion. So we have got the April shareholder vote and we look forward to providing further guidance in May as we have our investor conference.

Just as a follow on to that, if the E&P purge was done early well prior to year end would you have have certain behaving as a REIT by that I mean paying the dividend you assume is reasonable?

In terms of what we would do if we purged in 2010, and converted for the year of 2010 that means we would be operating as a REIT for the full year. In terms of the amount of the dividend, there are really two questions. One would be the amount that we would need to distribute to our shareholders in order to not have to pay tax on that dividend. That dividend in terms of the level would likely be very low, in 2010 given the amount of harvest deferral or qualifying timber in this very depressed economic cycle. So I wouldn't equate necessarily the two. There's an amount that you would need to divest in terms to meet the pass through tax rules and then there will be amount that the Board will -- they will take that into consideration, but then they will also look at just what would be the appropriate dividend level overall. So one minimum level driven by regulation, the other driven by dividend policy.

Thank you very much.

The next question will come from Paul Quinn of RBC.

Thanks, just a follow up question on the strength in building material markets. We are seeing a pretty strong lumber pricing rally right now. Just wondering in terms of -- I guess the question is are you seeing signs of improvement on the lumber demand or is this simply restocking?

Well, again, as I mentioned earlier, it is too early to tell. We certainly believe that there is some restocking and replenishment that's going on and we do see the downstream replenishment being more consistent basis in terms of how often that they do replenish. But in terms of whether that's truly an indication that underlying demand is going to be stronger on the timing of that, it is still too early for us to tell. We certainly are enjoying the improved lumber and OSB realizations as we speak.

Okay. You have taken a wait and see approach I guess on increasing production, but for the industry as a whole what's your assessment of the ease of increasing production?

I really couldn't speculate on what the industry as a whole is doing but as I have indicated on prior calls we actually on a weekly basis evaluate market conditions against where we are in supplying product to the market, and so we do try to make realtime decisions if terms of what's appropriate in terms of the supply that we bring forward.

Okay. Just lastly, just on Chinese markets for locks and lumber, it's created some excitement in my province BC, just wondering, whether you've seen the same sort of level of pick up?

Well, we are certainly seeing on the log supply and component there, Paul, we are actually seeing over the last year we have seen an increased take away of what was typically a domestic GC type quality, going into the construction market in China, we do have take away of lumber in to China primarily from our Canadian operations, but at this time, the predominant amount of line that's going there is basically lower grade material. This is an area that has opportunity but we're obviously going to monitor it appropriately. If it materializes we're certainly going to participate appropriately.

Thank, guys. Best of luck.

We have time for one more question, Thia.

Your final question will come from Joshua Zaret with Longbow Research.

Thank you. I have three quick questions. First, when you report real estate earnings for the first quarter, are you going to treat the contribution -- the $33 million contribution from the sale of the partnership interest as recurring income or are you going to treat that as unusual income? And a reason for that?

That will be a part of our regular segment most likely Josh because we do have partnership interests that we participate in as a part of the business and it is not unusual for us to have sales of partnership interests if you look back through the segment you will see those, but when we do have them we try to isolate those and give you information around them so that you can separately evaluate our homebuilding business, our partnership investments which are all part of the business of the real estate segment?

You will include -- I just want to make sure we are all on the same level but along the same line, you reported fourth quarter real estate earnings in the release of $21 million and in your hand out as $11 million, clearly that's the loss on the land and lot sales. I would think that would be included in your income and use the $21 million because it seems to be recurring but why do you have two different numbers for something that obviously should be one number, and which one should it be in your opinion? $21 million or $11 million?

Again land and lot sales are not an abnormal part of the business of our real estate segment. We try to be very explicit in terms of giving you information about what the various pieces of the real estate segment have produced. So land and lot sale losses of $10 million although it is a little larger number than normally because as we talked about in the fourth quarter we moved a significant amount of lots to take advantage of some tax losses that were in those sales.

I don't disagree with that. I would just hope you would be consistent on your material since it does create some confusion there. And then my last question, you talked about your timberland sale, can you sort of give us species, age, class, et cetera so we can get a feel for what you are selling?

Let me -- that would be comparable, primarily it's -- I don't have the details in front of me here, Josh, but it is primarily whitewood, probably in the magnitude of 65% plus, and relatively lower age class and it would be comparable to the material and the quality of acres that was included in our South Bend sale of spring of last year.

Yes, sounds like that. Great. Those were my questions. Thank you very much.

Thank you. Dan?

I would like to make a couple of final wrap up comments as we end the call. I would like to talk about our safety performance during 2009. Those of you on the phone who have followed us know that operating safely is a core Weyerhaeuser value. We care about safety because of the concern for the well being of our employees, because we believe there's a high correlation between safety performance, operating efficiency and product quality, because our safety record translates directly into lower operating and employment costs, and because it is simply the right thing to do.

For those of you who have had the opportunity to visit our operations, whether in the woods at our plants and mills, our home building projects or even in our offices, you know that all of our employees are keenly focused on keeping everyone on all of our sites safe. As a result of this long-term commitment to improving safety across the Company, we ended 2009, with an annual reportable incident rate of 0.62 which was the lowest in our history and the best in the industry.

I am taking the time to share the good news, in order to recognize the accomplishments of our employees, but more importantly to make another point. Our success in safety management shows what is achievable if we are relentless in holding ourselves accountable to a clear objective. I am committed to focusing that same level of commitment across our entire Company, to deliver the financial results, that our shareholders deserve. As I stated at the top of this call, our Company has been operating in an extremely difficult economic environment, since the precipitous downturn in the US housing began. In order to weather this storm, our employees our retiree, our operating communities, and our shareholders have all made sacrifices.

I want to thank all of you for your support during this difficult period, entering 2010, in a still uncertain and fragile environment I will state again that I am confident that we will deliver improved financial performance and I thank you all for taking the time to join us this morning.

Ladies and gentlemen, thank you for participating in today's conference call. You may now disconnect.