威爾豪瑟 (WY) 2010 Q1 法說會逐字稿

Good morning, my name is Thea. I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser quarter one 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 session. (Operator Instructions). Thank you. I will now turn the conference over to Miss Katherine McAuley. Ma'am you may begin.

Thank you, Thea. Welcome to Weyerhaeuser's first quarter 2010 earnings conference call. I'm Kathy McAuley, Vice President of Investor Relations. Joining me today are Dan Fulton, President & Chief Executive Officer, Patty Bedient, Executive Vice President & Chief Financial Officer, Tom Gideon, Executive Vice President Forest Products and Larry Burrows, President Weyerhauser Real Estate Company. This call is being webcast at www.weyerhaeuser.com. The earnings release and materials for this call can be found in 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. As forward-looking statements will be made during this conference call.

This morning Weyerhaeuser reported a net loss of $20 million, or $0.10 per share, for the first quarter of 2010. A net sale of $1.4 billion. Significant after tax items in the first quarter were a charge of $31 million, or $0.15 per share, for income tax adjustments related to the Medicare prescription drug tax deduction elimination and a state tax rate change. A gain of $26 million, or $0.12 per share, for the sale of wood product assets. Excluding these items, the Company reported a net loss of $15 million, or $0.07 per share. A GAAP reconciliation of special items is available on our website in the earnings information package.

Please turn to chart four in the earnings information package, as I will next discuss this board flow chart. Chart four is a bar chart detailing the changes and contributions to earnings before special items, interest and taxes. Changes in Weyerhaeuser's segment earnings from the fourth quarter of 2009 to the first quarter of 2010 were as follows. Beginning with the first bar on the left-hand side of the page, in the fourth quarter of 2009, Weyerhaeuser lost $61 million before special items, interest and taxes. Proceeding from left to right across the board flow chart we begin our discussion with Timberland. Timberland earnings were $53 million higher in Q1. This increase was due to more disposition of non-strategic land than in the fourth quarter, higher domestic log prices, lower silviculture cost and the fact that deep timber volume was brought forward into the first quarter. Wood products earnings were $60 million higher than in the fourth quarter. This improvement was due to higher lumber, OSB and hardwood price realization and lower unit manufacturing cost. Offsetting some of the improvements were higher log costs.

Cellulose fibers earnings were $15 million lower in Q1. Pulp price realization increased $50 per ton. Price improvements, however, were offset by higher maintenance cost related to schedule mill outages. Fiber and freight costs were higher during the quarter. Real estate earnings were $20 million higher in first quarter. In the first quarter, partnership income was $33 million and there was a $3 million gain from land and lot sale. Single family closing volumes was seasonally lower. Average home prices declined and margins decreased. Partially offsetting these trends were lower selling cost and a decline in G&A. Corporate and other increase by $20 million in Q1, due to foreign exchange gains, reduced variable comp and lower G&A. The final bar to the right of the page is the first quarter contribution to pre-tax earnings before special items of $80 million. I would now like to turn the call over to Dan Fulton. Dan?

Thanks, Kathy. After months of difficult markets, it's gratifying to discuss a quarter where results reflect improved market conditions and where we see the benefits of the work we have done to reshape the company and improve our long term competitiveness. I ended last quarter's call by saying I was confident we would deliver significantly improved operating performance. And though we're still not profitable, our first quarter results reported this morning show an improvement of $155 million over last quarter and a $244 million increase from one year ago.

Previously, I've discussed the close linkage between the performance of our Timberlands, wood products and real estate sectors and the level of US housing starts. We assumed the US single family starts would rise to 600,000 this year. Despite signs of gradual improvement, however, housing starts still remain below 550,000. Several weeks ago in a prepared statement, Fed Chairman, Bernanke, observed that, and I quote, "we are far from being out of the woods" and he added, "we have yet to see evidence of a sustained recovery in the housing market." We agree. The home building market has been characterized as fragile and yesterday a commentator described it as wobbly, a term which accurately captures our sense of market conditions. The essential ingredient for return to long term trend demand for new housing is job growth and until we see signs of employment recovery, we remain cautious.

Our first quarter results reflects some stabilization in the housing sector and improvements that we have made in our own operations. The fact that we've been able to show significant gains and performance at this level of start, is a testament to the hard work that our businesses have undertaken to weather unprecedented market conditions and improve long term performance. The results Tom and Larry will share with you today, reflect those actions. And as the recovery gains more strength, we are well positioned to take advantage of our strong market position. In addition to this work, our other focus involves the strategic decision we have made to convert to a real estate investment trust. This will place our core timberland segment into the most efficient tax structure for long term competitiveness. At our annual meeting earlier this month, our shareholders approved actions necessary to complete this conversion. Patty will talk a little bit more about our conversion in her remarks and we look forward to further discussion at our annual investor conference on May 29, in New York. And now to help you better understand the improvements we saw during the first quarter, and the challenges still ahead of us, I'd like to turn the call over to Tom Gideon, who will discuss the performance of our forest product businesses. Tom?

Thank you, Dan and good morning. Earnings from our forest product business increased in the first quarter as weather related disruptions constrained supply and led to improving pricing across most of our product lines. Performance of our timberlands and wood product businesses improved substantially in the first quarter, offset by a decline in earnings from the cellulose fiber segment. I will start by discussing our Timberlands business, which is referenced on chart five. Timberland revenues improved in the first quarter, compared to the fourth, as both log realizations and sales volumes increased. Harvest levels increased 17% versus the fourth quarter. Though we continue to defer harvest, we chose to pull forward volume originally scheduled for later in the year, to supply several of our southern mills. These mills struggled to procure logs as rain, snow and ice, disrupted logging operations in much of the region. First quarter export realizations increased modestly versus the fourth quarter on comparable volumes.

Export markets remain robust and we continue to supplement core Japanese demand with sales of domestic quality Douglas fir into China. Minerals revenues rose slightly in the first quarter, as oil and gas prices increased versus one quarter ago. On the cost side, per unit volume and road costs fell due to increased harvest volumes. Cellulose cost also declined, primarily due to weather. Earnings from dispositions of non-strategic lands total $31 million in the first quarter as we sold approximately 15,000 acres. These earnings reflect a mix of cash timberland sale, non-cash exchanges and sales of higher and better use, or HBU lands. Timberland prices appears to be holding up well, and we are pleased with the prices we received for our acres. Overall, Timberlands earnings improved in the first quarter, compared to the fourth, as the segment earned $81 million on first quarter operations.

I will now turn to wood products referenced on chart six and seven. Revenues for this segment increased 18% in the first quarter compared to the fourth. Lumber and OSB realizations increased sharply up 18% and 19% respectively, though volumes remained flat at first quarter levels. Sales volumes for engineered lumber increased by approximately 30%, compared to the fourth quarter, while average realizations declined slightly due to mix. Per unit manufacturing costs for most product lines declined substantially, compared to the fourth quarter, as we increased operating hours to meet customer demand. Our lumber system took 29 weeks of downtime in the first quarter, primarily in our southern operations. Overall, the benefit of these higher operating rates were partially offset by increased log costs.

First quarter earnings, for the wood product segment, included a gain of $40 million from the sale of certain British Columbia forest licenses and rights, and $4 million from the sale of the saw mill. Excluding these special items, wood products lost $63 million on first quarter operations, an improvement of $60 million compared to the fourth quarter. We continue to benefit from the application of lean manufacturing principals throughout the wood products business. During the first quarter, over 1500 eye-level associates participated in lean projects that reduced cost or improved margins in nearly every product line. I'm impressed with the creativity of our team, as they have improved mill up-time, saved energy, improved product quality and reduced waste. I want to thank our associates for all of their hard work on this initiative. Though we are still not satisfied with their operating results, we are pleased with the progress we have made so far.

I'd like to close my discussion of the segment with a brief comment on the first quarter rally in lumber and OSB markets. During the quarter, these markets were significantly affected by supply related events. Production capacity, that had been reduced by mill closures and adverse weather, was hit with a sudden surge of orders, as customers restocked highly depleted inventories to accommodate a seasonal increase in housing starts. Though we are encouraged by the improvement in market conditions during the quarter, any lasting recovery must be supported by a sustained increase in core housing demand. We will continue to monitor wood products markets very closely and adjust the operating posture of our facilities to match supply with demand.

I will now turn to our Cellulose fiber business, which is referenced on chart eight. Maintenance expense increased by $14 million from the fourth quarter. While we had planned for additional maintenance in the first quarter compared to the fourth, the first quarter annual outage at our Longview, Washington mill was also more costly than anticipated. Fiber cost rose, as wet weather in the US South continued to limit availability of pulp logs and saw mill residuals. Freight cost also increased.

On the revenue side, average pulp realization rose by $50 per ton relative to the fourth quarter. However, shipment volumes declined slightly, primarily as a result of inventory build. After entering the first quarter with low inventories, we built inventory in advance of annual maintenance outages to ensure supply of our contracted volumes. In total, cellulose earnings declined in the first quarter, compared to the fourth, as the segment earned $19 million on first quarter operations. I will now turn the call over to Larry Burrows, who will discuss our Real Estate business.

Thank you Tom. Good morning. Housing market conditions improved across several ReCo geographies during the first quarter. Record affordability, historically low interest rates and federal tax credit availability generated demand from qualified buyers. However, our markets are still experiencing high unemployment and low levels of consumer confidence which tempered demand. Though inventories have stabilized in many markets, shadow inventories from foreclosures and vacant units continue to create downward pressure on home sale prices. With respect to specific ReCo markets, Washington, D.C. and Houston improved throughout the first quarter as pricing remained stable. San Diego has also performed well, as our local value proposition is held up despite concerns about the regional economy. The Inland Empire in Las Vegas has improved modestly during the quarter, despite sustained pressure from foreclosures and delinquencies. In both markets we are seeing traffic from qualified customers excited to take advantage of record affordability. Los Angeles and Puget Sound have softened since the fourth quarter, affected by unemployment and price erosion. Phoenix remains challenged due to increasing foreclosures and short sales. These trends are reflected in the key indicators table on chart nine. Comparing the first quarter of 2010 to 2009, the average price of homes closed declined 3% on 8% fewer closings. However, our cancellation rate improved by nine percentage points to 19% and sales increased substantially. Single family home sales improved by 36% compared to the first quarter of 2009, helped by 21% increase in traffic. Our backlog of homes sold, but not closed, increased to 877 units, or nearly 300 more than one year ago.

Turning to our financial results. ReCo posted a $31 million contribution to pre-tax earnings in the first quarter of 2010. Our results are comprised of gains of $33 million on the sale of two commercial partnership interests, gains of $3 million on the sale of land and lots and a loss of $5 million on single family home building operations. This compares to a loss of $30 million on single family home building in the first quarter of 2009. While no one in ReCo is celebrating a loss in single family operations, the $25 million year-over-year improvement is encouraging given the lower volumes. I am proud of our employees effort that led to this improved operating performance. Though our work is not complete, our results reflect progress we continue to make in reducing SG&A, cost of goods sold, standing inventory and substituting smaller less expensive product. Though ReCo's first quarter sales were encouraging, we remain cautious about the housing markets overall direction. Demand remains fragile. Acceleration of foreclosure rates, changes in the availability of credit are adverse impacts from the conclusion of the federal governments tax credit, as well as, the Federal Reserve's Program to purchase mortgage backed securities quickly disrupt this recovery. While the housing market remains uncertain, I am confident that ReCo's focus on cost discipline, combined within our deep local market expertise, will enable us to successfully adjust to changing market conditions. I will now turn the call over to Patty to discuss the outlook for the second quarter.

Thanks, Larry and good morning everyone. We expect to return to profitability in the second quarter. While risks remain, and there is a deep level of uncertainty about the housing market as Larry just discussed, it would appear that we are in the early stages of an economic recovery.

I'll begin the outlook with Timberlands. In the West, export and domestic log prices are expected to increase, partially offset by a lower export grade mix. In the South, we anticipate that a slight increase in pricing will also be offset by a lower grade mix. Fee harvest volume in the West is expected to increase modestly in the second quarter. However, fee harvest in the South, will likely be lower compared to the first quarter as harvest was pulled forward from the second quarter due to adverse weather conditions. Silviculture and road costs should be seasonally higher in the second quarter. In addition, in the South, the first quarter weather related delays and silvicultural activities will likely result in increased spending for the second quarter. Excluding the effect of timberland dispositions, we anticipate that overall earnings in the timberland segment will be somewhat lower in the second quarter, compared to the first, and higher log prices are offset by increased cost and lower earnings from fee harvest.

Moving on to wood products. Thus far in the second quarter, prices have continued to increase, and we expect that compared to the first quarter, sales realizations in all product lines will improve. Although, sales volumes are still weak by historical standards, we anticipate significant increases compared to the first quarter with sales volumes increasing by approximately 25% in lumber, 40% in OSB and in engineered lumber anywhere from 20% to 35%, depending on the product. Raw material costs are expected to increase somewhat due to higher log cost. Manufacturing unit cost should improve as production increases to meet higher seasonal demand. We expect the wood product segment to be profitable in the second quarter.

In sale of fibers, average sales realizations are expected to increase significantly driven by the continued industry supply disruptions due to the Chilean earthquake, as well as, strong demand from Asia. Pulp shipment volumes are expected to increase slightly. We will likely experience higher cost for ocean freight and slightly higher maintenance costs in our pulp mills, as the second quarter has a slightly higher amount of scheduled maintenance down-time, as a result of regulatory requirements for boiler inspections. We anticipate these cost increases will be partially offset by lower fiber and energy costs. Earnings in our cellulose fiber segment should be substantially higher in the second quarter compared to the first.

In our real estate segment, we expect home closings to exceed 500 or an increase of more than 100 closings compared to the first quarter. Average home prices are likely to be lower in the second quarter due to mix. However, gross margins are expected to remain steady when compared to the first quarter. Selling cost should increase somewhat driven by the increased volume of closing. For the second quarter, we expect a small loss in our single family home building business comparable to the first quarter. We don't anticipate the significantly level of earnings from the sale of commercial partnerships that we experienced in the first quarter. However, we may have smaller land or lot sales. We didn't have any impairments in the first quarter and have not had any to date in the second quarter.

Now I'll wrap up with some financial comments including a REIT update. Capital expenditures for the first quarter were approximately $62 million. This compares with $68 million in the first quarter of 2009. We estimate net capital expenditures for the full year of 2010 will be around $200 million. We ended the quarter with over $2.1 billion of cash and short-term investments. This is up from the year end balance of just over $1.9 billion. Traditionally, the first quarter is a significant use of cash due to lower seasonal earnings, working capital increases, and semi-annual interest payment. In this first quarter, those out-flows were more than offset by the receipt of tax refunds of over $550 million.

Let me close with a brief REIT update. As Dan mentioned, we received the necessary approvals from shareholders at our annual meeting earlier this month, which will allow us to use significant amount of stock to pay out our accumulated earnings and profits. The most likely timing for the payout is later this year, but the actual timing has not yet been set. The total amount of earnings and profits as of the beginning of this year is between $5.5 billion and $5.7 billion. The Board intends to cap the cash portion of the payout at 10%, or approximately $550 million to $570 million, assuming a 2010 conversion. As we look forward, we are reviewing the appropriate level of cash balances in light of our announced REIT conversion, our future dividend policy, the appropriate capital structure for the company, including the need to replace our line of credit which expires at the end of next year, and our significant debt maturities at the beginning of 2012, as well as, consideration of growth opportunities as the economy improves. Although there continues to be much uncertainty as to the pace of economic recovery, especially in the second half of this year, our strong liquidity enables us to make the appropriate strategic decision to enhance value for shareholders. We look forward to giving you a better idea of timing for these decisions at our upcoming analyst meeting at the end of May. With that, I will turn the call back to Dan and I look forward to your questions.

Thanks Patty. Now we are ready to address your questions and your comments. Tom and Larry are prepared to answer your business specific questions on timberlands, wood products, cellulose fibers and ReCo. And you can feel free to address them directly. Patty and I will handle your general, corporate and financial questions. Now, I'll ask Kathy to open up the call.

Thank you, Dan. Thea, could you please open the call for questions?

Thank you. (Operator Instructions). We'll pause for just a moment to compile the q-&-a roster. The first question will be from Chip Dillon of Credit Suisse.

Hi. Good morning. My question has to do, and I apologize if you addressed this earlier, with the wood products business which is showing just a dramatic recovery and I wanted to know how much you thought the supply chain, either at the mill level where people haven't added chips yet, and particularly beyond the mill level in terms of just the entire distribution network is having an impact here and then maybe you can talk a little bit about the demand side from -- are you seeing repair or remodeling really driving this as we haven't seen a real jump in housing starts yet?

Hi. Good morning, Chip. What we have seen, and what we have heard in talking with our customers over the last quarter or so, is that they have seen this recent rally as being primarily driven by a limited supply, as well as, the restocking of their severely depleted inventories. Now, we've also seen underlying demand improvement and so that's really the genesis and the basis for what we have seen so far. In terms of the repair and remodel, they have seen relatively good business over the quarter. We have seen a slight uptick in our participation in the home improvement markets, and I think everyone has seen the results of the recovery in the economy at least as it's evolved to this date.

Do you anticipate that you all will be restarting any capacity?

As we look at that, we have and continue to look at our operations. We added capacity in terms of hours and ships based on what we are getting in terms of our customer demand and we brought back supply over the quarters we thought was appropriate to meet customer demand. And we're going to continue to assess our demand forecast and we'll make any future additions to our supply, both as market conditions warrant or economics dictate.

Thank you.

The next question will be from Mike Roxland of Banc of America.

Thanks very much. Quick question just on the guidance for ReCo. Are you guiding Q2 to be in line with Q1, at $30 million, or are you saying that ReCo should be more or less break even minus the land sales?

Mike, this is Larry. I think, what we're saying is that it's more close, we said we had $5 billion loss in single family home building and so we are talking about being comparable to that excluding any of the commercial sales.

So $5 million dollar loss for the overall segment in Q2?

For single family home building.

Right. But the guidance I saw was, the overall guidance for ReCo, I thought was to be in line with Q1's $30 million or am I reading that incorrectly?

I think you are reading that incorrectly. It's to be in terms of single family home building operations to be in line with 1Q. We don't anticipate any large commercial partnership interest sales in the second quarter and we may, or may not, have any land and lot sales in the second quarter.

Got it, thanks Larry. In timber can you provide give a little more color on the non-strategic land sales in terms of type of property, location, just stocking levels? I want to get a little bit more color on the $35 million in revenue you had in the quarter.

Sure. As we reported, we had about $31 million of earnings from our non-strategic sale of land. That was roughly about 15,000 acres. It was spread more heavily to the west than it was to the south. It was a combination of more heavily weighted, kind of like Timberland to traditional Timberland tracks, with some HBU and some recreational sales. And we also had some level of condemnation that were basically from minerals right away down in the south. We saw a good level of interest in what we had available and we continue to make sure that we get best value for what we have to offer.

Thank you.

The next question will come from Gail Glazerman of UBS.

Hi. (inaudible) was any of that land part of the 88,000 you're marketing in the West and, if not, can you give an update on that?

Hi Gail. No, none of that was any of the 88,000 that we had talked about earlier in 2009. As you'll recall, there was a significant amount of acres of non-strategic white wood Timberland sales that we held for sale and we still have that available. We have good interest by a full range of potential bidders. We have institutional investors. We have high network individuals, timber companies and conservation organizations that we're working with as we talk and we're reviewing a variety of options. Again, the key thing is that we are going to move at a very deliberate pace. We're heading into a recovery period and we are going to sell only if we get values that we feel are appropriate. We'll continue to work that and we'll let you know when it happens.

Okay. Can you give an update on what your operating rates were for lumber and OSB in the fourth quarter and if you're going to have the ramp up that you discussed in the first quarter -- I'm sorry, in the first quarter if you're going to have that ramp up in production in the second quarter?

Sure. As we looked at that, we operated across our system at a roughly about 62% of our lumber capacity and roughly about 43%, 44% of our OSB capacity as we went forward. I would say, though, as we look at that we had severe weather constraints in January and February that held down our lumber production particularly in the South where we have our largest footprint and on OSB we had significant outages in our southern West Virginia OSB facility as they had historical snow levels that took them down for the equivalent of two weeks. We also had some issues with a strander at our Elkin facility, which impacted our production during the quarter as well.

Okay. Larry, can you talk a little bit about the tax credit and how that might have impacted the volume you saw early in the year and how that might impact demand towards the back half of the year?

Sure Gail. We have benefited from the tax credit. It has been differential by market. I think it was, when the President extended it toward the end of last year, we didn't really see a whole lot of impact at the end of last year or the early part of this year. It's kind of picked up a bit in February and March, but as I've said, it's differential by market. In DC and San Diego, in Houston and probably LA it had a lower kind of impact. It's helped in the Puget Sound and Phoenix and Inland Empire and Las Vegas. So I think that that's -- we're waiting to see what's going to happen as to kind of the training wheels come off. Also, the state of California has just instituted a tax credit similar to what they had last year and that goes into effect next week on May 1. So, hopefully that will give California some legs.

Okay. And last question. Dan or Patty, I appreciate we can talk about this more next month, but are there any comments that you can make about how you view your current business portfolio just in terms of any assets that you might want to keep especially as we start to see recovery kick in, and also, how you view your current debt burden and, again, I appreciate you are still evaluating this as, in terms of the reconversion?

Thanks Gail. I'll start with your second question. We are evaluating capital structure, as Patty mentioned, and that will be part of the calculus as we look forward, as we review our cash balances and, also, as we review the decision regarding future dividend policy. With respect to the portfolio of businesses that we own, we continue to believe that they are complimentary. As we've talked before, as we convert to a REIT, they all fit and we are looking forward to the earnings and the cash flow that will come from housing recovery as it will be reflected in our wood products business and in our home building business.

Okay. Thank you very much.

The next question will come from Mark Connolly of CLSA.

Thank you. One question on the home building business. Over the past year you made a number of changes in house plants to hit different price points. Can you talk a little bit about how that is playing out for you and whether the plans you made worked out the way you had hoped? How satisfied you are with what you've done so far and whether you are seeing any changes in square footage trends?

Thanks for the question, Mark. We have been pleased with the results that we've had from the redesign and the repositioning of our product in our communities. It is, obviously, as we have different value propositions, it's differential by market but generally, what I would say is the homes are smaller. They are kind of less jazzy. They're kind of less ego intensive, if you will, elements to it, and although we are continuing to learn, adjust and refine, we're pleased with how our product and new product has advanced.

Terrific. That's all I need. Thank you.

Next question.

The next question will come from Claudia Hueston of JPMorgan.

Thanks very much. Just a couple of little questions. I was curious if you can give some guidance on both the tax rate and the corporate expense and then, just with regard to the maintenance you're taking in pulp, is this pretty much it for first and second quarter? Are those the heavier maintenance months or is there more maintenance we should expect to see as the year unfolds? Thanks.

Morning Claudia. I'll take your first couple and then I'll let Tom speak to the maintenance. As it relates to the tax rate, the tax rate at little over 40% was high for the first quarter for a couple of reasons. One, first of all, with not a lot of income or loss. It swings pretty much just even on small items. Some of those small items would be, there is no benefit from the loss of our international operations. So, even though they weren't huge, they do make a big change to the rate. The other thing is as we look forward, there are a number of tax credits that are going to the tax extenders prospects, which we anticipate that they will be extended, until they are extended, we can't put them in the rate. So, it makes them higher as well. And then the other piece is state taxes. So, as you look forward toward the end of the year, I would expect that our tax rate eventually will be below the 40%, probably something closer to 38%. Although, as I've said from a GAAP perspective, we can't include the impact of those credits at this point. As it relates to corporate expense, the corporate segment is the catch-all segment for a number of things. So, you do see it more around quite a bit from quarter to quarter. But I think as we look forward, a good number for just guidance purposes would be somewhere around $10 to $15 million of expense for the quarter.

Okay. Thank you.

Related to that, we do have some outages scheduled in the second quarter. Those are mandated by both regulatory, as well as, insurance requirement and we do that to allow us to operate safely but to make sure we maintain the process of liability that we need to supply our contracted volume. Where possible, we have looked at defering and we were able to defer one of these outages until later in the year.

Okay. Thanks so much.

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

Dan, I wondered if we can start just by talking about what, I think, you've already defined as non-core businesses, things like west wood chipping and maybe some short line railroads with ocean freight rates going up, is the prognosis for being able to do something with west wood improving?

Should be improving, as you observed, rates are coming back up. We identified those assets as non-core and as we evaluate an improvement in market, we should have some greater opportunity to make some decisions.

Okay. And then if we kind of come back to Gail's question about some of the other stuff that's maybe a little closer to the forestry business, the wood product business, the distribution business, the pulp business. Just in a general term, if you're going toward become a timber REIT, doesn't having all of these other businesses kind of tacked on the side, do you view that as a potential drag on your valuation.

No, we don't. We believe that the portfolio of our core businesses, Timberlands, wood products ,cellulose and home building, make sense and we believe that the assets that will be held in the taxable REIT's subsidiary, give us the potential, as I mentioned in responding to Gail, to generate earnings and cash that will support the overall portfolio. The conversion to timber REIT supports the core strategy of our timberlands ownership in order to get it into a tax efficient ownership position. We believe that the basic portfolio is complimentary and will give us significant earnings and cash flow power as we move forward.

Finally for Tom Gideon. I want to come back to this issue of being able to bring capacity back in the short-term in businesses, like lumber and OSB, right now to take advantage of this price rally. Can you talk about how that's occurring? Where you are able to add incremental shifts or extend over time and how quickly you can flex in that respect?

Mark, you are correct. What we have fundamentally done in OSB and inside of lumber is look at additional hours where appropriate to meet demand, as well as, some shift configuration as we have gone forward. We're able to work within those kinds of constraints. The issue that we will have, and I think the entire supply chain will have, will be on the availability of raw materials. So, the underlying demand were to spike in a sudden way. So, that will be the biggest limiting factor as we look forward to Q2.

Very good. Thanks.

Next question.

The next question will come from Greg Staphos of Bank of America.

Hi guys. Good morning. Sorry for jumping on a little bit late. You might have answered these questions already. First question, within wood product is there anything else that you need to do from a structural standpoint to improve your margins, at this juncture, are we just awaiting and riding on what looks to be the recovery in housing and wood products?

I would say George we're just not waiting for the rally. We continue to do everything we can to improve our operating margins and take cost out and improve our operations. During the quarter, all of our product lines saw improvement compared to the fourth quarter. We not only improved our total operating results by $60 million, but we reduced our manufacturing cost by $43 million. Now, some of that is due to price and some of that's due to higher operating rates. A lot of it's due to how well we are operating and I would say, for example, in lumber for the hours that we ran, we had a record amount of output per hour of operation in our facilities. So, that's an example of what we are doing in terms to maximize our efficiencies. OSB, we had very high process reliability and up time rates. We are doing things to maximize our ability to produce more.

Tom, I wasn't disputing the performance that you've had already. I was trying to get at if there is any other non-linear adjustments that you can make? But it sounds like, at this juncture, it's more a process and singles and doubles as opposed to anything major. Would that be fair?

Absolutely. Again, it's getting more out of the assets that we have and, as we've talked about in previous calls, George, we have an extensive process of applying lean concepts. For example, during the first quarter we had 1,500 of our associates, or nearly 28%, that were involved in some kind of kaizen event, which was designed to either take out cost, reduce waste, reduce down time, change over's, anything that we can do to maximize return that we are getting. So, we are going to continue to do all those things, as well as, maximizing margin and operating at our highest efficiency. We continue to have our focus on reducing cost where ever we can as well.

Last question and I'll turn it over. Broadly, as we think about the potential sources of cash and how you distribute that once you ultimately convert to a REIT, we have different models that exist in the market now that we can evaluate and compare to what Weyerhaeuser might ultimately drive its model to be. Should we think about the potential distributions that occur on a regular basis for the company being more centered from, if you will, traditional timber REIT results? Obviously, Timberlands, perhaps something from wood products, or do you see the whole portfolio as potentially available to support distribution as to shareholders once you convert to REIT? Similar question. Obviously ,you have some land that is for sale, the Pacific Northwest, but on an ongoing basis should we expect that Weyerhaeuser's is in the business of perhaps marking some of the existing land holds that you have? Thanks very much.

Yes, George. This is Patty. Good morning. I think, the way that you should think about it, is the REIT is a structure to support the strategy of the total portfolio. So, as we look at how we operate the company and maximize those cash flows, we look at the total portfolio, not just individual businesses or individually the Timberlands. Now, we'll do that cash flow to make it the most tax efficient for our shareholders. But, the whole portfolio is there to support the cash flows of the company.

Okay. Thanks.

The next question will come from Mark Weintraub of Buckingham Research.

Just need one clarification on the tax rate, Patty. If you do decide to convert to a REIT, presumably that will change everything and there would be a year and adjustment? Is that correct?

That's right, Mark. When we make the final decision of the conversion, in the year of conversion, while we said that 2010 is the likely timing, there hasn't been a final decision. So, until that happens, we can't reflect it in our financial statements. But if we were to convert in 2010, we would redo the tax rate and it would be lower than the 42% that we had in the first quarter. So, all the financials and the tax rates that I spoke of are consistent with our historical C-Corp status.

This is Dan. Let me just add one comment. As you introduced your question, you said if we convert to a REIT and then we get into timing questions and I want to clarify for everybody that is on the phone, that we have made the decision that we are converting to a REIT and really the decision at this point is timing. It's not if, it's when.

I appreciate that. The second question is, in a rapid price escalation like what we're seeing in pulp and wood products, I was hoping to get a better understanding of how the prices flow through into your business? In particular, I know, for instance in fluff pulp you went out with a large increase in April and then also another increase in May. Do those have fairly immediate impact? Does it take weeks or months for it to get passed along to customers? And like wise in wood products? There was a competitor in the OSB business who was talking about the fact, a couple of days ago on their call, that the big price run that we saw starting basically in March really didn't start showing up until April for them and that the prices that is we are seeing today really show up three or four weeks down the road in the realizations that they book. Do you have a similar experience or is yours different and if you would color, fill us in both for the structural panels and lumber.

Let me take the latter part of your question first, Mark. Our overall realization, as a general rule, we'll generally lag in the market in a rapid price increase and they will be slower coming down as prices fall as well. In that lag, whether it's in lumber or whether it's in OSB, is depending on the length of our order file. Which is generally a price time of order versus price time of shipping. And then for our contracted and committed volume, we generally index at perhaps to a random length at the price time of shipment. And for our contracted volume, we have a significant portion of our lumber, as well as, our OSB volume that's under contract. So, you will typically see some level of lag as well. Similar on the pulp side, as well, is dependent where the product is going and in some cases the time of shipment in terms of when it arrived at the port versus when it's recognized. It's going to be different. But, we generally will see some type of lag, but I don't know how to characterize in terms of exact precise number of days that that would be.

Next question.

Ladies and Gentlemen, our final question will come from Chip Dillon of Credit Suisse.

Yes, thank you. Just a quick follow-up. When you do think about your model, when you look at manufacturing the lumber is much more, I would think, in plywood tied to the forest than say on one hand versus OSB and engineered wood on the other. Are we correct to assume that the lumber and the plywood is more central to the strategy than necessarily owning the OSB and engineered wood products operations?

Well, Chip our wood product business includes significant lumber operations, as well as, engineer products and panels, as well as, distribution. We look at that business. We look at each component of that business on an ongoing basis. We think that those businesses operate well together. There is certainly more tied back to the timberlands in the lumber business. But they are all products in which we can be an effective competitor and our focus is on improving the performance, not just on the wood product business, but all of our businesses to achieve top quartile cost of capital performance. The issue as to whether or not they directly tie back to Timberland ownership is really secondary, if you think about the fact that we've got these businesses in the taxable subsidiary and they each need to operate and perform.

And I might just add from a market point of view, many of our customers buy multiple product lines from us. A few are single lines. Many of them buy two, three, four different product lines. So, it's important in terms of our total offering to the marketplace.

Got you. Thank you.

We actually have a little more time. So, if we do have a few other questioners in the queue, we'd be happy to take additional.

Yes. Thank you. The next question will come from Steve Chercover of D.A. Davidson.

Thank you. I guess my first question is kind of along the lines of Mark Weintraub's. You are technically a REIT today are you not at least structurally? And therefore the timber earnings at year end will be taxed at the pass through rate as opposed to the full year?

Thanks, Steve. We are structured such that we can convert to REIT in 2010. But we have not made the conversion. So, as we sit here today, we are, for purposes of our financial reporting, a C-Corp. If, as we have said, we do look at 2010 as the most likely. But when we actually make that final decision, we will then get the favorable tax treatment for the full year of 2010. We've not paid out our earnings and profits in 2010 yet. So, that is one step that we finally would need to take to actually do the 2010 conversion. So, the Board would have to declare that dividend, because that's what it is, and then we would go through the mechanics of completing that conversion in order to complete the process for 2010.

That's why you are accruing at C-Corp rates although you are structural ready?

Yes.

Any BCAP benefits in the first quarter or will there be any going forward?

Steve, we had some very minor payments based on what we submitted prior to the suspension of the program on February 3. Other than that, as you know, the program is being under review by the USDA and we'll await the final resolution of that along with the rest of the industry which will probably, at best, be later sometime this fall.

My final question was with respect to the OSB mill in Miramichi. Did that ever, did that sale get consummated and does this spike in pricing either change the deal or provide you with a top up?

At this point in time we are still under active negotiations at Miramichi and it really doesn't change how we think about that particular operation.

Still non-core probably worth more than it was a few months ago.

We are still under negotiations with the potential acquirer.

Thank you very much.

The next question will come from Peter Ruschmeier of Barclays Capital.

Thank you and good morning. A question for Dan. I was curious how you think about the growth of the timber REIT going forward? In particular, in response to the question about using the cash flows of both the timber REIT and the TRS. Doesn't that minimize the cash available for growth capital and so does that suggest that your intention is really not necessarily to grow the assets of the REIT?

We stated in the past, Pete, that our core business is Timberland's and as such we need to position our Timberlands in a tax efficient structure. And the ownership of timber in a C-Corp has constrained our ability to grow by moving to a REIT structure, it opens up opportunities for us to be, not only a more tax efficient owner, but also positions us to be able to grow the asset. As Patty said in her remarks, we look at the cash generation from the business on an overall basis, and so we will focus on opportunities as they emerge where we can be an effective operator earning, as I mentioned before, cost of capital return and we believe that we have the potential to glow the timber asset and that is one of the key reasons that we are making the conversion.

That's helpful. Just a quick business question I guess, operating question for Tom Gideon on the markets? I was curious how you think trade flows for logs and lumber between Russia and China are changing, if at all, and how you think about that in the context of what you expect for log demand and lumber demand from BC and the Pacific Northwest? Are you seeing any evidence of change in trade flows?

Well, Pete, we still have a good export market on the log side first. We see it growing and movement of what had been traditionally some Douglas fir domestic wood that is going into China. As that market continues to absorb more production. As we look at that, we do see that they are testing their net somewhat (inaudible). We expect that they'll actually look beyond just the West and actually look into Russia for additional wood supply, log supply as the year continues. On lumber our primary flow, for us, is going into Japan with some limited amount going into China and Korea and Japan still remains a very strong market for us.

Okay. And any changes that you are seeing in trade flows from BC into the Pacific Northwest and into that region? I mean with the Pine Beetle and other factors?

As we look at that, as you are aware, with the recent movement in pricing that there will be a reduction in the SLA tax that will be attributed to wood coming down from Canada and that will, obviously, have some impact on the market flows going forward.

Very good. Thanks very much, guys.

Ladies and gentlemen, we have time for one final question and that question will come from Richard Skidmore of Goldman Sachs.

Good morning. A quick question for Tom and then a question for Larry. First, Tom. The volume numbers that you gave for lumber OSB, were those quarterly changes or year-over-year changes that you have referred to in terms of the second quarter?

Those would have been quarterly changes.

Thank you. Larry, as you look at the expiration of the home buyer tax credit occurring tomorrow, how do you think that that might impact either traffic or housing, as you see it might play out here in the next couple of quarters or over the next six to 12 months? I think it will be differential by market. As I mentioned earlier, Richard. I think some of our markets had less impact from a tax credit. We hope to see some renewed interest in California, given the California credit that starts on May 1. But, I think, generally and this is the question. Generally, customers realize this is a good time to buy a home. If you have good affordability. You have low interest rate. So, really gets back to the question about their kind of confidence. Do I have a job. Do I feel good about that. So, we are hopeful that this will have some legs to it.

Thank you.

At this time, I would turn the conference back over to Dan Fulton for any final comments.

Thank you. As we close out the call, let me summarize for everyone on the phone our key themes for the quarter. First, those single family starts are up significantly from one year ago. The pace of continued recovery remains uncertain and continues to cause us to be cautious. Our word for this morning was wobbly. Larry described the expiration of the federal tax credits as taking the training wheels off and if you can create a picture in your mind of training wheels coming off a small bike and a young child on a two wheeler, that's the theme. It's a little bit wobbly coming through this period. Fundamentally, we need job growth to drive a sustain recovery. Second theme, is that even at current low levels, operating results were greatly improved from the prior quarter due to improved market conditions. But, importantly, due to the changes that we've made in the way we operate our businesses and we'll continue to focus on improving all of our businesses in order to achieve top quartile cost of capital performance. Third, Patty summarized our second quarter outlook for each business segment, including improvement in wood products and cellulose fibers, comparable performance in ReCo and somewhat lower results in Timberland's. Finally, we continued to move down the path of REIT conversion to support our core Timberland strategy. I would like to thank everybody for joining us this morning. As usual, Kathy will be available later today to follow-up with any of you that have questions or comments and we look forward seeing many of you next month in New York. Thanks very much.

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