威爾豪瑟 (WY) 2010 Q3 法說會逐字稿

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser third quarter earnings 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 would now like to introduce Kathryn McAuley, Vice President of Investor Relations. Ms. McAuley, you may begin your conference.

Good morning. Thank you for joining us on Weyerhaeuser's third quarter 2010 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations. This call is being webcast at www.weyerhaeuser.com. The earnings release and material for this call can be found at our website, or by contacting April Meier at 253-924-2937.

Please review the warning statements in our press release, and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this call. Joining me this morning are Dan Fulton, President and Chief Executive Officer, and Patty Bedient, Executive Vice President and Chief Financial Officer.

Today, Weyerhaeuser reported net earnings of $1.116 billion for the third quarter, or $3.50 per diluted share, on net sales of $1.7 billion. This compares with essentially break-even results on net sales of $1.4 billion for the same period last year. In the second quarter of 2010, Weyerhaeuser reported net earnings of $14 million, or $0.07 per diluted share, on net sales of $1.8 billion.

Earnings for the third quarter included $1.035 billion from income tax adjustments primarily related to the reversal of deferred taxes as a result of Weyerhaeuser's conversion to a REIT. Excluding the income tax adjustment, Weyerhaeuser reported Q3 net earnings of $81 million, or $0.25 per diluted share, a $137 million increase compared with last year's third quarter.

On our website, we provide an earnings information package, which includes a GAAP reconciliation of special items. You will notice that we have added new information to this package. We hope you find this information useful.

We begin our discussion this morning with a review of chart four, the waterfall chart, in the earnings information package. A discussion of each business covering charts five through ten will then follow.

Turning to chart four, changes in contribution to earnings by segment. Weyerhaeuser's segment earnings from the second quarter of 2010 to the third quarter were as follows, beginning with the first bar on the left-hand side of the page. In the second quarter, Weyerhaeuser earned $168 million before special items, interest and taxes. Timberlands ended Q3 with earnings $5 million higher than in Q2. Wood Products' earnings were $89 million lower than in the second quarter. Cellulose Fibers contributed $107 million more to earnings in the third quarter. Earnings from real estate were $7 million lower than second quarter, and corporate and other contributed $2 million more in Q3. The final bar to the right of the page is Weyerhaeuser's third quarter earnings of $186 million before special items, interest and taxes.

Turning next to the business segments, we begin discussion with Timberlands, charts five and six. Timberlands contributed $75 million to pretax earnings in Q3, $5 million more than in Q2. The Q3 disposition of non-strategic Timberlands was $34 million pretax compared to $14 million pretax in Q2. This increase was partially offset by lower log price realizations, as illustrated on chart six. Log prices in the west declined 7%, export sales realizations were down 5% due to mix. Log prices in the south were flat.

Chart six shows fee harvest volumes in the west and south. The fee harvest was seasonally stronger in the third quarter. Western harvest volume rose a modest 3%. Southern volume increased 10%. Year-to-date, the western harvest is down 18%, and the south is down 15% from last year. Harvest deferrals continue. Spending for roads and silviculture was seasonally higher. Silviculture spending, including a catch-up from activities deferred as a result of poor weather earlier this year.

Turning next to Wood Products, charts seven and eight, market conditions rapidly deteriorated at the end of second quarter, and difficult markets persisted in Q3. Wood Products lost $100 million, $89 million worse than the Q2 loss, before special items of $11 million. As indicated on chart eight, lumber prices declined 18%, or $61 per 1,000 board feet, and OSB prices plummeted 30% or $81 per 1,000 square feet. Engineered wood products' prices increased slightly, but engineered i-joist shipments fell 24%. The Wood Products business reduced working capital by $54 million during Q3, and ended the quarter at cash break-even.

Turning to Cellulose Fibers, chart nine. In third quarter, Cellulose Fibers on a pretax basis earned $181 million, contributing $107 million more to earnings than in second quarter. During the quarter, pulp prices reached a 15-year peak. Pulp price realizations increased by $70 per ton, 8% higher than in Q2. Pulp sales volumes increased 8% in the quarter. There were no maintenance outages in Q3, resulting in $30 million less of maintenance spending, and an improvement in productivity. There had been three maintenance outages in second quarter.

Real estate, chart 10. In third quarter, real estate contributed $20 million to pretax earnings, including income from partnerships. This contribution from real estate was $7 million lower in the third quarter from the second quarter. The volume of single-family homes closed declined 20% from 625 closings to 501 closings. However, due to mix, average prices improved 8%, and gross margins modestly increased.

Land and lot sales were fewer in the quarter. Land and lot sales were $4 million in Q3 versus $13 million in Q2. The backlog of homes sold but not closed declined in the quarter, and stands at 660 units. The cancellation rate edged down 20% from 22%.

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

Thanks, Kathy, and good morning to everyone who is joining us today. I'm pleased to provide my comments this morning on our quarterly results, as well as a review of current market conditions. We have some good news to share regarding the record performance of our Cellulose Fibers business, and the ability of our real estate business to produce its third consecutive profitable quarter in a very weak market. However, we continue to face challenging market conditions for Wood Products, which requires our continued focus on improving the performance of this business.

Before I comment on market conditions and our financial performance, I want to talk about the management changes we announced on October 1. Leadership is a critical element of business success. The changes I've recently made will accelerate our rate of improvement, and our overall competitiveness. First, I have eliminated the role of Executive Vice President for Forest Products, and the leaders of each of our four major business segments now report directly to me, increasing my direct involvement in our operations.

Our most important asset is our Timberlands, and that is why I have placed Tom Gideon in our Timberlands lead role. Tom has deep experience in Timberlands' management, having previously led the business. I expect Tom to apply his broad set of experiences to managing our core Timberlands asset in our new structure for the benefit of our shareholders.

Wood Products has been our greatest challenge during the housing recession, and I've asked Larry Burrows to lead this business. Larry has been leading our real estate business since April of 2008. The last three years have been the most challenging period WRECO has ever experienced. During this difficult time, Larry provided strong leadership, as WRECO repositioned land and product, reduced construction costs, and significantly reduced SG&A.

These changes, and strong local leadership, resulted in WRECO returning to profitability this year, outperforming much of the industry. I expect Larry to apply his strong operating skills, his intimate knowledge of the housing market and the home building industry to improve profitability in our Wood Products segment.

With Larry moving to the Wood Products business, I've chosen Peter Orser to lead WRECO. Peter most recently has been the President of WRECO's Puget Sound based subsidiary, Quadrant Homes. Under Peter's leadership, Quadrant became the largest home builder in the Pacific Northwest through its focus on manufacturing efficiency and profitably serving the needs of entry-level buyers. Our Cellulose Fibers business segment continues to be ably led by Shaker Chandrasekaran.

As an introduction to the market conditions affecting our Company, I will remind you that three of our major businesses, Timberlands, Wood Products and real estate, continue to be impacted by conditions in the US housing market, which are very challenging. We commented in this morning's release that the direction of the housing market remains uncertain. On our second quarter call, we noted that the improved momentum that began last year, and carried through the first quarter, suddenly turned negative following the expiration of the housing tax credit at the end of April.

These negative housing trends continue, as evidenced by our own third quarter performance metrics compared with the third quarter one year ago. In WRECO, our quarterly new home sales declined 30%. In our Wood Products business, sales of our TJI Joists, which primary are used in new construction, decreased 28%. And in our Timberlands business, combined external and internal domestic log sales volume was 9% lower, with export volumes helping to partially cushion the full impact of the drop in domestic demand.

Housing fundamentals remain weak as we enter the final quarter of the year, when construction activity is normally lower. This is a result of a lack of job recovery, low consumer confidence, stagnant home prices, the overhang of known and shadow inventory, and this week's front page story, the growing uncertainty related to home foreclosures. New single-family starts for September were 452,000 on a seasonally adjusted basis, a slight improvement from the low levels of the summer, but unfortunately well below the 600,000 level that we assumed as we entered 2010.

So let's discuss how these housing dynamics played out for us in the third quarter. Starting with our biggest challenge, Wood Products, we expected a significantly larger loss in the third quarter as compared with the second quarter because of rapidly deteriorating prices. Unfortunately, this is how the quarter played out.

Comparing quarter-over-quarter segment results for Wood Products, 90% of the decrease in contribution was the result of price decline, with lumber and OSB realizations dropping significantly from their second quarter peaks. On balance, quarter-over-quarter sales volume also suffered somewhat, with lumber and OSB volumes roughly flat, while engineered wood product volumes were dramatically reduced.

Despite these headwinds in the US, our three Canadian lumber mills ran at over 90% of capacity during the quarter, performing well, aided by lower log costs, good operating metrics and improved export sales. Timing and pace of housing recovery are still not evident, so we continue to match our production capacity with demand. During the quarter, we closed our Albany, Oregon, engineered lumber mill. We reduced the size of our sales and marketing staff by consolidating sales regions.

We're dealing with costs for a number of closed and underutilized wood product facilities, especially in our OSB and engineered Wood Products businesses. Currently, 30% of our total OSB capacity is indefinitely curtailed. 19% of our I-joist capacity, and 45% of our engineered solid section capacity is shut down. Even with this level of indefinitely closed facilities, operating rates at the remaining mills were low. And given the slow pace of housing recovery, we will be taking further action in the fourth quarter.

In our Timberlands business, as a result of continued softness in housing demand, we continued to defer harvest in both the west and the south in order to optimize longer term values. Year-to-date, harvest volumes in both regions are down approximately 16%, and compared with 2008, they're down 42%. Looking forward as supply becomes constrained, and demand and prices improve, we have the ability to increase our harvest.

In addition to revenues from log sales, and energy and minerals related income from our lands, we continue to see potential to generate additional revenues in the future, as markets develop for biomass once we have some clarity around US climate and energy policies.

Our real estate segment was one of the bright spots in the quarter. Though we expected break-even results, we turned a profit for the third consecutive quarter. Closings were lower quarter-over-quarter, while average prices increased due to mix, and we remained profitable. Margins were slightly higher, the result of our continued actions, which include repositioning product and managing costs.

Activity across our WRECO markets is mixed. California's Inland Empire, Los Angeles, Phoenix and Las Vegas markets are operating at low rates, and are extremely competitive. After outperforming the country for the last couple of years, Houston has started to move downward. And in the Puget Sound area, most communities are slow with the exception of those located near military installations.

On the positive side, in San Diego and the Washington, DC suburbs, activity is relatively strong. Winchester's Poplar Run project in Silver Spring, Maryland just opened its news models two weekends ago, attracting over 1,000 shoppers, evidence that there is still a market for well-designed homes in an attractive community where employment is improving.

I'll complete my remarks on business performance with a discussion of our one segment that is not tied to the US housing market, and that is Cellulose Fibers. This business is affected by global macroeconomic conditions, foreign exchange rates, and the strength of demand for our differentiated Cellulose Fibers products, especially absorbent fluff pulp from the US south.

We expected earnings from this sector to be substantially higher than the second quarter, and as reported in our release this morning, Cellulose Fibers turned in a record performance for the quarter, due to higher prices, lower maintenance costs, and strong operating performance by all of our mills. Our key customers are all growing, especially in emerging global markets, and they acknowledge their reliance on our products to meet their growth opportunities.

In addition to the record performance in our pulp mills, segment earnings were enhanced by continued strong profitability from our liquid packaging business. We certainly benefited from continued pulp price improvement over the past six quarters, and we've coupled that with steady improvement and safe, reliable operations across the entire business system, manufacturing as well as sales. I want to recognize Shaker and his team for this record performance.

Before turning the call over to Patty, I want to comment on one other significant accomplishment during the quarter. Though it may already seem to be old news, I'm pleased to report that our special dividend payment was completed on September 1. Our conversion to a REIT structure supports our strategy to enhance the competitiveness of our core Timberlands business, increasing cash flow available for distribution to our shareholders. This transaction was unprecedented in terms of size and complexity, given the historic nature of our Timberland assets, and I want to thank the entire Weyerhaeuser team who managed the process to a successful conclusion. I'm looking forward to sharing our ongoing dividend decision in December, following action by our Board.

And now I would like to turn the call to Patty, who will provide fourth quarter outlook and financial comments.

Thanks, Dan, and good morning, everybody. I'll start the outlook with Timberlands, and my comments are summarized on chart 11. In the west, our export and domestic log volumes and realizations are expected to decrease in the fourth quarter compared to the third. In the south, grade log realizations are projected to be flat to slightly lower compared to the third quarter. Fee harvest volumes in both the west and south are scheduled to decline seasonally. Costs should increase slightly, as a result of catching up on silvicultural spending in the south. Excluding the effect of non-strategic land sales, earnings in our Timberlands segment are anticipated to be lower in the fourth quarter compared to the third.

Wood Products' average sales realizations and sales volumes will likely decrease across all our major product lines in the fourth quarter. Log costs are expected to decrease somewhat, which will offset some of the decline in revenue. The seasonally slow nature of the fourth quarter, combined with lackluster housing demand, will likely lead to increased down time as we match production with demand.

In addition, we are reviewing our capacity plan across the system, including operations that are now indefinitely curtailed. As a result of this review, we may make decisions that could lead to additional impairments to facilities in the fourth quarter. Before the effect of any impairments, we anticipate the fourth quarter loss to be comparable to the third quarter.

In Cellulose Fibers, we expect average sales realizations to soften somewhat compared to the third quarter, although demand continues to be strong. We have a short scheduled annual maintenance shutdown at one of our facilities, so we will incur increased maintenance, and somewhat lower production relative to the third quarter, when we had no maintenance shutdown. Overall, we anticipate fourth quarter earnings on our cellulose fiber segment to be very strong, although lower than the record earnings of the third quarter.

Dan has already described the challenging market conditions facing our real estate business. Traditionally, the fourth quarter is the strongest quarter of the year for home closings. While we do expect to close approximately 100 more homes in Q4 compared to Q3, the number will likely be fewer than the 625 homes closed during Q2, which was aided by the housing tax credit. We expect margins to moderate somewhat in the fourth quarter compared to the third. And we don't anticipate any significant land or lot sales in the fourth quarter. Overall, earnings in our real estate segment are expected to be lower in the fourth quarter compared to the third. In addition, our backlog will likely decline during the fourth quarter from the already low level of 660 homes at the end of the third quarter.

As Dan mentioned, I will review some of the changes to the third quarter as a result of our special dividend, and our conversion to a real estate investment trust, or REIT, structure. On September 1, we made a special distribution to our shareholders. This distribution accomplished the payout of our accumulated earnings and profits, which was the last critical milestone to enable our conversion to a REIT. This payout was made by distributing $560 million of cash, and approximately 324 million new shares.

To help you understand the reporting implications of the dividend, we have included a couple of additional charts in the packet. Chart 12 lays out the reconciliation of the changes in our share count as of the end of the third quarter, as well as the computation of the weighted average shares outstanding used for the calculation of our earnings per share. Accounting rules don't allow for retroactive restatement of the historical EPS for the new shares issued in the dividend. On chart 13, we have provided the pro forma EPS, as if the shares issued in the special dividend had been outstanding for all of the periods presented. Looking forward, we anticipate using approximately 537 million shares for the EPS calculation in the fourth quarter.

As a result of REIT conversion, we also made a number of tax adjustments in the third quarter. These are illustrated on chart 14. Our effective tax rate for the year is estimated to be approximately 18.5%. Applying this rate to our third quarter earnings before taxes of $91 million, we have a tax provision of $17 million for the third quarter. The year-to-date benefit from the true-up of the tax rate for the first and second quarters is approximately $7 million.

We also have an adjustment during the quarter for the reversal of the deferred tax liability associated with our book tax basis differences in our Timberland, of approximately $1.043 billion and a charge of $8 million primarily as a result of Medicare Part D plan changes. These adjustments net to the $1.025 billion benefit as shown as our third quarter tax benefit.

While we're on the topic of taxes, I would like to comment on the effect of the recent IRS clarification regarding the cellulosic biofuel producers tax credit. Earlier this year, the IRS released a memo, which allows black liquor to qualify for this credit once companies are registered with the IRS. We received our registration in the third quarter. On October 5 of this year, the IRS provided guidance allowing black liquor to qualify for both the biofuel producers tax credit, and the alternative fuel mixture credit in the same year but not on the same gallons of fuel.

During 2009, we produced 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals approximately $240 million of potential cellulosic biofuel credit at $1.01 per gallon, or $149 million net of tax. We anticipate recognizing this credit in the fourth quarter. Since this credit offsets income tax liability, we will carry the credit forward.

At the end of the third quarter, we had nearly $1.37 billion in cash. This is a decrease of approximately $480 million from the end of the second quarter, primarily as a result of the special dividend of $560 million. We have included a full cash flow statement in the materials that we released this morning. Capital expenditures for Weyerhaeuser Company for the first three quarters of this year are just under $150 million. For the full year, we expect net capital expenditures to be just over $200 million. We continue to have strong liquidity with minimal near term debt maturities, and no borrowings outstanding under our $1 billion line of credit.

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

Thanks, Patty. Given the weakness we're seeing in today's housing market, we will continue to take aggressive actions across the Company to reduce costs and improve profitability. In WRECO, we'll continue to adjust product offerings, we'll adjust pricing as dictated by market competition, we'll continue to seek opportunities to reduce construction and operating costs, and we will continue to review and adjust our land and lot positions as necessary.

In Timberlands, we'll continue to seek opportunities to increase revenues by leveraging our experience and relationships in export markets. We'll carefully manage costs, adjust harvest levels, and exploit revenue opportunities from our mineral rights, as well as emerging markets for biomass.

In our Wood Products business, we're committed to improving profitability at today's level of housing starts. We need to improve margins using all available levers, by enhancing revenues, reducing operating costs and adjusting capacity. In our Cellulose Fibers business, we'll continue to focus on operational improvements as we serve the needs of our key customers, as they take advantage of global growth, especially in emerging markets.

In sum, we're committed to improving our performance at today's level of demand, and with our scale, we'll be prepared to take advantage of an economic recovery when it comes.

And now I would like to ask Kathy to open the call to your questions. Kathy?

Thanks, Dan. Nicole, could you please give instructions for questions?

(Operator Instructions) Your first question comes from the line of Peter Ruschmeier with Barclays Capital.

Thank you. Good morning.

Good morning, Pete.

I appreciate all of the details in your slides. I think the extra disclosures are helpful. And I wanted to ask on your fee harvest for 2010, roughly how much would you characterize to be saw timber versus pulp wood and how does that compare to a more normalized harvest?

Saw timber in the West is roughly 90%, Pete, and 65% in the South. There has been a bit of a shift towards fiber, especially in the South. But no significant change beyond that.

Okay. And, Dan, on your mineral rights strategy, can you remind us how you're thinking about the strategy for the business and what kind of earnings or cash flow have you been generating in that business and how do you think about it going forward?

We have approximately seven million acres of mineral rights, so we have mineral rights on land that we own as well as land that we have sold in the past where we've retained the mineral rights. The way we manage that is we have our own minerals group. We generally are entering into operating leases with those that are exploring and exploiting the resource, whether it's gravel, oil or gas. Those would be the primary resources that would come off of our land. Generally those leases are entered into. We receive an up front lease payment that ends up being amortized over a period of time and then we have the ability to collect royalties if they are successful.

Over the last several years, our minerals earnings have been running roughly in the $50 million a year range. In the quarter just completed, minerals earnings were just a shade under $15 million. The opportunities that we have are to continue to exploit the resources that we have on the lands that we have under our control. In addition to the existing materials, we also have that group managing some of the newer resources which would include wind and geothermal energy. The most significant resource that we have in the minerals group is in Louisiana where we have land that's part of the Haynesville Shale Play and though prices are down a bit in natural gas, we continue to generate good earnings and the operators that are operating under leases seem to be having some success. So we're optimistic about being able to maintain and grow that over time.

Thanks very much. I'll turn it over.

Next question.

Your next question comes from the line of Gail Glazerman with UBS.

Good morning. Dan, can you give me a little bit more color on the Timberland you sold in this quarter? Is that part of the 88,000 you've been marketing in the West?

It is not the 88,000 that we have been marketing, Gail. We had several sales during the quarter. The most significant was a property that we call Copper Creek, which is located in the western Oregon region. That was a sale of about 12,500 acres. It was non-strategic for our purposes. Roughly 65% Doug Fir, 35% Hemlock. It was lower value land in terms of what we would like to see long-term in our portfolio. And it was sold at a price that we felt was very competitive.

With respect to the property you refer to that we call Willapa, which is the 80,000 plus acres that we have been marketing on the West Coast of Washington, we have had a wide variety of interest from, quite frankly, a wide range of buyer types. We are in active discussions and we are optimistic that we may be seeing values that would cause us to transact that sale, although I wouldn't expect anything to happen until early 2011.

Okay. Can you give a quick update on asset sales outside of Timberland? I guess you sold Cosmopolis, an update on the railroads and any other assets that could be on the market.

Sure. As you noted, we did sell Cosmopolis. That is a dissolving pulp facility that has been shut down for a number of years. We found a good buyer and we're pleased that they're going to be able to reopen that facility and create some employment in a town that really needs it. We do have a transaction on our railroads that we are in the midst of. It's subject to Federal approval and we hope to receive that approval before year end.

In addition to those, we have a number of non-strategic assets that we identify over time that we seek opportunities to monetize. We are engaged in some discussions at this point evaluating strategic alternatives for our hard woods business which is a small niche business that reports up through our Wood Products segment, but that is just a process that we're going through right now and evaluating alternatives.

Okay. And just last question, in terms of the Wood Products business, can you talk a little bit more about what you can do there? Is this all about just shrinking the footprint or do you think there are other things you can do to improve results?

Improving the results in our Wood Products business is our highest internal priority right now. As I mentioned in my remarks, we are looking at all levers that we have, improving revenues, reducing operating costs both in the mills as well as SG&A. And then we are taking a very hard look at our capacity.

As I mentioned in my remarks, we already have a significant amount of capacity that is indefinitely curtailed. But of those mills that are still operating, they're operating at generally low levels. And so you should expect to see some activity in the fourth quarter related to capacity which would position us to be more profitable in the current market. Because even for these facilities that are shut down, there is operating costs associated with just maintaining them and for security purposes and maintaining the equipment. So it's a full court press in that business. And I'm confident that Larry Burrows taking a fresh look at it and taking a very strong handoff from Tom Gideon will produce some results.

Okay. Thank you.

Next question?

Your next question comes from the line of Christopher Chun with Deutsche Bank.

Thanks. Good morning, guys.

Good morning.

Just following up on the last question regarding Wood Products, can you talk a little bit more about what is the magnitude of the cost cutting opportunities might be and what kind of year-over-year improvements we might see if markets fail to improve next year?

I can't give you specifics, Chris. We have over the last two years been focused on this business. We've taken out a lot of manufacturing costs. As I mentioned, we have indefinitely curtailed a significant number of facilities. But at today's anemic level of housing starts, we still have too much capacity.

As we entered this year, early in the year you may recall that we were anticipating single family starts at a level of about 600,000. We're falling well below that. As we move towards 2011, we commented this morning as we talked about WRECO that WRECO is entering 2011 with a low backlog. I think WRECO is representative of other large home builders in the US. I would expect that the entire home building community will be moving into 2011 with a lower backlog than they entered 2010 with.

And so given the nature of low level of backlog at the beginning of the year, we're anticipating that 2011 will be another very challenging year and so we are sizing our activities to address today's level of demand and not counting on that improvement in 2010. And I would say that's a significant change year-over-year in the way we were looking at that business. We had anticipated recovery. We started to see it in the first quarter. It collapsed after the end of April. We believe long-term that single family housing starts will return to trend levels, but it is going to be a slow climb out of where we are today. So we're addressing that in the Wood Products business.

Are you operating under the assumption that we're going to have another 600,000 type year next year, or do you see at least modest improvement at this point?

We don't have a forecast yet for next year. We generate our own forecast, but we look at that of others. We'll share that later in the year when we have another opportunity as we get closer to 2011. We are planning for flat activity year-over-year and hope to be pleasantly surprised with recovery.

Patty, can you tell us about what percentage of Timberland earnings are requalifying earnings?

Well, if you think about our Timberland earnings, probably the way to think about it is what we've generated so far for the first three quarters. So I think our overall Timberlands segment earnings are about $225 million for the first nine months. And our qualified earnings are just over $70 million-ish.

So how do you get from that number to the $70 million? You first have to back out the non-strategic land sales which are about $80 million for the first three quarters. And then you would also have to back out the mineral income, which is down in the TRS, which Dan just mentioned is about $15 million a quarter. So that would be $45 million year-to-date. And then we do have some additional SG&A that we do have to charge to the REIT structure, which is about $10 million to $15 million a quarter. So let's call that $10 million a quarter. So that would be $30 million. So if you back out, take the $225 million, back out the $80 million, back out the $45 million, back out the $30 million, you get around to the $70 million number.

Great, and a final question, if I might, you mentioned that 2010 CapEx is looking like just over $200 million. Do you view that as a sustainable level or should we expect that to go up in the coming year?

Well, it will probably go up modestly in 2011. We haven't set those numbers as we sit here today. But I would say that somewhere in the $200 million, $250 million-ish range.

Thanks for your help.

Yes.

Next question.

Your next question comes from the line of Chip Dillon with Credit Suisse.

Yes. Good morning.

Hi, Chip.

Looking at the results, I was actually quite surprised and encouraged by how strong the cellulose segment came in. It seemed to be a lot better than I think we were looking for, although maybe I missed a black liquor credit or something in there. Was that $180 million the actual number?

No. There was --

No. That number is -- doesn't have any black liquor credit it in, Chip. That segment performed very well during the quarter. All the mills ran very well. We didn't have, as we had said, any maintenance downtime. But we took no black liquor credit for that segment in the third quarter. And you might recall that last year, of course, we did have black liquor in the third quarter. And if you compare year-over-year, even with black liquor in the earnings for last year, the earnings this year are greater than a year ago third quarter.

I've got you. And as you think about looking ahead, you've seen Proctor & Gamble come out with a very thin diaper that might now finally be getting some traction, the Dry Max. And of course that diaper doesn't include hardly any, if any, fluff pulp. And as you think about that business, which has been very strong, are you concerned about a further thinning of the diapers, if you will, across the marketplace where fluff pulp might not be used in that product? And obviously there are some offsets, I guess, with adult incontinence and other products. But any early read on how you see the demand side there for fluff?

Chip, I would say that we work very closely with P&G as one of our largest customers. And as we look at their demand and the demand for fluff overall, it continues to be a very growing market. And not only just a strong market this year, but as we look forward in demand. So I think we're very pleased with the outlook that we hear from P&G as well as our other customers in that business.

Okay. And I might have just missed this with the other call at the same time. But do you have a view sort of how we should roughly look at the maintenance schedule since I know it can make the numbers kind of lumpy in the segment as we look out at the fourth quarter and then maybe the first or through the four quarters of 2011, sort of when will you take a lot of maintenance and when will you take a little and I guess the third you don't take any at all?

Well, those maintenance shuts are scheduled on an annual basis. And this year we had two in the first quarter, three in the second quarter, none in the third. And as I mentioned, we have one now in the fourth. We plan those annual maintenance around when we need to do things like boiler inspections or put in additional capital plans. So we have not set that schedule and communicated the schedule for 2011. But I wouldn't see that it would be terribly different from what you saw in 2010.

Thank you.

Next question.

Your next question comes from the line of Mark Weintraub with Buckingham Research.

Thank you. Just following up a little bit more on the Cellulose Fibers business. You gave us the pricing being up $70 and I think you had indicated that the maintenance down time had been about $30 million in the second quarter. So if I add those, the impact from those two, I get somewhere between $65 million and $70 million of improvement. And you got $107 million. And is that all from the mills just running better which then would kind of be -- the question is, what is the third quarter truly exceptional or were the mills just not really running as well perhaps as they could have been in prior quarters?

I think the primary difference quarter-over-quarter, Mark, is the lack of maintenance down time. These mills have been running well. And so the third quarter happened to be a time when we didn't have any scheduled shutdowns. They all ran full. And as you note, we got the benefit of price improvements. So it was an across the board accomplishment of just great operations.

I think also, Mark, the $30 million that Kathy gave you for the quarter is maintenance spend and it doesn't account for the fact of the downtime that happened in the second quarter.

Okay. Okay. And so do you have a sense as to how much that the downtime cost? And perhaps another way to come at it, it seems like -- would it be fair to say you roughly took half your annual maintenance downtime in the second quarter? And so roughly how much is full year annual maintenance spend/downtime? How much does that cost the Company typically in a given year?

I think your assumption about roughly half in the second quarter is correct. As Patty said, we had downtime in the two mills in the first quarter, three in the second quarter. We've got one coming up in the fourth quarter. I don't have the numbers that you're asking for specifically. But we can get back to you.

Yes. Some other things in the quarter, Mark, was we had somewhat lower fiber costs, lower chemical costs. And as I said, the productivity impact from just not having those mills down were really the primary reasons for the improved performance of third over second quarter.

Okay. And just switching gears to building products, with prices having been falling during the quarter, I imagine that makes it very difficult for the distribution business, because effectively they're chasing the price down. Was there -- were there significant losses in building products distribution tied to that?

Yes. That's part of the overall loss, you're right. There is -- we have a distribution business that primarily services our engineered wood products and OSB. So as products flow through that system, as prices are moving as quickly as they have been, we incur additional loss. Plus there is some -- there is loss in that business that is associated with low utilization. At the level of activity that we're at today, not only do we have underutilized manufacturing facilities, but our distribution system is underutilized. And all of that increases your operating cost.

Okay. And then one last real quick one, pension contributions year-to-date, I think we're running about $190 million. So that's roughly $60 million, a little bit more than that per quarter. Is that a kind of decent number on a go forward, or do you expect that is going to change significantly in the year ahead?

Sure, Mark. As you think about our pension plans, we have the largest plans are in the US but we do have a number of Canadian plans as well. As you look at the US plans, we don't expect to have to make any contributions to those in 2011. The Canadian plans don't all have annual valuations. Some of them are done on a triannual basis. We do have a larger number of them that will need valuations this year. And we will likely need to make contribution to the Canadian plan in 2011. We would expect that when we add them all together. And we're doing those valuations beginning that process as we speak, so I don't have exact numbers for you. But I would expect that that could be up to $100 million for all the Canadian plans, but nothing anticipated for the US plan.

Okay. I appreciate it. Thank you.

Yes.

Next question.

Your next question comes from the line of Rick Skidmore with Goldman Sachs.

Good morning. Thank you. Dan, maybe just on the Wood Products business for a moment, you talked about some closures in the fourth quarter. Are those likely to be temporary type of closures or indefinite closures?

I can't comment specifically today, Rick. As I mentioned, we already have a number of facilities that are indefinitely closed. We have our operating facilities that have various levels of utilization. And so we're looking at the entire system and we'll be taking some action. But I can't comment whether it would be temporary or permanent closures. We are taking shift down time in a number of our facilities based upon today's level of demand as we have throughout the year.

And can you quantify, Dan, how much the indefinite closures actually cost you in a quarter?

I can, but I don't have that number today. But we can get back to you. We have closure costs where we provide security. We have, when a mill is closed, we have some on-site people for some low levels of maintenance and security. And we have depreciation that is related to those mills. All of that runs through our P&L.

I guess the question that I'm ultimately trying to get at is as you look at your sort of thought on the US housing recovery being a gradual grind higher from here over the next number of years, if there is not a need to maybe take more permanent closures and take off some of those expenses that you're incurring each quarter.

And, Rick, that is something that we are looking at as a part of this review. We don't have any decisions to share with you this morning. I think a way to think about that cost is -- and it's differential, but it's probably in the neighborhood of $5 million to $10 million a quarter.

Okay. And then one last question. Big picture. Dan, as you go to the Board here in the next month or two talking about the dividend, can you just frame how you're thinking about that and some of the things that you're considering as you thinking about setting or proposing what the dividend should be as you go forward?

Absolutely. Our Board's intent is to set a dividend that is sustainable and one that we can grow over time. In considering the appropriate level of that dividend, we start by looking at the overall macroeconomic climate. We have an evaluation of our own forecast for earnings over the next several years. We are looking at the level of dividend paid by other timber REITs. We're taking into consideration an appropriate capital structure for the Company, including appropriate level of debt, the need to maintain access to capital markets and have appropriate liquidity as we go forward. And then longer term, we need to plan for growing the business, especially the core asset of our Timberlands. So all of that becomes part of the calculus for determining what we believe is an appropriate level and, as I said, we'll be communicating that once the Board makes a decision in December.

Great. Thank you.

Next question.

Your next question comes from Steve Chercover with DA Davidson.

Thank you. Good morning, everyone. My three quick questions are all based on Cellulose Fibers. First of all, with respect to Cosmopolis, I assume that there is a non-compete clause. They will not be doing anything that's in grades that you're active in.

Yes, that is a dissolving pulp mill and it does not compete with any of our pulp grades.

Then could you characterize your 1.7 million tons of capacity, how much is commodity, how much is fluff and then what volume do you have that's in higher end products?

We have five pulp mills. Four in the US South and one in Grand Prairie, Alberta. The mills in the South primarily produce absorbent fluff. Our Grand Prairie mill produces NBSK. And we have a facts book where we publish actually the capacity for each of these mills that gets you up to that $1.7 million capacity level. Fundamentally, the US South product is heavily focused to what we would consider to be specialty pulp. It's going to these large customers that are using it for absorbent products like diapers, feminine hygiene, adult incontinence.

Roughly -- if you think about our pulp business and the markets that we serve, roughly one-third is North America, one-third Asia, one-third Europe. Those percentages shift a little bit over time, but the business gives us great exposure to global growth and especially what we're seeing from our customers is that they have significant growth opportunities in emerging markets. The one consistent theme that we hear from our customers in the pulp business is that they are growing. They need our product. And so we're really pleased with the performance, but also the outlook for that business.

Great. And I did think it was absorbent. So there is quite a bit of capacity coming on stream. Do you believe that the demand is sufficient to absorb that capacity, no pun intended?

Yes. Long-term -- I love the pun. Long-term very confident of the need for that capacity. When it comes online -- you know, you're referring to a couple of conversions. So we have Alabama Pine and also the Domtar-Plymouth mill that are converting to fluff. That will create in the short-term some new supply. And so there may be a short-term disruption in the market. But long-term all of that supply is needed. As long as -- I mean, we have this unique characteristic of fiber coming out of the US South from southern yellow pine that is manufactured into that fluff. That is the desired product worldwide for the absorbent products. And so what we're seeing is we're seeing this very strong growth globally as our customers penetrate new markets.

Great. Thanks. We look forward to December.

Thank you.

Next question.

Your next question comes from the line of Stephen Atkinson with Bank of Montreal.

Good afternoon. With relation to the credits, talking about the alternative fuel credit versus the cellulosic credit, if I understand it correctly, you have $149 million relating to the cellulosic credit. Are you allowed to use the same two in one year, or do you have to return the alternative fuel credit you've already received and then redo the process?

Well, the number that I referred to was the number for the credit for primarily the black liquor produced in the first quarter of 2009. And in the first quarter of 2009, we were not blending for the alternative fuel mixture tax credit. So that gallonage of about 238 million, I think it was, would all be available for the cellulosic producers tax credit.

Now, what you're referring to is that, is there a potential to unwind the alternative fuel mixture tax credit that we already took and replace it with the biofuel producers tax credit. And that is something that I think still from a procedural standpoint is being worked out with the IRS. But the numbers that I referred to are for a period of time where we did not have the alternative fuel mixture tax credit.

That's great. Thank you.

Yes.

Next question.

Your next question comes from the line of George Staphos with Bank of America Merrill Lynch.

Thanks. Hi, guys. Good morning. I jumped on late and I'm guessing that you've already answered several questions on Wood Products. My question would be then if you haven't already answered it the changes that you're making in the quarter and as you're thinking about the business relative to your operating stance within Wood Products, is it just a reflection of a deeper cyclical downturn or a more pernicious recovery or do you think that you will be changing your overall philosophy regarding Wood Products businesses that you're in and how they fit within the portfolio going forward?

We have two issues, George. One is the depth of the housing recession and the slow recovery that I referred to. So even if we were to go back a year ago and look at our housing forecast and that of most economists, what we're experiencing is 2010 with a lower level of starts than anyone anticipated and a longer climb out of this for a variety of reasons. I talked this morning about we still have an issue with consumer confidence. We have an issue with employment. We've got an issue with an overhang of inventory. And then we have this new event which is the foreclosure problem and the documentation related to mortgage securities. So that causes us to need to react to a more pessimistic near-term forecast. And what that means for us is we need to adjust capacity to today's level of starts. As we do that, we're also taking the time to evaluate all of our operations. We believe we have opportunities to both enhance revenues as well as to take out operating costs both in our mills and in our SG&A. So it's a full court effort on all fronts. And as I mentioned earlier , it's the highest priority we've got

Okay. So you feel in total you have the stable of businesses perhaps that you'll have into the recovery. It's just a combination of a cycle that's being a little bit more difficult to climb out of and waste optimized cost within that stable of business? Would that be the fair characterization?

That's a fair characterization. But as I've said before, all of our businesses need to be operating over the cycle at top quartile levels of performance within their respective industries. And we are not operating at that level in our Wood Products business today. So that is why we need to address it and we need to improve it.

Okay. I appreciate the insights. Good luck in the quarter .

Thanks, George.

We have time for one more question.

Your final question comes from the line of Joshua Zaret with Longbow Research.

Two questions and then a follow-up on someone else. Dan, I read in the press that you either have restart or about to restart two lines of your Hudson Bay OSB mill. What is the thinking there, and would you be closing down something somewhere else to compensate for that? Given this market, it's kind of surprising.

Good question. Our situation at Hudson Bay is that, that mill has been shut down for an extended period of time. And were we to leave it in its current state, we would be subject to additional cost, including severance. And as a result, we made the decision to restart the mill and we'll be aligning its posture as we go forward in a disciplined manner with production across all of our operations. It will be a slow start. We'll have little production this year. We'll start to see some next year and then we'll balance it across the system. But fundamentally it was a decision related to cost of extended shut versus reopening.

Great. Thank you. Clears that up. Second , export log volume. Can you give us your volume year-to-date this year versus year-to-date last year. We assume there would be a big step up. And if there has been any shift in

I don't have that number right in front of me. Let me just talk about the nature of it a bit. One of the things that we have seen over the past year is there has been a mix shift. So as we think export, historically for us that's Japan. But over the last couple of years, export off of our western Timberlands operations includes not only Japan but it is China and Korea. We have seen a pick up in logs going to China. That for us really started two or three years ago as we were harvesting storm damaged wood off of the West Coast of Washington and Oregon. That was low quality, low price, but it was a great take away. And what has happened is that we have been able to develop an improved position in that market. The quality of logs has increased. We're shipping Douglas Fir logs to China. We've got White Wood going to Korea. And then as you know, the long-term quality Doug Fir continues to go to Japan. The amount of export volume is up out of the West about 15%.

Okay.

As I mentioned, that's really favorable for us. We have long-term relationships in the export markets. We've got great logistics coming out of our western Timberlands. So we're well positioned to take advantage of that. And with domestic markets which continue to be slow, it has been beneficial for us as a take away for the logs coming out of our western Timberlands. And we would expect that will continue over time.

In the old days, there used to be about a $400 a thousand foot board foot premium for Japan over the domestic market, then it evaporated. Has that ever come back?

I can't comment on the specific spread.

Fair enough. Let me give you my last question because I think it's an important one. Everyone has danced around the maintenance for cellulose -- the maintenance charge spend. You gave us guidance in the second quarter of $30 million. Zero in the third quarter. What is it going to be in the fourth quarter?

The shut in the fourth quarter, Josh, is a short shut at one facility. So it will just be up probably a little around a week or so. So it won't be as significant in terms of relative to the second quarter where we had most of our annual maintenance downtime. And the lost tonnage won't be as significant either.

Okay. That's the best you can do. I appreciate it. Thank you .

Yes.

Thank you very much for joining us this morning. I'm sorry. I need to turn the call back to Dan.

Just some concluding comments. I wanted to just close the call and summarize our key themes for the third quarter and our current view of the fourth quarter. So as we entered the third quarter, we anticipated improved performance in our Cellulose Fibers business and we delivered record results. In our Wood Products business we were already feeling the pain of rapidly falling prices and it was a very difficult quarter for us. With housing activity near record lows as we entered the quarter, we expected break even results for WRECO and we turned in our third consecutive profitable quarter. And in Timberlands, operating earnings were lower as expected and our non-strategic land sales enabled us to increase earnings quarter-over-quarter. So as we move to the fourth quarter, we're especially cautious about the near term direction of the housing market and we're planning accordingly. We're committed to improving profitability at today's level of demand and will continue to take necessary action to reduce cost and improve profitability. And with that, I would like to thank you for your attention this morning. And we look forward to talking to all of you in December. Thanks very much.

Thank you for joining us this morning. If you have any additional questions, please contact me at 253-924-2058. Have a good day.

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