威爾豪瑟 (WY) 2011 Q3 法說會逐字稿

Good morning. My name is Ashley, 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)

I would now like to turn today's conference over to Kathryn McAuley, Vice President of Investor Relations. Ms. McAuley, you may begin your conference.

Thank you, Ashley. Good morning. Thank you for joining us on Weyerhaeuser's third quarter 2011 Earnings Conference Call.

This call is being Webcast at www.Weyerhaeuser.com. The Earnings Release, Analyst Package and Web Slides for this call can be found at our website or by contacting April Meier at 253-924-2937. Please review the warning statement in our Press Release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this Conference Call. Joining me this morning are Dan Fulton, President and Chief Executive Officer; and Patty Bedient, Executive Vice President and Chief Financial Officer.

This morning, Weyerhaeuser reported third quarter 2011 net earnings of $157 million, or $0.29 per diluted share. Our net sales from continuing operations of $1.6 billion. Earnings for the third quarter include after-tax gains of $91 million from special items. These items include a benefit of $83 million, or $0.16 per diluted share related to foreign tax credit; a gain of $32 million, or $0.06 per diluted share on disposition; a charge of $24 million, or $0.04 per diluted share for impairments and restructuring in Wood Products. Excluding these items, the Company reported net earnings of $66 million, or $0.12 per diluted share.

Please turn to the earnings information package available on our website. This package includes a GAAP reconciliation of special items. In the discussion of the business segment I will refer to charts 4-10.

Chart 4, changes in contribution to earnings by segment before special items. This chart illustrates the change in contribution by business segment from second quarter 2011 to Third Quarter 2011. My comments reviewing the third quarter refer to changes from the second quarter unless otherwise noted. We begin our business segment discussion of the third quarter with Timberlands, Charts 5 & 6.

In the third quarter, Timberlands contributed $62 million to pre-tax earnings, $50 million less than in Q2. $28 million of the decrease was the result of lower earnings from non-strategic land sales. Third quarter land dispositions were $4 million, compared to $32 million in the second quarter. Average third-party price realizations in the West declined 5%, as a weakening Chinese market exerted downward pressure on domestic and export prices.

In the South, average third-party price realizations declined slightly. Fee harvest volumes were flat in the quarter. Volumes were down in the West. As the Chinese export market softened, volumes rose in the South. Costs were seasonally higher. These increases were due to road construction in the West and silviculture spending in the South.

Wood Products, Charts 7 & 8. Continuing operations in Wood Products lost $43 million, $10 million less than second quarter. Lumber price realizations were flat. Price realizations for OSB and engineered solid sections declined slightly. Engineered I-joist price realizations rose slightly. Operating rates in Q3 were flat in lumber, improved in OSB, and were slightly lower in engineered wood products. Restructuring and impairment charges were $38 million, primarily related to the permanent closure of four previously idled engineered wood products facilities. This was offset by a $5 million gain on the sale of property. Charges related to the sale of Discontinued Operations were $13 million in Q3.

Cellulose Fibers, Chart 9. Third quarter cellulose fibers' pretax contribution to earnings was $135 million, $55 million higher than second quarter. Average pulp price sales realizations declined 4%, or $40 per metric ton. Pulp sales volumes were flat. Maintenance costs were lower, and pulp production increased 13%. There were no maintenance outages during the third quarter. There were four scheduled annual maintenance outages in the second quarter.

Real Estate, Chart 10. Real Estate contributed $10 million to pre-tax earnings, $2 million more than second quarter. Single-family closing increased seasonally, from 459 homes in Q2, to 508 homes in Q3. The average price on homes closed during the quarter increased $12,000 to $403,000. This increase was due to mix. Margins on single-family homes closed also increased due to mix.

Corporate & Other. Excluding Discontinued Operations, Corporate & Other was $5 million lower in Q3. Foreign exchange charges, primarily related to the strengthening of the US dollar, reduced Corporate and Other by $18 million. This was partially offset by $7 million of additional gains related to share-based compensation. A decline in the Company's stock price during the quarter resulted in a larger mark-to-market adjustment. Discontinued Operations included a loss from operations of $4 million, and gains of $58 million on the sale of Westwood and properties in the third quarter. Discontinued Operations had a charge of $11 million in Second Quarter.

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

Thanks, Kathy and good morning, everyone. Thanks for joining us today.

Despite a more challenging macroeconomic environment than we anticipated just 3 months ago, I'm pleased to report that our quarterly performance improved, as increased earnings from 3 of our 4 businesses offset and anticipated earnings decline in our Timberlands business. In addition to overall factors affecting the US and world economies, the 2 most significant external factors affecting our quarterly performance are the same as they were last quarter -- US housing, and China. I'd like to comment on these overall themes first, and then I'll discuss activity in each of our Businesses during the quarter. Following my remarks, Patty will provide our business outlook on the fourth quarter, as well as financial comments.

First, let me talk about housing. 3 of our 4 businesses -- Timberlands, Wood Products, and Real Estate -- are impacted in varying degrees by current conditions in the US housing market, which I described in this mornings release as languishing. As we enter 2011, our planning assumption was that US single-family housing starts would total 525,000 for the year, which would have been a modest increase over 2010 construction levels. As we sit here today in late October, we currently estimate that we'll end the year at a level of about 425,000, approximately 20% below that planning assumption.

Long term demographics continue to be compelling, but perspective home buyers today exhibit little sense of urgency. This is a result of a lack of consumer confidence, continued high unemployment rates, concern about potential downward price risk related to an overhang of foreclosed homes, and a desire to maintain employment mobility.

One last factor affecting home sales is interest rates. Because of Chairman Bernanke's statements, the market now expects mortgage rates to remain low for an extended period of time; and while low rates are generally a positive for home sales, the expectation of continued low rates give buyers yet another reason to put off a purchase decision. Once a purchase agreement has been signed, prospective buyers face an increasingly difficult mortgage underwriting process that causes many motivated and qualified buyers to move back to the sidelines and wait. Our political climate has only added to uncertainty, and we see little evidence at this point that conditions will improve before next year's Spring selling season.

The glass half full side of me, nevertheless, sees some good news on the housing front. First, although we generally don't highlight conditions in Canada, housing activity north of the border has been relatively stable, at about 185,000 starts for the year. We produce for this healthy housing market through our lumber, OSB, and engineered wood products mills, several of which are located in Canada. Our Canadian mills also serve export markets, particularly off the West Coast.

Second, although US single-family housing starts are stagnant, multi-family rental construction is relatively strong in response to low vacancy rates and rapidly increasing rents. Rental units are generally smaller than single-family homes, but for the most part, they are wood-frame construction and use the full range of wood products that we produce -- lumber, OSB, and engineered wood. That's good news for our Wood Products and our Timberlands.

Third, inventory levels of new homes are at an all-time low, so any pick-up in new home sales will quickly lead to increased construction activity. Although our forward planning assumptions are based upon today's level of starts, we have the ability to flex all of our operations as markets improve. Homebuilding, wood products manufacturing, and in the woods.

Let me turn now to China before I provide some specific comments about quarterly performance in each of our business segments. Growth in China affects 3 of our Businesses -- Timberlands, Wood Products, and Cellulose Fibers. We have long-term experience selling products to China. Today, we sell logs, lumber, and cellulose fibers to a range of Chinese customers; and although Japan has long been our primary Asian export market, sales to China have increased significantly over the past 24 months. On last quarter's call, I noted that we were beginning to see some pullback, in both price and volume, from China. Those early indications of softness were realized in the third quarter, as credit tightened and demand slowed. Our view is that this slowdown is temporary, and we expect Chinese demand to return and to continue to grow over the longer term. In the meantime, we should expect a greater level of volatility and in our more traditional markets.

I'll begin my discussion of Business & Company highlights for the quarter with Timberlands. During the quarter, the impact of slowing Chinese demand led to price declines. Volumes were relatively steady, but the fall off in Chinese log prices had a ripple effect on the entire Western log market. Export activity from our Western Timberlands during the quarter was 40% of total volume, split among Japan, China, and Korea. Our ability to access export markets from our Western lands has long been a significant source of revenue and competitive strength, and reduces somewhat our reliance on the US housing market. During the quarter, we made some progress towards additional market diversification from our other Timberlands. We tested sales of Southern yellow pine logs from the US South to Turkey, and pine logs from Uruguay to China. These sales pale in significance compared to our long-term West Coast Asian markets, but they are a step in the right direction.

Turning to land transactions, the $28 million quarterly decrease in Timberland dispositions, which was due to transaction timing, negatively affected quarter-over-quarter Timberland earnings. Our minerals business remained a steady performer during the quarter, contributing approximately $15 million. We continue to receive royalties for hard minerals and from our oil and gas properties. These include both our Haynesville Shale gas acreage in North Louisiana, and bonuses from new leases with shale oil potential in the Tuscaloosa marine shale play that crosses Southern Louisiana.

In our Wood Products business, our initiatives to lower cost and improve performance are beginning to show results. Even with weaker market conditions, our EBIT before special items improved $10 million over the quarter, and $59 million over the prior year. As we entered the year, I told you that it was my expectation that our Wood Products segment would be cash-positive for the year, based upon our housing construction forecast. The business was cash-negative during the first quarter, due to a seasonal build-up in working capital; but we were cash-positive in the second quarter and in the third quarter as we continued to reduce working capital. Given the downturn in housing that we've experienced, it is unlikely that we'll meet our cash break-even objective for the year, but we're making progress and it continues to be our focus as part of our return to profitability in this segment.

We are pushing all levers available to us to improve our performance in Wood Products focusing on revenue enhancement as well as cost reductions. As in our Timberlands business and Wood Products, we continue to find opportunities to diversify our sales outside North America, especially from our Canadian mills. Export represents 38% of our Canadian lumber volume. Japan is our largest export market, with over 60% of export sales; shipments to China have nearly tripled this year. I noted earlier that we're well positioned in all of our wood products to meet the growing activity in multi-family construction; and we're focused on growing share where we have competitive advantage based upon our products and our geography. I'm impatient, but encouraged with our progress.

This morning, we made the decision to permanently close our 4 previously- curtailed engineered wood products facilities -- LVL facilities in Albany, Oregon, and Simsboro, Louisiana; and veneer facilities in Pine Hill, Alabama, and Dodson, Louisiana. This is another step in reducing the costs associated with closed facilities that we've concluded we will not need in the future, based upon the pace of the housing recovery.

In our Real Estate segment, we turned in another profitable quarter on the strength of our single-family operations. During the second half of the year, when we normally have increased closing activity, closings were up 11% over the prior quarter, while margins increased slightly due to mix. Although traffic during the quarter declined 27% year-over-year, sales increased 5% as we continued to experience higher conversion rates. Local market conditions are mixed. Our most active markets are Houston, and the Maryland and Virginia suburbs of Washington D.C. Our weakest markets are Southern California and Las Vegas.

The most significant indicator of market strength today is employment. To give you a little local flavor -- in Phoenix where single family permits are down 19% year-over-year, our sales are up 42%. The longer-term good news for Phoenix is that job growth will approach 2% in 2011; and the existing home market is remarkably strong, on track to exceed 95,000 transactions, compared with the prior peak of 92,000 in 2006. In Houston, where home prices are stable, new home sales are down 30% from last year, but our sales increased 21%. Similarly, in Washington D.C., new home sales activity is 20% lower than a year ago while our sales are up 23%.

Turning to our Cellulose Fiber segment, we continued to run well, and had no planned maintenance down time. Revenue declined somewhat during the quarter, due to price as well as mix. Even with pressure from declining realizations, the overall business result was a significant quarter-over-quarter earnings improvement. I want to comment on progress on 2 other initiatives in our Cellulose Fiber segment. Both are examples of executing our strategy to grow with key global customers, and to make disciplined investments to improve productivity of our mills. In early August, we broke ground on our new modified fiber facility in Gdansk, Poland. Upon completion, an estimated start-up in early 2013, this facility will convert fluff pulp from our mills in the US South into a proprietary raw material used in diaper manufacturing by a key global customer; supplementing existing production from a similar facility in Columbus, Mississippi. At our Grande Prairie, Alberta, pulp mill, we're generating surplus green electric power from a new generator fueled by sustainable black liquor, converting an energy expense into energy income.

Lastly, during the quarter we closed on the sale of our Hardwoods operations and our Westwood shipping line. The Hardwoods sale, which closed on August 1, included seven hardwood mills. Year-to-date revenues from these operations totaled $220 million, and generated a $3 million operating loss. Our Westwood sale closed on September 30. Year-to-date revenues from this business were $180 million, with no earnings. The sale of these non-core businesses allows us to focus on our long-term strategic direction. As I noted last quarter, we'll maintain a relationship with our former associates, as Hardwoods will continue to be a log customer, and will transport products to our Asian customers on Westwood shipping lines. We wish our former associates the best at success with their new owners.

Now, I'll ask Patty to discuss our outlook and provide a financial summary, and then I'll have a quick recap before we invite your questions. Patty?

Thanks, Dan, and good morning, everyone.

The outlook for the fourth quarter by business segment is summarized on Chart 11. I'll begin the outlook discussion with Timberlands. In our Western operations, we expect lower selling prices for logs as a result of a softening export market, reflecting the backup of log inventories into China. Fee harvest volumes are also projected to be lower. In the South, we anticipate that selling prices and fee harvest volumes will be flat, as those markets did not experience the same price increases earlier in the year as did the West. We expect growth costs and civil culture costs to increase seasonally.

Excluding the effect of non-strategic land sales, we expect that earnings in our Timberlands segment will be lower than the third quarter. Earnings from non-strategic land sales will increase from the very low third-quarter level. Our Wood Products business is entering what is, traditionally, its slowest quarter of the year. Average sales realizations are expected to decrease for both lumber and OSB, as is typical of the seasonal slowdown in the housing market. Sales realizations for engineered wood products will likely be flat.

Sales volumes across all product lines are projected to be lower. We expect additional production curtailments, as we match supply with demand, and incur the traditional holiday down time, especially in our lumber system. As a result, per unit manufacturing costs are expected to increase throughout our product lines, although log costs should be flat to slightly down. Overall, we anticipate the loss in our Wood Products Business to increase in the fourth quarter, compared to the third quarter this year. However, we expect that it will be less than the fourth quarter of last year, reflecting improvements we're making in the business, as Dan described.

In our Cellulose Fiber segment, global softwood pulp demand is weakening as a result of the high level of industry inventories and global economic uncertainty. We expect prices to soften in the fourth quarter, offset by slightly higher shipment volumes. Costs are likely to be somewhat higher for fiber, chemicals, and energy, due to seasonal increases. We will not have any annual maintenance shutdowns, as we completed our scheduled maintenance in the first half of this year. Overall, earnings in our Cellulose Fiber segment should be slightly lower in the fourth quarter compared to the third, and we expect to generate another record year of earnings in this segment.

In our Real Estate segment, home closings are anticipated to increase over the third quarter. The fourth quarter is traditionally our strongest quarter for closings in our single-family homebuilding business. We expect approximately 600 closings, compared to 508 last quarter. Prices will likely be lower, offset by slightly higher margins due to mix. Earnings in our single-family homebuilding business should be higher in the fourth quarter, compared to the third quarter. In addition, we do have some land parcels for sale that have the potential to close in the fourth quarter; however, there are none of significance under contract at this time.

One of our WRECO subsidiaries is a minority party to litigation relating to a joint venture in Nevada known as South Edge. A reserve for this litigation of approximately $38 million was recorded in 2008. A plan of reorganization was approved a few days ago, and we expect to make a payment of approximately $30 million in November in settlement of the litigation. Now I'll wrap up with some overall financial comments, starting with the special tax benefit booked in the third quarter.

During the third quarter, we made the decision to dividend earnings from our Canadian subsidiary to the United States. This decision triggered our ability to recognize a tax benefit for the difference between the net amount of taxes paid in previous years in Canada, which is allowed as a foreign tax credit in the United States; and the US taxes due as a result of the dividend. Given our mix of taxable income in 2011, we will carry this benefit forward, and anticipate utilizing the credit over the next 3 to 5 years. The full amount of the benefit of $83 million was recognized as a special item in the third quarter.

We ended the third quarter with cash of $971 million, an increase of approximately $90 million. Cash flow from operations was $117 million, and cash from the sale of assets was $157 million, primarily resulting from the sale of our hardwoods and shipping operations. During the quarter we invested $66 million in Capital Expenditures, which brings our total expenditures through the third quarter to $159 million. We expect to spend approximately $100 million in the fourth quarter, which is in line with our earlier guidance of $250 million to $270 million for the full year. We paid $81 million in dividends, and repurchased just under 1.8 million shares of our stock for approximately $29 million, at an average price of $16.41 a share. Approximately $5 million of the cash settled after the end of the quarter.

These purchases helped offset the dilution from stock option exercises, investing of restricted stock that took place earlier in the year. We did not have any debt repayments in the third quarter, and we have no further debt due until next year. Earlier this month, we did repurchase approximately 12.5 million of medium-term notes due next year for less than their face value. During the fourth quarter, we will contribute approximately $60 million to our Canadian qualified pension plan.

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

Thanks, Patty.

Although the fourth quarter is our seasonally weakest quarter, as reflected in Patty's guidance, we have made significant improvement throughout the year. We're not satisfied with our level of performance, and every Business is focused on improving results in today's market. That means getting the right facility set, controlling costs, and growing the top line. This morning you've heard examples of actions and results in each of these areas, and I look forward to sharing continuing progress in future quarters. And now we welcome your questions. Ladies and Gentlemen, [OPERATOR INSTRUCTIONS].

(Operator Instructions) George Staphos with Bank of America.

Thanks, hi guys, good morning. Thanks for all of the detail.

Good morning, George.

A couple questions, on the progress that you still have ahead of you, Dan. You've done a nice job, on SG&A, both sequentially and year-on-year, I think SG&A is down $26 million versus the year ago quarter. Wood products, you're nearing breakeven EBITDA right now, forgetting about the working capital source of cash. As we think about what is possible, and if we hold the current environment constant, what further progress do you think you'd make on either of those line items, over the next two to four quarters, say?

Thanks, George. As I remind ourselves, internally and I remind you, our focus is to improve operations at today's level of starts. We continue to be optimistic and bullish about long term recovery, but our experience has shown over the last couple of years, that we need to live with today's level of activity, and so that's been our focus. We have, as you noted, continued to bring down our SG&A costs. That continues to be an ongoing focus, and in our Wood Products business, our focus has been on, first of all, moving to cash-positive, and then earnings-positive range. And then, in the Wood Products business, that takes both cost management, but also top-line growth.

So, just a couple of comments on SG&A. We make progress on SG&A as we continued to make decisions, such as the sale of our shipping business, and our hardwood operations, that we concluded in the quarter. That allows us to focus on our ongoing operations. It does leave us with some overhead that we need to address that have supported those businesses, but we've made great progress over the last several years, in working down legacy costs, and bringing down overall headcount across the Company, to become more efficient in everything that we do.

In our Wood Products operations, our focus across the entire system is to bring down operating costs and that includes manufacturing, where we need and have made progress in improving the operating efficiency and utilization of our facilities. That is, in part, related to the decision that we made during the quarter, to permanently shut down these four facilities.

We believe that we can move forward in the housing environment that we have, with the facility set that we have in place and then we have a number of initiatives to grow top-line. Some of that comes from increasing markets offshore, as we discussed this morning, and some of it comes from finding opportunities where we have, perhaps, pricing power, where we have the ability to increase share based upon the products that we manufacture. Based upon the location of our operating facilities, where we may be logistically advantaged to serve some markets, and, as we look at the homebuilding business, focused more on mid-size and smaller builders, where we can provide products efficiently and cost-effectively.

We're also increasing some activity in repair and remodel market, going back into some locations where we have not been active, where we have products that customers would like to sell, and where we have an advantaged situation relative to our own manufacturing operations. So it's an ongoing effort, one whereas, I said this morning, I'm somewhat impatient, but we're making progress and it continues to be a focus and will continue to be one. This is not a process where we get to a certain point and quit.

Sure.

This is an ongoing effort, to improve our cost effectiveness and competitiveness, and I'm encouraged with the progress that we're making.

Thanks for that, Dan. Maybe one follow-on and one additional question and I'll turn it over. Given the fact that you may have some unabsorbed overhead, if I heard you correctly, might we see some temporary lull in your ability to reduce SG&A? Or, either in aggregate or within wood products, or do you expect the trend, without sizing it in dollar terms, to continue to be positive on a sequential and year-on-year basis?

The trend should continue to be positive, George.

Understand

I can't give you numbers. And you're letting me off the hook on that. I appreciate that, but it's going to be an ongoing effort and every time we make some changes, we find more opportunities, so I'm encouraged that the organization is involved in a number of efforts, in order to both reduce cost, but also I would re-emphasize growing top line is equally important.

Okay, quickly, just on Chart 1, if I look at the detail there, I can come up with, effectively, an operating pre-tax of about $54 million and I can come up with an operating income tax, when I strip out the gain of about $8 million, and when I add those two together I get to your EPS. Considering how much earnings were contributed from Cellulose Fibers, I was just curious, why you actually had a benefit in the quarter. Thanks, guys and good luck in the quarter.

George, we did have a tax benefit in the quarter.

But the question, Pat, I guess, is why, considering how Cellulose Fibers was such a big piece of the earnings.

Well, I think the tax benefit is a function of two things. One, it's what happens in the quarter, as well as, truing up the year-to-date effective rate. And, maybe the way to think about the tax rate, it's a benefit of about 20%, after you strip out the discreet items. So, if you were to look, for example, on the Analyst package, the first page that shows the consolidated Statement of Operations, you would see that year-to-date, we have earnings of $202 million. That's the earnings from continuing operations before income taxes.

Right.

So, from that, take out -- we have three discreet items, this year. The first one would be the large Timberland sale, that was in the first quarter for $152 million, and then you would add back, the second discreet item, which is the $26 million of loss on early extinguishment of debt. And then, you would compare that, to what we actually booked for income taxes, which is right below the $202 million, which is the $52 million, and that $52 million benefit, you would have to add back the third discrete item, which was the foreign tax credit. So, it's the $52 million, take out the foreign tax credit benefit, take out the Willapa sale -- or the Timberland sale, and then, also the effect of the debt extinguishment, and you'd get $15 million. So, our effective rate, benefit rate, through the third quarter and for the year, is just under 20%,once you strip out those items. But, it's really a function of the year-to-date rate, plus the discreet items, that are in the year-to-date, and drilling it up.

Okay, thank you.

If you want more detail, certainly, give us a call after the call is over and I'd be happy to walk you through it.

Yes, there's more directional. Thanks, Patty.

You bet.

Next question?

Our next question comes from the line of Joshua Barber with Stifel Nicolaus.

Hi, good morning.

Hi, Josh.

I was wondering, Dan, in light of your comments about a poor outlook going into 2012, and it sounds like the consensus, if you can tell us a little bit more about how inventories in log decks are looking, going into that year, and how tight things would be, even if we got a modest improvement, right now.

I'm sorry, Josh, could you repeat the question one-time, please?

Yes, I mean, in light of your comments about nobody really expecting much from building season, Spring, where do you see log decks and overall lumber inventories being, so that if we got some modicum of recovery, going into the year, how much slack do you think there is in the supply chain today, to respond to that?

I really can't respond to overall supply chain slack. I think you highlight an issue, which is in the industry, people are cautious. We see these housing starts at relatively anemic levels, and so, the concern that you raise, is if we see a pick up, and when we see a pick up in the Spring do we have the ability to respond? We've had good weather this year, and so, log inventories, should not be a problem in most areas. I think, we as well as others, are very careful, in managing inventories of finished product, and the supply chain has shrunk, during this entire recession. Think about the supply chain, from the manufacturers to the distributors, and ultimately, to the builders, we've had shrinkage in the distribution chain.

Most distributors are managing their inventories much more tightly, and so, as the market begins to recover, I think there will be tension and it will tighten up relatively quickly. I do think the industry does have the ability to respond, at a range that is likely to occur. I don't see a huge snapback, in demand, in the first quarter just because, I think we would expect to see some seasonal improvement, unless there were some major public policy changes, and I believe that the system will respond appropriately. Builders have the ability to put houses on the ground if they have sales, but I wouldn't expect a lot of speculative inventory, and I think that the recovery will happen, in a measured basis.

Next question?

Anthony Pedinari with Citi.

Good morning. You discussed weaker Chinese demand in the quarter, and your view that, that slowdown is temporary. I'm just wondering, are you seeing any buying or inventory trends in September or October, that is kind of boosting that view or is that more kind of a general view, based on longer term trends? And then, maybe to the extent that you can, if you can talk about how you would expect Chinese demand to go from 3Q to 4Q, granted that there's kind of a seasonal slowdown there?

We started to see a slowdown in China, at the end of the second quarter, we commented on our last call, and as I commented this morning, that played out during the third quarter. Our volumes to China were relatively unchanged in the third quarter, but would expect that there would be some fall off in fourth quarter. Most of the slowdown has shown up in pricing. And the evidence is, that there's a build up of inventory in China. Some of that is seasonal. Some of it clearly is caused by a tightening of credit, in China, that has slowed construction and there are some concerns that have been raised about over building in the real estate market. We have to remind ourselves that wood products and the logs that are being converted are not going into wood frame construction. They're used for industrial purposes, but they are used for construction forms, as well as pallets and packing.

Long term, our view is that China is going to continue to grow. It's going to maintain it's steady urbanization, and there would be a continued demand for wood products coming out of North America. North America should realize its share, as compared to other sources, which could be New Zealand, Russia, even Scandinavia. But, we've been very encouraged by the pick up over the last couple of years. We view the current slowdown to be somewhat temporary, and we're bullish long term.

Thank you, that's helpful, and then, just turning to the US side, just following up on the growth in multi-family homes, can you give us a rough sense of how much maybe less lumber and wood products the typical multi-family home would use than a single family home? Is it 20% less or 30% less?

First of all, we have to be somewhat cautious when we talk about multi-family, so when we see multi-family statistics, they would include both for sale housing that's attached, as well as rental housing. We happen to be a builder of some for sale multi-family, they would be town homes, in a market like Washington D.C. But, the significant change in activity that I was referring to this morning, was multi-family rental and that in this country is generally low rise. It is generally built with wood frame material.

There's a different mix of product that are used in multi-family units. First of all, the square footage for your average multi-family unit, is smaller than a detached unit. There is a higher percentage of engineered wood products, and especially engineered lumber, that go into a multi-family unit. That favors Weyerhaeuser Company because of our significant presence in the engineered business, and then there are also uses of OSB. OSB is primarily used in flooring, more than wall sheeting in multi-family. So you have to actually drill down into the individual products. Lumber, engineered wood products and OSB, in order to establish a relative range. I can use a rough number, but it is not exact, because it does vary, but roughly, the square footage of multi-family rental unit is about half the square footage of a single family detached unit. And I think, you could roughly apply that 50% factor across the wood products consumption, but it would vary dramatically by wood product type.

Next question?

Great, great, thank you.

Gail Glazerman with UBS.

Hi, good morning.

Hi, Gail.

Good morning, Gail.

I guess, just looking out to 2012, pulp markets seem to come off fairly harsh, so it is hard to see how they might get a lot better. I guess there's some question about whether the export markets would be better than they were in 2011. I'm just wondering, can you foresee, within your other operations, an ability to offset that type of decline next year within Wood Products, Timberlands, ReCo?

We're not at a point, where we're able to make a forecast for next year's operations, Gail, and at this point, we have seen softness, as you note, in pricing for Cellulose Fibers products. We've talked, directionally, about our wood products business, and the path that we're on to return to cash breakeven and the profitability. We don't yet have a forecast that we're ready to share, for planning purposes, on what we're assuming for housing starts next year. I'd like to do that the next time we get together on a call, because I think it's helpful to you to understand our planning process and what we're thinking.

As I noted, we went into this year and we told you that we were planning on 525,000 single family starts. We didn't see it. But, that enters into our thought process, and each of our businesses are making assumptions, based upon the factors that impact them. Single family housing starts is a big one, but also, as we look at our cellulose fibers market, we're looking at global demand, not just North America, but Asia and Europe. So, it's a little bit too early for us to give you guidance for 2012, but when we get together next quarter, we'll talk about our view of housing starts and how we believe that plays out and also our sense of the cellulose fibers market.

Okay, and just one other one, on capital allocation. Given the lack of recovery we've seen to date in US housing, you guys have been pretty active, doing lots of little things here and there, buying back debt, you've bought a little bit of land, you bought back some shares. Can you just help us think of your policy, and just how you plan to allocate capital moving forward, given the continued challenges in housing?

We continue to be cautious, as we gauge the pace of recovery for housing, and our focus in most of our capital spend, over the last several years, has been reforestation and silviculture cost to maintain the quality and sustainability of our timberlands. We have continued to invest in capital-effective projects in our cellulose fibers business, with a goal of driving down production costs, increasing productivity from our existing mills, and that's why I gave an example this morning of what we've just done in Grand Prairie. And, we've talked on earlier calls, about a longer term initiative in our Cellulose Fibers business to be stretching out our planned routine maintenance, from a 12 month schedule to an 18 month schedule, And so, we seek high ROI projects with relatively quick payback, that have the benefit of increasing productivity, and also they improve our environmental footprint.

We've been spending a minimal amount, as necessary for safety and environmental compliance, on our Wood Products facilities and we've been cautious in our real estate business, because we already have a large land position and we're well positioned to take advantage of a recovery in real estate. So, we're relatively well situated, as Patty said, in her remarks, we've bought in a little bit of stock. We thought that was an appropriate use of cash during the quarter and we'll continue to evaluate capital allocation on a go-forward basis, strategically. The one business that we've talked before about, long term intent to grow, is our Timberlands business, and so that will play into some of our thinking in the future when we look at how we allocate capital.

Next question?

Mark Wilde with Deutsche Bank.

Good morning.

Good morning, Mark.

Patty, is it possible to get a sense, of sort of, the order of magnitude, that we might see in the fourth quarter, on those non-strategic timberland sales?

Well, Mark, they are lumpy. We had, I think, earnings of $4 million in the third quarter, and they were down $28 million. I don't think they will be as big as they were in the second quarter, but significantly greater than where they were in the third quarter.

Okay, so if we use something in the sort of $15 million to $20 million, as just a placeholder, that would probably get us at least in the stadium?

Oh, you'd be in the zip code.

Okay, sounds good. Another Timberland question I had. Just in looking at a year-over-year comparison, your log realizations, for the most part are up nicely, as are your harvest volumes; yet your EBIT, on a year-over-year basis is, down. Is that just a Timberland sale issue or is there something else going on?

I'd have to do a little bit of research on that one, Mark, because I'm not relating to your comment. Realizations have risen in the West, and relatively flat in the South. Volumes can be a little bit misleading in the South, because we've got more commercial thinning happening and the commercial thinning, obviously, brings a lower realization than log sales. So, I think I want to get back to you on that particular issue, we'll provide more detail.

Okay, what I'm pointing to, is just kind of, it went from $75 million down to $62 million, yet it looks like the third party log sales are up, somewhere in the range of about 25%,as are prices. So I'm just trying to understand, what else I might be missing there. Dan, one other question on Timberland, if I could. I just notice that the realizations that you get down in South America are about half of what you get in the Southern US, on a per cubic meter basis. Is that a mix question, or is that just the fact that we don't have, kind of, developed markets down there in the way we do in the Southern US?

We have less developed markets and we have less mature timber. It's primarily the timber itself, Mark, because we're still growing out that forest. We are converting some of that in our plywood mill. As I noted, we are finding some opportunities, limited opportunities, to export, but it is more a function of the age and maturity of our timberland in South America.

Okay, and the last question I had. You really have made great progress in improving wood products, but as you noted, you're still burning cash. Is it possible to give us some idea of just the particular areas within wood products that are drawing most of your attention right now, as you try to improve performance further?

We are engaged in initiatives in every single one of our product lines. Lumber, oriented strand board, our engineered wood products, as well as our distribution, and so we are focused on driving down costs. Some of that comes from increased facility utilization, and we've made progress there, and then growing the top line as I mentioned. Going into some new markets, and there's also some improvement that we've made, even in just increased realizations in existing markets, as we understand our opportunity to price appropriately, given our competitive advantage.

So, we have a tremendous number of initiatives across the entire organization, both on cost reduction, operating efficiency improvement, and top line growth. And, our goal is that they all come together, bring us back to cash-positive but more importantly, return to profitability in this business. And, we're doing this in an environment with credibly challenged level of housing starts, and so the organization is responding well.

Mark, this is Patty. As I think about your question about Timberlands, I think there are probably two primary things affecting that comparison that you went through. One would be a non-strategic land sale, which I think, if you compared the third quarter to-date of this year and last year, are down about $25 million.

That's the issue.

And then the other, would be also some cost increases, primarily in the way of diesel fuel, which ran up as you'll recall pretty significantly earlier in the year. So, I think the combination of those two, would pretty much get you where you want in your analysis.

Very good. Thanks Patty and good luck.

Thanks, Mark.

Next question?

Chip Dillon with Vertical Research Partners.

Hi, yes, good morning all. Wanted to first ask Patty about the buyback in this quarter. We haven't seen you buyback stock, certainly, in the last year and a half or so, and is that just merely planned to offset some of the options exercises we saw this year, or is there something more to it?

Well, Chip, it might be good just to step back from our overall share repurchase, and just recap for a minute where we are on our authorizations. So, as you said, when we came into the quarter, we did have an existing authorization that really dated back to 2008 for about $250 million, and we only used a small amount of that authorization in prior years. Earlier in the quarter, we purchased about $20 million of shares, under that authorization and when we came into the August Board meeting we terminated that authorization, and replaced it with a new authorization for $250 million. And then purchased $9 million under that authorization in the quarter, so at the end of the quarter, we had a remaining authorization of about $241 million.

So, as we looked at uses of cash, we do believe that share repurchase is an important tool for returning cash to shareholders. And, as we said in the past, we'll utilize that share repurchase on an opportunistic basis, and given the fact that the stock price during the quarter had fallen, and that we had received cash for the option, stock option exercises earlier in this year of just a little over $30 million. We believed that, that share repurchase was a good value for shareholders. I wouldn't want to speculate on the amount or timing of what we would do in the future, other than to say, that we will continue to use that tool, opportunistically, where we can create additional value.

That's great to know. And secondly for Dan, as you look at your house, your markets where you build homes and just, your intelligence, since you guys are on the ground in so many places, we're hearing that rents are going up, even where there's not a lot of job creation, because people just can't afford down payments. And in that spirit are you -- or in that vein, are you seeing new projects for multi-family construction, in some of these areas, where you're seeing an almost shortage of rental property, with people not being able to afford down payments and needing a place to live.

The rental market is relatively strong, across the country, and it's very strong in certain major metro areas, and it's a function, Chip, I believe of a couple things. One is, some challenges in purchasing, but I think more importantly, the points that I summarized in my comments this morning, I think that people are sitting on the sidelines, waiting for the signal that it's okay to go back into the home purchase market. And so, there is some concern, overall, about consumer confidence and there's some concern in some markets about employment. I think this mobility issue is a big one, where people want to maintain the ability to be mobile, and to take a job in a different neighborhood or a different metro area, if that's what it takes.

The mortgage qualification process is much more difficult, than it has been, even over the last two to three years. Appraisals are a challenge, down payments are a challenge, and I think, that, that's an area where we have to address some public policy issues in order to break loose a bit of activity in the system. Rents are high. In many markets, it is cheaper to own, than to rent. And so, people are making a choice, to maintain, in effect, an option, by renting, before they come back into the market. We do have land that we sell to multi-family developers in some locations, so we are not an apartment builder but where we have multi-family land, that's been a benefit because we can sell to institutional developers of multi-family property and participate in that market. It's also putting some pressure on labor costs, because we are seeing construction labor flow to multi-family projects.

And just real, real quickly, I know that FHA loans you can get with like 3% to 5% down, and you think of a 2 -- let's just be practical, a $200,000 home, and you need $10,000 down, after three or four years, if you've been able to keep your job, it would seem like you've got enough money for a down payment. Am I missing something? Do the houses you sell, do they not qualify for these FHA loans? Do you have to have the bigger down payments, or maybe you could just give us a little color on that, because we could be on the verge of a turn, if we have seen the number of people save up, over the last three or four years.

We're going to put you in one of our sales offices, Chip, because you have a compelling value proposition and we do sell to some buyers that use FHA financing. The challenge, quite frankly, is not the down payment. The challenge is the credit underwriting process, that has become overly burdensome. And then, there's a problem with appraisals, because we have changed the appraisal process. It's a much more difficult one, and in some markets, the challenge is; you have a willing buyer and seller for a new home, they agree on a price, but the house won't appraise for that price because the appraisal includes comparables and maybe foreclosures in the same metro area, although that buyer wouldn't want to buy that foreclosed home.

So, that's one of the things that is an impediment in the system, today, and needs to break loose, and I think, that to some extent, the buying public is looking for the green light to go on to say that it's okay to go back in and start purchasing. And what we have seen in some markets is investors coming in from offshore, that are purchasing multi-family units, and I think that's perhaps, flight capital, or capital that is attracted to current market opportunities because prices are significantly lower than they were at the peak.

Next question, please?

Mark Weintraub with Buckingham Research.

Thank you. Two quick questions on Cellulose Fibers. First, I know that first half this year, thinking about $80 million of down-time costs, and then nothing in the second half. You talked about trying to change the down time schedules going forward. Are we going to have less than $80 million in downtime costs maintenance, downtime costs in 2012, as a first question?

We are on a longer term path of stretching out our scheduled downtime, as we've talked before, from 12 months to 18 months. That process will take about four years to completely accomplish. Part of it is, we have entered into some capital projects that will allow us to operate safely, for longer periods of time. There's also certification processes that need to take place for those individual mills. And so, 2012 and 2013, will be bridge years, where we will start to stretch out the time frame on a mill-by-mill basis. It's probably a little bit early to be giving you guidance for 2012, but I wouldn't expect that you'd see anything significantly different in 2012, as compared to 2011. This is a longer term process, that we have a lot of confidence in, but we need to do it safely.

Okay, understood. And then, secondly, I guess, I was somewhat pleasantly surprised, that in the pulp business, you thought that profits would hold up pretty well 4Q to 3Q, given that there has been some erosion in pricing. Now, I guess I was trying to understand whether there is some lag that happens in the way the contracts are set up, so that some of the price deterioration shows up a little later, as opposed to in the immediate. Is that what's going on, or is it just that the fluff pulp has really been holding much more stable?

Fluff pulp has been more stable than MBSK, and we have a mix of products, the primary one, which is fluff, and it's going to our large customers, so there is a bit of a lag, Mark. Fluff prices have come off their peaks, they haven't suffered as much as MBSK. And we are expecting a pick up of some of our specialty fibers, in the fourth quarter. So, generally, in Patty's comments, we talked about earnings being slightly lower, as we look forward to the fourth quarter, and we'll have to see that play out.

Mark, I think there is some softening in the quarter, but as I also said, we'll have some, a little bit higher shipment volume in the fourth quarter, compared to the third as well, so those two are offsetting each other.

Okay, and so basically, there's not a significant lag effect to be thinking about for the first quarter?

No.

Thank you.

We have time for one last question.

Joshua Zaret with Longbow Research.

Thank you very much. Two quickies. First, I would like to get an explanation in Wood Products, so what seems like an unusual, sequential quarterly trend in shipments between softwood lumber, which was down about 3%, and OSB which was up about 10%, the a diversion trend. And, when you answer that, I'm really curious, because the OSB is -- the volume was 28% above a year ago, and I'm wondering if there's anything pushing that up, like hurricanes or something, that we should deduct as we go forward to the fourth quarter?

Josh, softwood lumber is trending down. That's a seasonal factor related to construction during the fourth quarter. As we look at our OSB business, we've got two year-over-year changes, as we would look back at last year. Number one, we reopened, late last year, our facility at Hudson Bay, Saskatchewan. We saw very little volume coming out of that in, even late fourth quarter, as we brought that mill on line, and that had been shut down for a couple of years. It is still not operating fully, given market recovery, but there is year-over-year volume coming out of Hudson Bay that you didn't see last year. And then, we have an oriented strand mill in Grayling, Michigan, and we've increased production there. We're operating 24/7, because we've got good demand out of that geographic region.

So, that's a fair level, the $549 million, relative to demand for the third, as you see it, for the third quarter?

Can you repeat your question?

In other words, there's nothing unusual in that $549 million, relative to demand. I mean you've brought, housing has done nothing you've brought your demand up quite substantially year-over-year and even quarter-over-quarter.

You're right. There's nothing, in terms of overall market demand, but we have increased production, in those two facilities. Number one, in Grayling, Michigan, because we have opportunities to sell more product. So, if you think about my general comments on Wood Products, we're working on driving costs down, But we're also looking for opportunities to increase top line, where we have product that is competitive, where we have logistical advantage, we're taking advantage of that, and so, we've increased production and increased sales. And then, the Hudson Bay mill, we brought back online, so we've got increased production this year that we didn't have last year. And that's a mill that we hope to see increased production over time. We're going through a process now, in certification for the Japanese market, that creates some additional opportunity that perhaps could come out of Hudson Bay, but it's too early to talk about specifics.

Okay, and then the second quick question. In Timberlands, the margin for the segment really took a dive to 23%, it's typically in the 30% to 40%. Can you confirm that that's overwhelmingly due to the less non-strategic, Timberland sales, and not to the other cost issues that you've mentioned?

There have been slightly higher costs. Some of that is related to fuel. There was a drop in realizations -- modest realizations -- in the West, as we talked about, the Chinese market slowing down and the impact on pricing. And then the big factor, in the quarter, was the land dispositions.

Would the land dispositions, you mean, the lack of land dispositions for this quarter, but would that be the biggest factor, the lack of land sales and driving that down or would it be--?

That was the biggest factor in the quarter.

Okay, great. That's what I was trying to get at. Thank you very much.

Okay, so I just want to thank everybody for joining us this morning. We always appreciate your comments and your questions. We invite you to follow-up, after the call, with Kathy McAuley, and she will be able to answer follow-on questions and we appreciate you having joined us this morning and look forward to talking to you in the New Year. Thanks.

Thank you, Ladies and gentlemen. This does conclude today's Weyerhaeuser third quarter earnings conference call. You may now disconnect.