威爾豪瑟 (WY) 2012 Q3 法說會逐字稿

Good morning, my name is Marlee, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Weyerhaeuser third quarter 2012 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 the call over to Ms. Kathryn McAuley, Vice President, Investor Relations. Ma'am, you may begin your conference.

Thank you, Marlee. Good morning. Thank you for joining us on Weyerhaeuser's third quarter 2012 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 statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call.

Joining me this morning are Dan Fulton, President and Chief Executive Officer and Patty Bedient, Executive Vice President and Chief Financial Officer. As summarize chart 1, Weyerhaeuser reported third quarter 2012 net earnings of $117 million or $0.22 per diluted share, that was on net sales of $1.8 billion. There were no special items in this quarter. Turning to our business segments, my comments reviewing the third quarter of 2012 refer to changes from the second quarter of 2012. Beginning with TIMBERLANDS, charts 3 and 4. TIMBERLANDS contributed $80 million to pre-tax earnings, $3 million more than in Q2. Revenues from TIMBERLANDS exchanges were $24 million in the quarter, an increase of $17 million.

In the west, log prices declined approximately $5 per cubic meter. Domestic log prices decreased due to an abundant supply of farmer wood. Export log prices were off slightly due to mix. Dry conditions and fire danger in the west resulted in a 3% reduction in fee harvest volumes. Growth cost in the west were seasonally higher. In the south, log prices increased 2%, third party log volumes rose 6% and the fee harvest was slightly higher. Silviculture costs in the south were slightly lower, as planting was deferred due to dry weather conditions.

Wood Products, Charts 5 and 6. Wood Products contributed $59 million to pre-tax earnings in Q3, $29 million more than in Q2. Price realizations increased across nearly all product lines, as product supply channels remained lean. OSB prices increased $54 per thousand square feet or 25%, and lumber prices rose $9 per thousand board feet or 3%. Sales volumes for engineered wood products increased 8%. Sales volumes for lumber declined slightly, as southern lumber mills took down time in response to slightly weaker market conditions around the fourth of July holiday. Lumber mills operated over an 80% rate in the quarter. OSB mills took down time for scheduled maintenance, resulting in lower sales volumes; the operating rate for OSB was 85%.

Cellulose Fibers, charts 7 and 8. Cellulose Fibers contributed $78 million to pre-tax earnings, $42 million more than in Q2. During the third quarter, this segment had a strong performance; pulp production increased 9% and maintenance costs were lower. In Q3, there was only one scheduled maintenance outage of 13 days. In Q2, there were two annual maintenance outages, resulting in 27 days of mill downtime. Pulp sales volumes increased 2%; pulp price realizations were flat.

Real Estate, charts 9 and 10. Real Estate contributed $17 million to pre-tax earnings, and had no significant income from land and lot sales. Second-quarter pre-tax earnings of $15 million included $12 million of land and lot sales. In Q3, single family home closings increased 21% to 615 homes from 508 homes in Q2. Home closings were up 21% over the same quarter last year. Although the average home closing price was $372,000, this was nearly flat with second quarter.

Margins went up in most geographies, with the largest increase in San Diego. Gross margins in Q3 were 24.3%, up from 19.5% in the previous quarter. The backlog at the end of the quarter was 1,055 homes. Real Estate controls approximately 27,000 lots in our primary markets. In addition, we control 67,000 lots, mostly under option, in a large master plan community in Nevada, where development and construction is on hold, pending improvement in the local market.

Unallocated Items, chart 11. The foreign exchange gain of $11 million in Q3 was due to the strengthening of the Canadian dollar. The swing from Q2 was $19 million. Offsetting this, was a charge of $10 million for the elimination of interest segment profit in inventory and LIFO. As we discussed the last quarter, this item was formerly reported at the segment level and is now reported in unallocated items. The charge for share-based compensation increased in Q3, as the price of Weyerhaeuser stock appreciated. The increase in share-based compensation largely accounts for the increase in SG&A. Now, I will turn the call over to Dan Fulton. Dan?

Thanks, Kathy, and good morning, everyone. Thanks for joining us today. I'll start by saying that I'm pleased with our strong quarterly performance. As Kathy noted, we earned $117 million during the quarter. Comparing this quarter's earnings with our second quarter earnings before special items, we had a quarter-over-quarter increase of $70 million, with each of our four business segments showing gains. The rise in our earnings was the result of ongoing business improvement initiatives coupled with increasing strength of US housing, which allowed us to capitalize on the full value of the Company. Before I offer some brief comments on the performance of each of our business segments, I'll provide a macroeconomic context for our quarter.

First, the housing market. On last quarter's call, I noted that the long-awaited housing recovery looks and feels real. After another solid quarter, all indicators point to continued steady improvement. Recent September housing starts data shows a seasonally adjusted level of 745,000 for the year, confirming what we're seeing on the ground in the marketplace. In addition to increased construction activity, we now have the latest release of the widely reported Case-Shiller numbers, which are a bit of a lagging indicator. These numbers show broad, modest increases in pricing across most major markets. Price increases help build consumer confidence, which then begins to move more potential home buyers off the sidelines.

While today's construction levels are still low by historic standards, all forecasts point to continued recovery in 2013 as we begin to return to long term trend levels that are needed to house a growing number of US households. Since World War II, housing has normally led the way out of our cyclical recessions, but as economists Rogoff and Reinhart suggest, This Time is Different. In this recovery, the broader economy began to improve earlier in the cycle and we enjoyed the benefit of improving global markets over the past couple of years in our Cellulose Fibers business. This time, however, it's housing that has been lagging. Ironically, it now seems that the broader economy has hit a soft patch, perhaps in response to trouble in Europe and slower growth in China.

Housing is, at last, beginning to play its historic role in putting people back to work. There are plenty of reasons to feel cautious about the pace of the housing recovery, including election year uncertainty and the year-end fiscal cliff. Additionally, high oil prices affect our costs directly in the form of diesel fuel, resins and glues and freight costs. And high gas prices affect consumers, especially home buyers in California. Nevertheless, our quarterly results show that we're improving our performance in this uncertain environment.

With respect to global economic conditions, over one-third of our revenues come from exports of products from our Cellulose Fibers, TIMBERLANDS and Wood Products segments. Slower growth in the Euro zone and China affects demand for our products in these markets. Demand is also affected by supply from global competitors, adjusting to changing levels of regional demand. I'll discuss specific factors as I review results for our business segments. Now, I'll comment on the performance of each of our businesses in the third quarter.

In TIMBERLANDS, we had a solid quarter with earnings increasing slightly as a result of increased profit from dispositions. Export sales of logs from our strategically located western lands are a competitive strength of Weyerhaeuser, and they're an important component of our earnings. During the past quarter, demand from Japan, which is our largest export market, remained stable. Quarterly volume was down slightly due to the timing of shift departures. These shipments will be included in fourth quarter results. Over the past few quarters, we've commented on the slowdown of log exports to China, but noted that we expected some pick up in Chinese demand towards the end of the year. Our effectiveness in building longer term reliable relationships with direct customers, together with some correction of temporary oversupply, resulted in a 9% increase in our shipments to China during the quarter. This increase helped to offset the slight decline in volume to Japan, which will be reversed in the fourth quarter.

In Wood Products, we again delivered strong year-over-year results and quarter-over-quarter results. Sales realizations increased for most products as a result of improved commodity prices, as well as a higher value product mix. The segment also benefited from the effective execution of performance improvement initiatives. The result? Earnings nearly doubled compared with the second quarter, despite slightly lower volumes for lumber and OSB. Excluding special items, our $92 million in EBITDA for the quarter was up $102 million from the third quarter of 2011. And year-to-date, we're up $195 million, demonstrating the operating leverage that we have with our large scale and all product lines, especially lumber and OSB.

Improvement year-to-date is the result of better market conditions, but also from deliberate across-the-board initiatives that we've undertaken to improve our performance. In total, these initiatives have contributed to more than half of our year-over-year bottom line gains. Examples of these broad improvement initiatives include revenue gains from targeted price increases for both commodity, as well as value-added products. Volume growth from an expanded presence in the repair and remodel market; reduced manufacturing costs from higher operating rates; and greater manufacturing reliability. And lower raw materials costs due to improved log recovery, reduced purchase of outside veneer and reduced use and cost of wax and resin additives. We still have further opportunity to improve our performance, but we're pleased with our progress.

Moving to RECO, as Kathy noted, earnings increased slightly from the second quarter results, as home closing rose 21% due to steady market improvement, as well as seasonal activity. This quarter, we had no significant land sales compared to the second quarter when we sold our Cross Creek Ranch master plan community in Houston. Sales continued to show the strength of the housing recovery as quarterly sales increased 45% compared with last year. Year-to-date, total sales were 40% greater than last year and they're up in every one of our markets. This sales activity led to a 74% increase in our backlog compared with last year.

The national housing market continues to improve at a measured pace, attracting job growth and a steady decline in both new and resale home inventory. Real estate is still local, however, and the pace of recovery differs among our regional markets. In the quarter, our most improved market was the Inland Empire of California, where sales doubled from the second quarter and tripled from one year ago, as we tapped the market opportunity with attractive newly designed homes for more price sensitive buyers. Sales in the Washington, DC market, which typically are slow in the summer months, showed surprising strength compared with last year. This improvement included sales of affordable homes, which were required as part of our development entitlements in this region. Year-to-date, our most improved markets are Arizona, Las Vegas and California's Inland Empire, followed by solid gains in the Puget Sound region, Washington, DC and San Diego. The LA Ventura market is beginning to show signs of slow recovery, and Houston, which has been a solid market during the downturn, has maintained steady volume this year.

My final business comments relate to our Cellulose Fiber segment. Our Cellulose Fiber segment earnings increased significantly as a result of less planned maintenance down time and higher productivity. This improvement came despite challenging global market conditions. Price realizations were approximately flat, holding better than commodity grade index prices, which declined during the quarter. With approximately two-thirds of our Cellulose Fiber sales coming from exports, foreign exchange rates can affect our results. During the quarter, the Canadian dollar rose slightly while the euro strengthened late in the quarter in response to new Euro zone policy measures. Both changes should help the relative competitiveness of our Cellulose Fiber segment.

We continue our dual focus of continuous improvement in our manufacturing and marketing, while also developing innovative new products. Innovation over time will provide margin uplift and allow us to continue to grow with global customers. Construction is nearing completion at our new modified fiber manufacturing plant in Gdansk, Poland. Product qualifications set to begin by year-end, and we should begin to deliver product by mid-year 2013.

Our newest announced product is THRIVE, a proprietary form of thermoplastic composite using a sustainably sourced cellulose fiber from our pulp mills as a reinforcement additive. The product will initially be used in automotive parts and household goods. This green polymer product will help manufacturers of auto parts improve performance characteristics and costs compared to their existing petroleum based parts. So this will not have a significant near term financial effect for us; it's an example of our success in developing innovative new products from cellulose. In this case, for new customers, starting with [Ford] today with global potential in the future.

Before turning to Patty for comments about our fourth quarter outlook, as well as financial highlights, I will talk about our recent decision to increase our dividend by 13% from $0.15 per quarter to $0.17. When we converted to a REIT in 2010, we stated that our objective was to set an attractive dividend that would be both sustainable and could grow over time. In setting our initial post conversion dividend level, we wanted to strike the right balance, considering our overall economic outlook, our outlook for near term company performance, our targeted capital structure and the affordability of our targeted dividend.

On last quarter's call, in response to a question, I said that we would set our dividend not looking back, but looking forward, considering our future earnings potential, as well as our view of market conditions. Although we remain cautious about the pace of recovery in the US and global economies, our Board was pleased to take action at this time to increase our dividend. This decision was based upon the clear results of operational improvements to enhance performance within each of our businesses that are evident in our report this morning and our confidence that housing fundamentals are improving. And now, I'll turn the call over to Patty to discuss our fourth quarter outlook, as well as provide financial highlights.

Thank, Dan, and good morning, everybody. Notwithstanding the uncertainty in the overall economy, we are pleased that nearly one month into the fourth quarter, we continue to see the sustained signs of an improving housing market. Our outlook for the fourth quarter is summarized on chart 12, and I'll begin my comments with TIMBERLANDS. In the west, domestic log prices are anticipated to be slightly higher on volumes comparable to Q3. Export volumes to Japan, our highest margin log, remains strong and are expected to increase in the fourth quarter. Housing markets in Japan have been stronger this year driven by a combination of historically low mortgage rates, planned increases in consumption taxes in later years, and some rebuilding and repair activities from last year's tsunami.

The weak euro continues to create heavy price competition from European laminated lumber. Demand an prices for our logs to China are expected to increase moderately with improvement in both residential and commercial construction activity. In the south, realizations for logs are expected to be slightly lower due to a smaller piece size with a heavier mix to chips and fiber. The volume is likely to be slightly higher seasonally. We will see significantly increased costs, mainly due to the timing of silviculture treatments. Non-strategic land sales are expected to be flat to Q3. Overall, we expect earnings in our TIMBERLAND segment to be comparable to the third quarter.

In Wood Products, the fourth quarter is traditionally one of the weakest earnings quarters of the year due to seasonality. While we do not -- while we do expect to see some softening as we progress through the quarter, to date, prices and volumes have been unusually strong for this time of year across most product lines. We will likely have reduced volumes later in the quarter and we will continue to match supply with demand. We continue to focus on driving operational improvements across the system, and we will take the opportunity with the slower holiday season to complete some minor maintenance and capital projects. We expect to be solidly profitable in the fourth quarter, but well below third quarter levels.

Moving on to Cellulose Fibers. In the fourth quarter, we expect sales realizations for pulp to decline primarily due to softening in the fluff market, which lagged the decline in MBSK. Global softwood inventories are in the normal range, but uncertainty in the global economy still exists. Sales volumes are expected to increase somewhat compared to the third quarter. Our final planned outage for the year was completed earlier this month, with down time of about six days compared with maintenance down time in the third quarter of 13 days. As a result of fewer maintenance days, maintenance expense will be lower. Energy costs will likely be somewhat higher as a result of lower electricity sales and somewhat seasonally higher natural gas usage. We expect that earnings in our Cellulose Fiber segment for the fourth quarter will be comparable to the third quarter.

In our Real Estate segment, we anticipate home closings to increase to just over 800 compared to 615 in Q3. The mix of closings in the fourth quarter will include fewer closings from certain high margin communities in San Diego and increased volume of affordable homes with low margins due to regulated sales prices. As a result, although our homebuilding activity continues to be strong, we will likely see margins drop to below 20% in the fourth quarter. The increased closing volume will also result in higher selling-related expenses. We expect that earnings from our single family homebuilding activity will be slightly lower in the fourth quarter compared to the third quarter, and it is possible that the fourth quarter could have some land sales although the amount and the timing is difficult to predict. There was no significant land sale activity in Q3.

Now, I'll wrap up with overall financial comments. Through the third quarter, capital spending for Weyerhaeuser Company totaled approximately $219 million. We still expect total spending for the year, which includes reforestation, to be around $290 million. We ended the quarter with cash of $608 million. Major uses of cash during the quarter included debt maturities of approximately $181 million and a $97 million payment on a note related to a timber monetization for timber that was sold in 2002. During the fourth quarter, we expect to receive about $110 million when the related financial investment matures.

Cash received for stock option exercises during the quarter was approximately $66 million driven by the higher stock price. Our dividend pay out in the fourth quarter will increase to approximately $92 million, reflecting increase in the quarterly per share dividend to $0.17, as Dan has already discussed. We have no further debt maturities this year and we expect working capital balances to decline seasonally by year-end; however, not to the levels of last year-end given our stronger wood products market. With that, I'll turn the call back to Dan and I look forward to your questions.

Thanks, Patty. Quarterly results from all of our business segments demonstrate the operating leverage that we have to a recovering housing sector, as well as operational improvements in each of our businesses that are increasing our competitiveness. We will continue to focus on what we can control, improving our operating performance and our relative competitiveness. Being prepared to take full advantage of the quality of our assets, the strong relationships with our customers and suppliers and the commitment of our dedicated employees. And now, we welcome your questions and comments.

(Operator Instructions)

And your first question comes from Anthony Pettinari with Citi.

Hi, Anthony.

I've got a question on costs. You've done a good job of containing SG&A over the past year, but as we look forward to 2013, there's a possibility you could be growing revenue, maybe in the double digits; you should be seeing volume recovery in most of your businesses. Can you talk about how you think about SG&A targets in that environment? And then in terms of working capital requirements as you ramp up volumes, what are the working capital needs and the incremental capital spending that's going to be tied up as we move closer to 1 million starts next year or the following year?

Good morning, Anthony. Let me first talk about -- address your question on SG&A. We've made a tremendous amount of progress on bringing down our overhead expenses over the last three to four year period, and our journey is not done. We continue to look for opportunities to continue to ratchet down our T&A. However, we are now shifting to a period where we expect to be growing because of the pick up in housing and the need to be re-staffing in certain locations. A lot of the re-staffing is not reflected in G&A; it's cost of sales headcount, so we continue to be focused on managing our G&A and keeping the gains that we've made during this downturn. We would expect selling costs to be increasing, coincident with the pick up in sales because fundamentally, most of our selling costs are tied to revenues, and we would expect selling related expenses to be increasing as we begin to recover.

As we think about working capital, Patty commented that we shouldn't expect the same level of working capital at the end of this year in our Wood Products business as we had last year. Because we are selling more material and we are manufacturing product not just to maintain our current level of business, but as I mentioned in my remarks, we are increasing sales in certain channels. And so there will be some additional working capital related to increased sales activities as we go into 2013 and as we continue to expect housing starts to recover. We would expect the same thing to be showing up in our RECO business throughout 2013 because we expect our volume to be increasing coincident with the pick up in housing.

Maybe the one thing that I would add, and you saw that in this quarter as Kathy commented, where G&A will go up to the extent that it -- the stock price impacts the variable compensation in terms of marking our share price to market. So I look forward to that part of the G&A going up, but as Dan said, they will continue to stay very focused on holding on to the G&A gains and really increasing that through productivity and some of the activities that we have under way.

Next question, please?

Okay, that's very helpful, and then maybe just shifting gears to Chinese log demand. You referenced expectations for improved log prices on Chinese homebuilding activity. I'm just wondering, can you tell us what you're seeing in October, and is that something that you're really seeing now? Or is there sort of an expectation for an improvement towards the year-end, or can you just give us any kind of color on what you're seeing now?

Well, we saw some pick up in our export activity in the third quarter, probably a little bit better than what we might have imagined. We had been anticipating some market recovery towards the end of the year; we were able to capitalize on better conditions in the third quarter, and we would expect that to continue through the fourth quarter and into next year. Some of that, as I said, is related to working down inventory, generally, in China, but also us continuing to capitalize on the relationships that we have developed with our Chinese customers. There was a slowdown in construction in China that now seems to be reversing itself a bit.

Remember that we're not selling structural grade material into China for wood frame housing. The wood that's going to China is used in construction for primarily forms, as well as other industrial uses. But I think we're seeing benefits of the predictability of our logistics, the quality of our logs, and so we expect that we continue to take advantage of the opportunity in China. Recognizing, once again, that our largest market is Japan for our export volume for logs.

But Anthony, to your question, what we're seeing for China now, we are having, and they are moderate increases, small, but we are seeing pricing picking up on our China. And as Dan talked about, we really go through very established customer relationships, so it may be a little different than what you're seeing in the broader industry.

Thank you, Anthony. Next question?

Your next question comes from Mark Connelly with CLSA.

Good morning, Mark.

Mark?

I'm sorry, can you hear me better?

Yes, that's better. Thanks, Mark. (laughter).

Okay, sorry. So, two things. Everything you said about housing is right and bullish, and I think we all feel pretty good about it. Was the increase in the cancellation rate anything special, or is there something we should be watching for there? And then the second question, which I know I've sort of asked this question before, as I talk to southern land owners, they tell me that rotations are changing dramatically just by default. Is your system not seeing that just because it's so big?

With respect to cancellation rates, I think they've been extraordinarily low for the last several quarters, and I think, Mark, what we're seeing is a return to perhaps a little bit more normal situation. The primary reason today for cancellations is the challenge in qualification, which is still a difficult process for most home buyers. And so there is some level of discouragement that leads some to dropout, but I don't view the uptick in cancellation rate to be troubling. In fact, there's a very low level of finished inventory in the market for new homes and the inventory levels of pre sales have come down pretty dramatically. So there's a shortage of product out there and that causes me to feel relatively comfortable.

Okay, that's really helpful.

Southern log rotations, we're not seeing any significant changes in our system.

Okay, I'll just assume it's because you guys are bigger and better, thank you.

Thank you, Mark. Next question?

Your next question comes from Mark Wilde with Deutsche Bank.

Good morning, Mark.

Dan, again, I appreciate the increased data and visibility inside Weyerhaeuser we continue to get from you guys. I did wonder today, can you give us any color on the non-strategic timber sale in the quarter just in terms of location, acreage and values that you're seeing out there?

Mark, this is Patty. Actually, it's not just one. There's a number of ones that we have that are small in size. Most of the activity that took place this quarter, I believe, was primarily in the south.

Okay, and do you have an expectation, Patty, for what we'll see over the next 12 to 24 months in terms of aggregate level of non-strategic sales?

Boy, Mark, it's difficult to know, as you know, those sales are lumpy. I wouldn't see a significant pick up in the amount of acreage that we would bring to market from a sale perspective, only because we've really optimized the portfolio. So in terms of additional non-strategic assets, as you know, we've sold a fair amount over the past. In terms of things that might come on the market, I think we are seeing some pick up from the industry broadly, but difficult to know exactly what will happen over the next 12 to 15 months.

Okay, and could you talk -- at RECO, what you're doing vis-a-vis lots and lot options at this point?

Yes, I mean, we always approach the RECO markets differentially, Mark, as we've explained in the past. It's really a function of what the entitlement risks are in each market. We are always active in the market, we have a strong pipeline of lots at various stages, and so we're confident that we've got a lot of availability that we can see for an increase in activity in 2013. As we look out towards 2014, our plans are in place to be sure that we've got the improvements going in so that we'll have finished lots for those time frames. We also have lots -- I think as we've discussed before, that -- where we have the ability to sell to other builders at the right time and the right place, and we've got the optionality in our portfolio to either build homes on those lots or to sell them to others if that happens to be an advantageous strategy. And then the lot market is tightening up in most major metro areas, especially finished lots, so the industry is working through a lot of the lots that had been developed prior to the turn down in the cycle. Now we're back into a mode of having to put in infrastructure improvements to complete new lots, and so that is causing some escalation in prices in most markets.

Thank you, Mark. Next question?

Your next question comes from Chip Dillon with Vertical Research.

Something that stood out, and I know we're not back to normal times, and who knows what normal will be, but when you go back in the past, it seemed like you all had, usually, a rush of closings in the fourth quarter in Real Estate that really took the number up a lot. And again, knowing we're just on a turn, I can see why it might be premature, but is there anything else going on that might make the pattern seasonally be different as we go through next few years? As housing -- assuming it continues to recover, as that happens, or will we at some point -- is this an unusual year that the fourth quarter is not really moving up a lot?

Well, our fourth quarter closing estimate is increasing, and that is typical with the seasonality that you observed in the past. I think that's typical not just for us, but for other builders, and so we have actually, a fairly significant increase in closing that are projected. As Patty pointed out, the margins will not be as great as what they were in the third quarter, and so that's a quarter-over-quarter comparison that's important to recognize. Q3 margins were higher than normal because of a mix that was heavier to San Diego, especially some projects in San Diego where we were closing out subdivisions and had very high margins. As we move to the fourth quarter, the shift of mix moves away from San Diego to more affordable markets where margins are lower. And is further affected by the fact that we have a significant number of closings that we're projecting out of our Winchester operation in the Washington, DC metro area where they will be delivering some affordable homes that are required as part of the entitlement process in Maryland and Virginia. And so those are very low margin homes that are part of an overall subdivision development.

Those affordability requirements are imposed on developers in projects that are roughly 50 watts or more, and so what you're seeing, really, is a quarter-over-quarter comparison that is a mix shift, and that accentuates those differences. But we still expect an increase in activity in the fourth quarter for closings. What is noteworthy this quarter, as we look at the fourth quarter, I think as Patty noted, normally, we would have more slowdown in the Wood Products business. And what we're seeing is pricing hanging in there a little bit longer than what might be normal, and I think that's related to construction activity, not for homes that will be delivered this fourth quarter, but early next year.

So Chip, just to give you some numbers on the closings, if you went back last year in the third quarter, we were at 508 and we went to 582 in the fourth quarter. This quarter, the third quarter, we were at 615 and we'll be over 800 in the fourth quarter, for this particular quarter.

Got you, and that's very helpful with the mix, it sounds like it's unusual. And just one quick follow-up, I'm looking at your guidance for Wood Products, and we always, as we all know, have to take it with a grain of salt given the volatility although there are lags. It just seems to me that you are taking a quite cautious view, especially given that in the last week or two, we've seen a rise in the price of both lumber and OSB, at least in the trade press. And now, we've got this hurricane which, of course, you guys don't have to worry about out there that is about to visit us here on the East Coast. And so I mean, are you taking a large dose of the normal seasonality and putting that into your guidance and -- or do you actually think this is -- are you being conservative?

(laughter). I think it's a fair statement, Chip, that our overall guidance is conservative, as you appropriately pointed out. Volatility for pricing in both of those commodities has been a pleasant surprise both in the third quarter, and as I said in my opening comments, to date, in the month of October, we've been pleasantly surprised with the strength of pricing. Just to give you, maybe, some way to gauge that a little bit, in lumber, every $10 of movement in price for us in this quarter will be about $3 million per month, given the volumes we're projecting for the fourth quarter. And in OSB, every $10 is $2 million a month, so those earnings move pretty dramatically with price increases. So if these price increases hold, we will be above the guidance that we gave you for the fourth quarter. And I think, you know, the nice thing about wood products is you do get some visibility as we go through the quarter in terms of what's happening out in the market, given the printed publications that come out. But we're pulling for higher pricing in both of those, and I would be very pleased later in the quarter to be reporting our guidance for the fourth quarter was higher than what we're talking about today.

Two final comments on that question, Chip. When the new housing start numbers were announced last week, that did cause some increase in activity among our customers because our customers are running with very thin supply inventory levels and they would normally be managing inventory levels down at year-end. And so good news with starts causes the channel to react relatively quickly especially with limited amount of product in the channel. And then finally, we do care about the hurricane; that will potentially affect our manufacturing business and our woods on the East Coast, as well as the overall market conditions for our customers, and so we're concerned about that just as much as you are.

Thank you, Chip. Next question?

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

I have two questions. One on RECO, to beat that, perhaps, into the ground, and one on Cellulose Fibers. The closing that you're projecting for fourth quarter are actually pretty normal relative to your backlog, if you look over history, and certainly, you've talked about mix and the fact that you have more affordable housing being produced this -- or closed this quarter. Yet traditionally, Dan, the fourth quarter from an EBITDA dollar standpoint, an operating profit dollar standpoint, has been, in fact, larger than the prior quarters. Should we now assume that this change in mix is something that we should expect for future periods, or are there any implications from this, or is this really just a one-off factor? And when you're talking about mix, could you relate at all what the selling price changes were on what closed this quarter within your regions?

On Cellulose Fibers, my question is, has there been any positive or negative implications thus far in terms of your demand from some of the outages that we've heard about on super absorbents, relative to that Japanese factory explosion? Thank you.

George, I'll answer in the order that you asked them. With respect to the fourth quarter, it is a mix issue especially relative to Q3, and it includes these affordable units. And the issue on the affordable units is that there's a different rhythm to them, so in our Winchester operation, which is where the sales are coming from, they are normally a pre-seller of homes. So they take an order and then they build the house and deliver it. With these affordable units, they are attached, they are part of a larger project. We build them, and then when they are close to completion, we turn, really, the sales process over to the community entity that handles these affordable units.

So it's a larger number of deliveries all at one-time, and so it will have low margins in a large group of homes, it tend to drag down the overall mix. That's not something that I would expect over time, but there is lumpiness to the way those affordable units are delivered. We are also seeing an increase in closings that tracks the sales that we've had earlier in the year in some of our lower priced markets, and so that is also affecting margin. As we look at cash flow, the increased activity in closings will generate more cash flow even if margins are down a bit, because fundamentally, we're recovering all of our costs including the land cost that's invested in those lots.

Sure.

With respect to the question on the SAP --

Maybe before you go there, Dan, in terms of the EBITDA quarter-over-quarter fourth quarter last year to this year, the other thing that impacts that, George, and I think you referenced that is just the average closing price itself. And you can see that delineated somewhat on chart 10 that's in the packet, so you can see that the average closing price at the end of last year's fourth quarter was almost $400,000, this year it's $372,000. But right below that graph, you can see the average sale price, which came down through the end of last year and the beginning of this year, but now is trending back up again, so it's a combination of those two.

Patty, that's mix, so would you say that all your markets have seen increasing in selling prices, even if the mix itself has changed the average price that you're reporting?

We are seeing some; it's not a huge, significant amount. We certainly would look forward to seeing more as housing recovers greater, but --

Understood.

We did see a pick up in the quarter in September. So if we look at our September numbers are different than the quarterly numbers, but the September numbers, prices are up, I think, in every single one of our markets.

Fair enough.

The question on the SAP outage in Japan, that did lead to some activity with some of our customers who are trying to replace the amount of production; I think that plant produces about 20% of that product worldwide, and --

Right.

So our key customers contacted us, and we've been taking some of their needs in order to fill the gap that they will experience with that outage.

Thank you, George. Next question?

Thank you.

Your next question comes from Alex Ovshey with Goldman Sachs.

With the --

Alex?

Yes, can you hear me?

Yes.

Excellent. With the housing momentum gaining or improving, especially with the housing starts number that we saw a couple weeks ago, which I think was a lot better than people's expectations. As you look at your Wood Products manufacturing footprint, is there any capacity that right now isn't running that you think you will be bringing back into 2013?

We're operating all of our lumber manufacturing facilities today. We're operating all of our OSB facilities. They have -- they are not running 100%, so they have some capacity potential in our Engineered Wood Products facility, we still have some mothball facilities. The operating raise in our engineered manufacturing operations is lower than it is with OSB and lumber, and so we have the ability to ramp up production in order to meet demand in the near term. And we have no announcements at this point, nor we have made any decisions about when to bring back shuttered capacity.

Okay, understand that. As you're going to go through your budgeting process for next year, would you be able to share what housing starts number or relevant range for housing starts number that you would expect to use, as you think about budgeting within the wood products business next year?

We will share that on our next call at the beginning of the year; so we're tracking the number of outside forecasts. The ranges today for 2013 from third party forecasters that we track range from about 900,000 up to as high as 1.2 million. We'll have a better handle on that at year-end and then we will share with you what we are using for planning purposes, and that would help you calibrate perhaps what we're expecting to be delivering in our Wood Products business, our timber business and homebuilding.

Sounds good, thank you.

Thank you, Alex. Next question?

Your next question comes from Gail Glazerman with UBS.

I was wondering if you could talk a little bit about southern saw log markets. So we've seen a reasonable pick up in housing activity, wood pricing products are up, but it doesn't seem like there's much traction in terms of log prices. So I'm just wondering what you think is holding that back and what it will take to start to see a pick up in turn there.

I think it will be consistent, steady demand and we would expect some pick up in response to increased activity. It continues to be a regional market, Gail, as you know, and so as starts pick up generally, there's opportunities in the marketplace to manufacture more in certainly our wood product facilities, as well as third parties. And I do think it's going to be continued uptick in demand that will tension the market and then you should start to see some movement.

Okay, and then in terms of homebuilding activity, when you look at the sales activity that you're seeing, is the mix of business what you would expect to be normal? Not aside from the affordable housing issues you're having in the fourth quarter, but are you seeing the new home buyers versus the mix that you'd expect of new home buyers versus move-up buyers, etcetera, that you would expect in a more normal housing market?

We are. We sell to a broad range of customers. The activity that I talked about this morning in the Inland Empire has been reassuring for us because that market has been very slow, and so we've seen a steady increase in activity. And I think we found a sweet spot in terms of price and product for that market, so that's a first time buyer product. In some of our other markets, we've seen move-up activity being stronger.

Las Vegas is a market where we've had some real success in move-up housing, so I'd say it varies by market. We're not seeing noticeable long term shifts in demand in terms of the kinds of homes and the kinds of features. We're all focused on affordability, and we're focused on getting home buyers confident again to go back into the marketplace. And so we're starting to see that activity in each of our local markets are responding with new product that meets the needs of today's buyer. Not seeing any significant long term shifts at this point.

Thank you, Gail. Next question?

Your next question comes from Mark Weintraub with Buckingham Research.

Hi, Mark.

Hi, good morning. Do you have a sense yet as to what your pension expense might be looking, if rates -- discount rates stay roughly where they are for next year versus this year?

You know, Mark, we'll be going through those calculations here shortly. We really haven't finished that work-up yet, so I really don't have anything to share at this point, but we will be going through that on our fourth quarter call.

Okay, is it -- if I could, one more -- Do you -- I know last year, you had a pretty big increase in the amortization of actuarial loss that went up, I think, about $70 million. Does that stabilize this year, or does that also go up again this year?

I've not gone through the computation, so I would just be speculating. Sorry.

Sure, and then real quick, so lumber panels, you mentioned, you're operating 80%, 85%, if I caught you right?

Yes.

Okay. The types of housing start increases, particularly the upper end that some of the forecasters are talking about, would potentially imply that, quite frankly, you would struggle to meet all of the demand and maintain market share. Am I missing something there, and what can you do? Is there flex in your system now where you can meet that higher demand if need be fairly quickly?

We have flex in our lumber business because we have the ability to add hours, and ultimately, if the demand is sustained, to add some shifts. And then there is -- we have continued to make improvements in the productivity and the throughput in the mills that we do have. Our OSB mills have some flex capacity as we ramp up, and what we'll do is focus on serving the markets where we optimize our margin, with longer term relationships and we optimize our strategic advantages. So I would say, we're looking forward to the opportunity to challenge ourselves, Mark, with that increased activity.

Understood, thank you.

The other thing is especially, as we look at our lumber system, Mark, we do have the ability to do some de-bottle necking across the system as the demand picks up. So we're looking at the ability to do that first with non-capital solutions and then obviously, to the extent that there are other capital things that would give us some additional capacity that we have in front of us; we'll be looking at doing that, as well.

Next question?

Your next question comes from Steve Chercover with DA Davidson.

Thanks, good morning. Just wondering, I actually missed your discussion of how many lots you had. I think you said 27,000 within RECO, and then you had a big position in Nevada, which I missed?

Yes, so what we said is that we have control of about 27,000 lots in our primary markets; those are lots that are intended for our own homebuilding operations, as well as for sale to other builders. Of those lots, roughly 80% are owned and 13% are optioned, and then additionally, we control about 67,000 lots in large master plan in Nevada. And that is a project that -- where we've put the development and construction on hold pending improvement in local market conditions. The majority of those lots are held under a long term option and the value of that particular property is based upon its development rights, and in particular, its water rights. When we look at our lot position, we have always sold some portion to third party builders, and what that gives us is tremendous amount of optionality because we can choose to shift the mix between what we build and what we sell.

So in general, about 25% of the lots that we control have been targeted for sale to third parties, but we do have the ability to ship that mix depending upon opportunities in the marketplace. The length of our lot pipeline varies by market based upon local entitlement conditions, so we have a much longer position in a place like California, where entitlements are very difficult. And in a short position in a market like Houston, which has no zoning and one can go through the process relatively quickly. And in some markets, we are developing a majority of our own lots and others, we continue to purchase lots from third party land developers.

So the 27,000, are those basically shovel ready? And how would that compare to your target inventory in a normal housing environment?

They are not all shovel ready, but they are -- we control them and we have some level of entitlements. And what we do is we manage the development of these properties so that we're not investing in a lot of infrastructure earlier than we need to, so we're comfortable with the position that we've got as the market picks up. We will continue to perhaps move the location of those lots around and the investment in lots, but that's an ongoing process based upon local demand and local opportunities.

Thank you.

Could you just -- sorry Kathy, remind me of the time lag between when a home is sold and closed?

Well, that varies. In some cases, we have finished homes. Houston is a market, for example, where we historically have built homes on a speculative basis because there is a large group of buyers in Houston that are relocating there, primarily in the energy business. And when they come to town, they need to buy a house, and so that house needs to be ready to move in, in probably a couple months. If it's a completed home and if we sign a contract in today's market, it's likely 60 days to go through that processing, through a mortgage. Then the other extreme would be a pre-sale, which we do in most of our markets, where we have a model complex, the buyer comes in, they sign a contract. And then we build the house and the construction time frame can run from say, 90 days to 6 months depending upon the complexity of the house and the finish and the ultimate price range. And then you'd add the closing time frame to that, so if it's a pre-sale, the home buyer is going through the mortgage qualification process while the home is being built.

Next question?

Your next question comes from Joshua Barber with Stifel Nicolaus.

Again, sorry to beat the homebuilding issue to death. Just one quick question there. Can you tell us what your community count is on the RECO side, and how that's changed over this year? And also on that, where you envision that going in 2013?

The community count for RECO is down just a bit this year, and so what is happening in the homebuilding business at all times is you're continuing to open new communities, you're closing out new communities. Total community count today for us is 66 and we would expect that to be increasing next year. One of the things we have focused on, especially over the last two to three year period, is the sales per community. So we have focused on increasing the effectiveness and the productivity of every one of our communities to the point that today, I think, based upon our data, we've got the highest number of closings per community of any public builder.

And are you seeing credit trends among new home buyers today or existing home buyers? Are you seeing that going down the credit curve, so to speak, or is it still mostly in people with very high FICO scores, people that could get mortgages much easier. Are you starting to see some thawing of credit?

Still very high FICO scores; mortgage qualification process is challenging. We're still waiting for a definition of qualified residential mortgage through the Consumer Product Protection Bureau and also, coming out of Dodd-Frank. That's an issue that needs to be addressed in the industry. Right now, the initial proposals continue to be for a 20% down payment. I think that's too difficult, and there needs to be some moderation, and the pendulum swung very far to tightening credit and I think that longer term, we need to see moderation in that process.

Thank you, Josh. We have time for one more question.

Your final question comes from the line of Paul Quinn with RBC Capital Markets.

Thanks very much for taking the question. Just two questions on Wood Products. You obviously saw OSB prices jump in 2012 here, and they seem to remain high. How do you see about the -- what do you think about the sustainability of that market? And then also on lumber, although it has come up, we're still below long term averages. Just your future view on that pricing dynamic, as well.

I'll take lumber first, Paul. We take the long view on lumber and look at total projected North American starts, both US and Canada, and we look at the relationship that we have with lumber that is has historically come from Canada. We would expect demand to be increasing as the market recovers and we would expect a healthy environment for lumber; I can't project future prices. With respect to OSB, the market has been tight, most operators are producing at relatively high levels. As I mentioned earlier, when the new starts number came out last week, it was evident that the supply channel was pretty thin and so I think that's what's been helping OSB prices. And we would expect that we've got a long way to go in this recovery. As I mentioned, today's levels are still very, very low compared to historic starts numbers and long term trend numbers and so we're bullish on the long term.

Great, thanks very much.

Okay, well, thank you for all of your questions. We appreciate you joining us this morning on the call. We especially appreciate your continued interest in Weyerhaeuser Company. If you have further questions following today's call, we encourage you to follow-up directly with Kathryn McAuley. And I thank all for joining us this morning.

Thank you, and have a good day.

Thank you for your participation. This concludes today's conference call and you may now disconnect.