Weyerhaeuser Company (WY) Q2 2010 Earnings Report, Transcript and Summary

Good morning. My name is Thea, and I will be your conference operator today. At this time, I would like to welcome everyone to Weyerhaeuser's Quarter Two Earnings Release Conference Call. [Operator Instructions] Thank you. At this time, I would like to turn the conference over to Ms. Kathy McAuley. Ma'am, you may begin.

Good morning. Thank you for joining us on Weyerhaeuser's Second Quarter 2010 Earnings Conference Call. I am Kathy McCauley, Vice President of Investor Relations. Joining me this morning are Dan Fulton, President and Chief Executive Officer; Patty Bedient, Executive Vice President and Chief Financial Officer; Tom Gideon, Executive Vice President, Forest Products; and Larry Burrows, President, Weyerhaeuser Real Estate Company. This call is being webcast at www.weyerhaeuser.com. The earnings release and materials for this call can be found at the 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. Also on this call, we will update shareholders on the steps remaining in the special dividend process. This morning, Weyerhaeuser reported net earnings of $14 million or $0.07 per diluted share on net sales of $1.8 billion. Significant after-tax items in the second quarter were a charge of $33 million or $0.16 per share for the early extinguishment of debt. In the quarter, we redeemed $548 million of the March 2012 bond. A gain of $5 million from Wood Products asset sales, primarily the Delta, BC, hardwood lumber mill. Including these items, the company reported net earnings of $42 million or $0.20 per diluted share. A GAAP reconciliation of special items is available on our website in the earnings information package. Please turn to Chart 4 in the earnings information package as I will discuss the waterfall chart. Chart 4 is a bar chart detailing the changes in the contribution to earnings before special items, interest and taxes. Changes in Weyerhaeuser's segment earnings from the first quarter of 2010 to the second quarter were as follows, beginning with the first bar on the left-hand side of the page. In the first quarter, Weyerhaeuser earned $80 million before special items, interest and taxes. Proceeding from left to right across the waterfall chart, we begin the discussion with Timberlands. Timberlands' earnings were $11 million lower in the second quarter than in the first quarter. Higher domestic and export log prices were offset by fewer nonstrategic land dispositions. Costs were also higher as silviculture activities postponed from the first quarter due to weather conditions occurred in the second quarter. Wood Products’ earnings were $52 million higher in Q2. This improvement was due to higher average price realizations for all major product lines, with significant increases in average oriented strand board, plywood and [audio gap 13:17] prices. OSB, plywood and lumber volumes also improved. These benefits were offset by higher log costs. Manufacturing costs were also higher due to the downtime taken late in the quarter. Cellulose Fibers contributed $55 million more to earnings in the second quarter. This improvement was largely driven by higher price realizations with a benefit from lower energy costs. Real Estate’s contribution to earnings was $4 million lower in the second quarter from the first quarter. The volume of single-family closings was higher and margins increased. However, there was no partnership income in the second quarter. Corporate & Other was $4 million lower in the second quarter due to less favorable foreign exchange translation. The final bar to the right is Weyerhaeuser's second quarter pretax earnings of $168 million. I will now turn the call over to Dan Fulton. Dan?

Thank you, Kathy. As I look back on the quarter, I'm very pleased with our progress on a number of fronts. We improved our operating earnings. All businesses were cash positive from operations, and we took the last major step towards our REIT conversions. Beginning with our performance, I'm encouraged by our ability to profitably manage operations in an uncertain economic climate without a sustained housing recovery. Timberlands delivered strong operating performance despite continued harvest deferrals, and we saw significant quarter-over-quarter improvement in Wood Products, Cellulose Fibers and single-family real estate operations. As Kathy noted, this improved performance generated $168 million in operating earnings before special items. This is an improvement of $88 million over the first quarter, and more significantly, it is an improvement of $229 million from one year ago. Last quarter, I noted that the pace of the housing recovery remained uncertain, and this continues to be true three months later. This has been especially evident in the market retreat following the expiration of the federal home buyer tax credit at the end of April. I also noted last quarter that we needed job growth and renewed consumer confidence to drive a sustained housing recovery, and this is still the case. The extreme volatility in Wood Products' prices during the quarter is further evidence of the challenging economic environment in which we are operating. Though some of our overall progress this quarter comes because of slightly improved economic conditions, much of the improvement in our financial performance, particularly in our Wood Products and Real Estate businesses, is attributable to our ability to improve our own operational performance at lower levels of housing starts. Tom and Larry will discuss the quarterly results of our operations, and they'll provide some additional color on how we've been dealing with current business conditions while positioning for the future. Finally, we continue to move forward on the path of reconversion to support our core Timberlands strategy. On July 11, shortly after the close of the quarter, we took the final major step in that process by declaring a special dividend to pay out our accumulated undistributed earnings and profits. Later in the call, Patty will review the remaining activities we will complete to pay the special dividend on September 1, while also providing our third quarter outlook. Now I will turn the call over to Tom Gideon, who will discuss our second quarter performance for our Forest Products businesses. Tom?

Thank you, Dan, and good morning. Operating earnings from our forest products businesses improved by $96 million in the second quarter compared to the first, even though the strong market conditions we experienced in the quarter were partially offset by a significant deterioration in Wood Products markets beginning in early May. I will start by discussing our Timberlands business referenced on Chart 5. Log markets strengthened in the first half of the second quarter, as higher operating rates among wood product producers combined with improved export markets created strong demand for our logs. This resulted in higher revenue from our U.S. operations in the second quarter compared to the first, as both sales realizations and volumes improved. Domestic log realizations increased modestly, primarily in the West, and export realizations also strengthened. Export sales volumes increased substantially due to the increased shipments of Douglas fir into Japan and China. Sales into the Chinese and Korean markets comprised 20% of our total export sales volume in the second quarter compared to 13% in the first. However, competition in these markets is increasing rapidly. Domestic log sales volumes increased in the second quarter as the decline in sales to our own mills due to reduced operating rates was more than offset by an increase in sales to third parties. By the end of the quarter, weak demand for wood products was beginning to affect log markets as well, and we reduced harvest operations in the West at the end of the quarter to respond to lower demand. We also rebalanced our southern harvest to planned deferral levels following the pull-forward of some volume in the first quarter to supply several of our cellulose fibers and iLevel mills during weather-related procurement challenges. As a result, total fee harvest declined by 8% in the second quarter compared to the first. I would also like to touch on harvest activity in our Canadian forest land operations, which declined seasonally in the second quarter. Canadian harvest typically declines quite sharply in the spring, as logging activity becomes extremely difficult due to the spring thaw. Changes in Canadian logging activity do not affect the Timberlands segment’s earnings because we transfer those logs to our iLevel and Cellulose Fibers manufacturing facilities at cost. However, the reduced activity is reflected on the segment’s income statement as a decline in intersegment sales with equally offsetting expenses. Expenses associated with our U.S. Timberlands increased slightly in the second quarter compared to the first. We incurred seasonably higher road-building costs, and silvicultural costs also increased, as we caught up on activity that had been deferred from first quarter due to wet weather. Earnings from our core Timberlands operations improved by $6 million quarter-to-quarter. However, this improvement was more than offset by a $17 million decline in earnings from the disposition of nonstrategic Timberlands. Overall, Timberlands’ earnings declined in the second quarter compared to the first, and the segment earned $70 million on second quarter operations. I will now turn to Wood Products, referenced on Charts 6 and 7. Lumber and OSB prices climbed rapidly during the first half of the second quarter, and Weyerhaeuser experienced strong demand across nearly all of our product lines, as our customers rapidly restocked depleted inventories. Industry-indicated prices for both products peaked in the last week of April. We have said before that any lasting recovery must be supported by a sustained increase in core housing demand, and wood product markets will remain volatile until single-family housing starts to recover. Wood product markets begun to correct in early May as it became evident that housing starts had been pulled forward due to the expiring housing tax credit. Demand eroded almost overnight and indicated prices for OSB and lumber fell rapidly, declining 50% and 32%, respectively, between the end of April and the end of June. Weyerhaeuser experienced improved price realizations and strong revenues through mid-to-late May due to favorable mix and a slight lag between price realizations and market indicators. However, profitability declined substantially across all of our product lines in the month of June. Price realizations for lumber and OSB declined rapidly, and orders for engineered Wood Products plummeted due to declining housing starts and inventory drawdowns by dealers. Comparing first and second quarter results for the Wood Products segment, revenues increased 30% in the second quarter due to improved quarterly average realizations across nearly all of our product lines. On average OSB realizations increased 35% quarter-to-quarter, and lumber increased 10% while sales volumes increased 31% and 16%, respectively. Sales realizations for engineered lumber improved modestly, on flat to slightly declining volumes. Manufacturing costs increased compared to the first quarter due to higher log cost and substantial production curtailments needed to match supply with eroding demand. This downtime which occurred mostly during the month of June affected nearly all of our product lines and geographies. Our lumber system took 32 weeks of downtime in the second quarter, including 30 weeks in the month of June. This compared to 29 weeks of downtime for the entire first quarter. Included in the second quarter wood products earnings are gains on asset sales of $8 million compared to gains of $44 million in the first quarter. Excluding these special items, Wood Products lost $11 million in second quarter operations, an improvement of $52 million compared to the first quarter. In many ways I am encouraged by our performance this quarter. Our year-over-year financial performance has improved by nearly $160 million on only slightly higher sales volumes. Wood Products operations were cash positive for the second quarter as well as year-to-date. While we certainly benefited from the rally and realizations, it is also apparent that the dramatically reduced cost structure that we put into motion last year is now being reflected in improved operating results. At the same time, I'm disappointed that we do not post stronger second quarter results. Though our OSB and Lumber segments performed well in the second quarter, our Engineered Wood and Distribution operations remain severely challenged due to the lack of housing starts. We will continue to monitor Wood Products markets very closely and adjust our operating posture on a weekly basis to ensure that we match supply with demand. While we are optimistic about our long-term financial prospects, the extraordinary market volatility we experienced in the second quarter underscores the absolute need to stay focused on reducing our cost structure and improving our margins. I will now turn to our Cellulose Fibers business, referenced on Chart 8. Pulp markets remained robust throughout the second quarter and our Cellulose Fibers business delivered excellent operating results, with both our pulp and liquid packaging businesses performing very well. The segment's increased earnings were primarily driven by higher revenues, as average pulp price realizations rose by $94 per ton relative to the first quarter. Second quarter once again included significant maintenance expense, as we completed scheduled annual maintenance outages at three of our mills. In total, Cellulose Fibers’ earnings increased in the second quarter compared to the first as the segment earned $74 million. I will now turn the call over to Larry Burrows, who will discuss our Real Estate business.

Thank you, Tom. Good morning. I am proud of the successful execution that has enabled RECO to be profitable for the second consecutive quarter. RECO generated a $27 million contribution to pretax earnings in the second quarter of 2010. This represents a significant improvement over the second quarter of 2009 when we lost $50 million, including a $14 million loss in single-family operations. We made considerable progress on the single-family front, higher-than-planned closings and improved margins enabled our single-family Homebuilding operations to earn $14 million in the second quarter. We supplemented these earnings with $13 million from the sale of land and lots, as we executed our strategy of opportunistically and profitably selling land to land-light builders. Our improved performance is the result of the many actions we have taken as I have outlined in past calls. Reducing SG&A, lowering cost of goods sold, repositioning communities and introducing smaller and less expensive product, as well as managing our standing inventory. We continue to leverage these improvements particularly in the face of deteriorating market conditions, as we experienced during the latter half of the second quarter. Overall, our housing markets remain unsettled, with low consumer confidence and high unemployment outweighing attractive mortgage rates and record affordability. Continued foreclosures, short sales and the building shadow inventory of delinquent loans are placing downward pressure on new home sales prices. The second quarter’s traditionally the height of the selling season when we build a backlog of homes to be closed later in the year. This momentum did not materialize in the quarter, suggesting that the spring selling season may have concluded early upon the expiration of the Federal Tax Credit. As illustrated in the key indicators' table on Chart 9, sales declined 21% in the second quarter of 2010 compared to the first on 26% lower traffic, and our backlog of homes sold, but not closed, declined by 134 units. With respect to specific RECO markets, San Diego remains active across all price points, and our local value propositions continues to resonate well in that market. Washington, D.C. also remains strong, with market activity focused on closer-run communities. The Houston market is now softening due to concerns about employment prospects within the aerospace and extraction industries. Las Vegas and Los Angeles remain weak, Puget Sound and Phoenix have softened modestly since the first quarter and though the Inland Empire as a whole remains challenged our positioning has helped us to perform well in that market. Fundamental to RECO success is our ability to adapt to changing market conditions, adjusting our offerings market by market to serve demand better. During our May Investors Meeting, I highlighted several examples of our local agility, and we continue to advance those products. Our Living Smart product, which we recently introduced in the Inland Empire has a starting price in the high $100,000s. This offering has been highly successful, and we have adapted it for introduction in the Las Vegas market. Virtually every existing and new community contains freshly designed and value-engineered product targeted to evolving market tastes. I'm pleased with RECO’s second quarter accomplishments. I believe we are well positioned to adjust to the more challenging market the third quarter may bring. I will now turn the call over to Patty to discuss the outlook for the quarter.

Thanks, Larry, and good morning, everyone. I'll start the outlook with Timberlands. Domestic log sales realizations are expected to decrease in response to the weak wood products market. Export realizations are expected to increase somewhat due to mix. Silvicultural costs should increase seasonally. Excluding the effect of non-strategic land sales we anticipate that earnings in our Timberlands segment will be lower in the third quarter compared to the second. In Wood Products, lumber sales realizations are expected to decrease by over 15% on slight increases in volume. OSB realizations are likely to decrease by over 30% compared to the second quarter while sales volume should be flat. Engineered Wood sales realizations are anticipated to increase 6% to 8% on decreasing volume. Log costs should be slightly lower. Overall manufacturing costs are expected to decrease in Q3 compared to Q2, primarily for lumber, as a result of slightly favorable operating rates, although Engineered Wood Products’ production costs are expected to rise slightly as volumes decrease. Overall, we expect a significantly larger loss in the third quarter compared to the second due to significantly lower sales realizations, many of which are expected to be even lower than the first quarter. In Cellulose Fibers, we expect average sales realizations will be higher in the third quarter compared to the second. We are starting to see some softening in the market as global supply, which was disrupted earlier in the year by the Chilean earthquake, European strikes and adverse weather conditions, comes back online. However, our demand remains strong and inventories are at very low levels. Maintenance costs and productivity in the third quarter should be very favorable as we have no planned annual outages scheduled for the third quarter compared to three in the second quarter. As a result, we expect more volume at lower cost. Earnings in our Cellulose Fibers segment should be substantially greater in the third quarter compared to the second. In our Real Estate segment, single-family sales activity has slowed significantly so far in the quarter. Competition for the shrinking pool of buyers is intense. Contract cancellation rates are expected to remain high as foreclosures and short sales are prevalent in most of our markets. We expect to close approximately 100 fewer homes in the third quarter compared to the second. Average prices for Q3 are anticipated to approximate Q2 prices but with slightly lower margins. We expect break-even results from our single-family Homebuilding operation. No major non-single-family transactions are planned for Q3. Capital expenditures for Weyerhaeuser Co. were just over $100 million for the first six months of this year, and we anticipate that net capital expenditures for the year will be just over $200 million. We ended the second quarter with $1.8 billion of cash and short-term investments compared to $2.1 billion at the end of the first quarter. We generated approximately $240 million of cash from operations during the quarter. The most significant use of cash in the quarter was approximately $600 million that was used to repurchase $548 million of our 2012 bond maturities. We do not have any significant debt maturities until 2012. Let me now provide you an update on the cellulosic biofuel producers tax credit. The IRS has recently released a memo which allows black liquor to qualify for this credit once companies are registered with the IRS. We anticipate receiving our registration this quarter. During the first part of 2009, we produced approximately 238 million gallons of black liquor, which did not qualify for the alternative fuel mixture credit. This equals $240 million of potential cellulosic biofuel credit at $1.01 per gallon, or $149 million net of tax. Since this credit offsets income tax liability, we could only carry the credit forward. It is still unclear whether the credit can be claimed in the same year as the alternative fuel mixture credit. For the last three quarters of 2009, we claimed $344 million of fuel mixture credit. There's a great deal of uncertainty as to the process for claiming these credits and we are evaluating both credits to determine which credit or mix of credits, if allowed, would add the most value to the company. To wrap up, I would like to update you on the timing and process to pay our special dividend. On July 11, we announced a special dividend of $5.6 billion. This is the final major step in executing our plan to convert to a Real Estate Investment Trust. We held a special conference call on July 12 to discuss this dividend, and the slides used for that call can be accessed from our website. To briefly recap, this distribution is governed by IRS rules, which require the company to pay out its previously undistributed earnings since its inception. The distribution will be made with a combination of stock and cash and the entire distribution is taxable to shareholders as an ordinary dividend. The board has capped the total amount of cash for the special dividend at 10% or $560 million. The remainder of the dividend will be paid in stock. Shareholders may elect to receive the dividend in stock or cash. If the cash election by shareholders exceeds the 10% cap, the cash portion of the dividend will be prorated among the shareholders who elect cash. Those shareholders then will receive the dividend in a combination of cash and stock. Chart 11 shows the calendar for this special dividend process. The record date for the special dividend was July 22. This week, we are mailing election forms and a prospectus for the special dividend to shareholders of record on July 22. Those forms are due back by August 23. The number of shares to be issued to pay the special dividend will be determined after the election forms are returned. For purposes of determining the number of shares to be issued, we will average the closing stock prices on August 24, 25 and 26. The expected payment date for both the cash and stock portion of the dividend is September 1. Using Chart 12, I would like to walk through the mechanics to determine the number of shares to be issued. On this chart, we are assuming that the average of the three-day closing prices from the valuation date is $16.49, which was yesterday's closing stock price. Again, the number of shares to be issued will depend on the actual stock trading value on the valuation dates in August. We won't know the number of shares to be issued for the ratio between currently outstanding shares and shares to be issued until those August valuation dates. Dividing the stock portion of the dividend of $5.04 billion by the hypothetical average closing price of $16.49 gives us the hypothetical number of shares that would be issued in the special dividend. Of course, market events between now and the valuation dates in August will affect the actual trading value, so this is just a hypothetical estimate of the number of shares to be issued. Our reported tax provision for the first six months of this year is computed on a C Corp basis. Once we complete the payout of the special dividend in the third quarter, we will revise our tax expense to reflect the effect of REIT tax status. Our tax rate on current year earnings will decrease and we will also decrease our deferred tax liability by approximately $1 billion. As we reported on our July 12 conference call, we expect to give updated guidance as to our ongoing dividend policy in the fourth quarter. Now I'll turn the call back to Dan and I look forward to your questions.

Thanks, Patty. Now we're ready to address your questions and comments. And I’ll ask Kathy to open up the call.

Thanks, Dan. Thea will open up the lines now for questions.

[Operator Instructions] And the first question will come from George Staphos with Bank of America-Merrill Lynch.

Just minor housekeeping, share count for the third quarter basically will be an average of two months at 211 million shares and one month at, in this case in the hypothetical, 517 million shares. Is that fair?

Yes, what will happen, George, as we’ve talked about, is that this additional share count that will be issued in September will be treated as a stock issuance, not a stock split so we will include those additional shares with no additional proceeds.

Okay, right. And again, it's perspective and that’s why it’d be a weighted average for the quarter. Correct?

Exactly. Absolutely.

Now within Wood Products, Tom, interested in your views on this. It sounds like the fairly steep reduction in demand was the primary reason why Wood might have been off a bit from maybe your expectations going into the quarter. If that's a fair characterization, do you think at this current level of demand you can be cash breakeven in the third quarter given your current operating profile?

Actually, a major component for what happened in the second quarter was rapid declining prices as opposed to demand although both were involved. We had positive results in April and May, which was offset as you mentioned by the dramatic fall-off in prices. Put that into context, we saw prices for both OSB and lumber from May to June on the indicated prices reduced by over $100. For us, given our scale, each $10 change in lumber is a monthly impact of $3 million and each $10 change in OSB is $1.5 million. So on a monthly basis, that impact is $4 million to $5 million. So you can just imagine the impact that we have when we have dramatically falling prices. Having said that, we do look for Q3 to be closer to Q1 in view of our current prices and expected demand. We see our customers are being more deliberate and replenishing their inventories as they revise their housing starts. So at today's prices and volumes, it's going to be difficult to be cash positive for the quarter. Now we were cash positive for Q2 and we are cash positive year-to-date in Wood Products and we saw good, good returns overall in our Lumber and OSB segments for Q2, but the lower demand where it really hit was in our Engineered segments and our Distribution. So we're going to continue to do the things that we can to ensure that we’re using all the leverage to generate positive cash. But it’s difficult market conditions.

Tom, at this current level of demand and pricing, do you have the tools or levers by which to become cash breakeven over the rest of the year within Wood Products, i.e. through reducing production or other moves like that?

Well it's going to be difficult as I said, if demand doesn't materialize to levels that we’d expected, we're going to continue to review our operating portfolio, we're going to ensure that our supply base and our supporting cost structure is well aligned to that demand. I would also note that in contrast, in Q1 when we had this call, we had built some working capital both in inventories as well as accounts receivable in anticipation of a better Q2. We have worked that off during the second quarter and positioned ourselves for what we see as dampening market conditions that we will see in Q3. So George, it's going to be difficult, but we're going to have the levers we think we have to do what we need to do to come as close to generating cash positive as we can.

The next question will come from Mark Connelly with CLSA. Mark Connelly - Credit Agricole Securities (USA) Inc.: The higher Homebuilding margins that you saw in the quarter, can you give us a sense of what was really driving that? I mean, I would have expected your material cost would be up so was it mix or was it a healthier portfolio?

Yes, Mark, I think it was a combination of factors. Mix certainly helped, but also it’s beginning to be, we're beginning to feel the impact or the benefit of some of the actions that we've been taking over the last couple of years and so a lot of things that had to do with our construction hard costs, how we reposition communities, introducing new product, combination of those factors have helped in that regard. Mark Connelly - Credit Agricole Securities (USA) Inc.: And am I right in thinking that your material costs would have been up?

Not necessarily. We look at being able to manage our material costs all the time, and then while, obviously, there may have been some elements of it that increased in that quarter, there are others that went down. And so I think generally we would have ended up with a little bit lower cost in the second quarter. Mark Connelly - Credit Agricole Securities (USA) Inc.: Great. That’s pretty good. One question, point of clarification on the Timberlands, the comment was made that export sales to China and Japan are seeing increased competition. Is that increased competition coming from the U.S. or somewhere else?

Well, as we looked at it, we saw substantial improvement in all of our volume in going to both China, Japan and Korea in Q2. The comment I was specifically referring to was for China and Korea as other producers are looking for outlets for their volumes compared to the domestic alternative. Mark Connelly - Credit Agricole Securities (USA) Inc.: And are those other producers in North America? I'm just curious where they're coming from?

Those other producers are North America, as well as New Zealand and as well as other producing companies. Mark Connelly - Credit Agricole Securities (USA) Inc.: So it is more broad than just Doug Fir. Okay.

Absolutely.

The next question will come from Chip Dillon with Crédit Suisse. Chip Dillon - Crédit Suisse AG: Patty, just so we get this right, I would imagine in the third quarter is when you're going to catch up on the tax rate and will you intend to sort of tell us what portion of the reversal or credit that's almost inevitable? Or maybe it's not a credit, but what portion of the tax line is to catch up from the first half and what portion deals with the third quarter?

Well, it will all run through the quarter, Chip, and we can dimension what the catch-up would be versus what it would be on a quarter basis. As you think about just the tax rate differential, we're at about 37%, 38% right now and it's probably going to be something closer to 20% for the year. Chip Dillon - Crédit Suisse AG: And I think if you could give us a little color just as a follow-up on Specialty Fibers, the Pulp business. It was much better than we thought with sort of the hand-hide behind your back of three mills being down. Could you just let us know how much that downtime cost reversal will likely be in the third quarter? And is it sort of fair to say that we should look at, for the most part, the industry pricing that, given your fluff orientation, is substantially higher according to RECE today than it was on average in the second quarter?

Chip, this is Tom. Let me take that. The maintenance cost associated with the three outages was approximately $30 million in Q2. So you can factor that into your model. And of course, as you've noted, we have very strong markets in our fluff components, and I would also say that as you look at our MBSK, we are heavily weighted towards premium towel and tissue which has held up reasonably well. And I would also indicate that we have very little transactional exposure to China. So when we put those together, as Patty mentioned, we're looking forward to increased realizations in this segment for Q3. Chip Dillon - Crédit Suisse AG: If I may on the stock, the way I’m viewing it, and tell me if I'm missing this, is that what trades today basically reflects the market cap above $5.04 billion. And I was wondering if is there anything either an investor can do or the company would do or cares about to sort of reduce the volatility which, of course, it hasn't been that volatile, but you do have this window of time where it's not going to reflect the total market cap, but just the part above $5.04 billion?

Well, I think the way to think about the market cap if you were looking at Chart 12, for example, would be to take the total shares that are indicated there of the $517 million and if you took that times the trading price of the stock, so if you used yesterday's stock price, for example, of $16.49, you'd end up with a market cap of I think that's probably somewhere north of $8 billion. So around $8.5 billion. So that's the way really to think about the market cap. As we had talked about on the conference call in July 12, theoretically, the market cap should change by the amount of the cash portion of the dividend. So market cap decrease should be about $560 million. Chip Dillon - Crédit Suisse AG: Totally understand, but the volatility of the market cap will only be expressed between now and September in what trades right now.

Yes.

The next question will come from Gail Glazerman with UBS.

Larry, I was hoping you could give maybe a little bit more color on where the surprise came from in the quarter. Your guidance was initially, I think, for a loss in the single-family sales. I'm just wondering usually you have a decent amount of lead time in outlook in there so I'm just wondering what changed in the second quarter.

I think a couple of things happened. We saw mix had to do with a good part of it, and so a little heavier in some of the San Diego, Houston did well to a lesser extent, DC, and then we also had improved margins. And we also got some additional closings and some of that may have had to do with the June, or at least initially the June 30 closing date that was the expectation for customers to be able to qualify for that first-time tax credit.

Okay. And do you feel pretty good about the visibility you have for the current quarter right now?

Well, I think that the markets are, as we said, challenged, but we do feel okay about what the visibility that we have, yes.

Okay. And, Tom, just following up on Chip’s question on fluff pulp. I mean, can you talk maybe just the supply-demand dynamics that you're seeing in fluff. And with commodity prices falling, I mean, do you think it would follow that, that fluff would eventually have to follow that?

Gail, as you know, it's still a relative overall-type market despite evidence of softening. With the supply disruptions are behind us and of course, China’s being very deliberate in replenishing its inventory. And as you know, they have some new local supply with their new mill at Rizhao which is bleached hardwood craft so those are some factors that are involved. On the other hand, what you have offsetting that is that industry inventories are currently very low. And as I mentioned earlier, we participate in MBSJ primarily in the premium towel and tissue, we have a very strong relationship in fluff with a few key customers who are growing. We have a very strong order file. So while there is some overall price moderation that could put some downward pressure on markets, we feel very good about our order file and about what it looks like for fluff going forward.

The next question will come from Christopher John with Deutsche Bank.

I was just wondering about what you’re seeing in terms of log price trends. Wood Products, a lot of volatility with a sharp spike in 2Q and then the drop-out since then. I'm wondering how much the log prices benefited from that on the way up and is going the other way now.

Well, Chris, the log prices do have a strong dependency on what happens on the Wood Products markets. If you look year-over-year, we've seen tremendous improvement in our log realizations as Wood Products markets have improved as well. And it is impacted domestically depending on how our customers are doing in terms of their ability to pay for the raw material. So that's another reason why we not only make sure that we do a great job in marketing our material in domestic U.S., but we also maintain great international presence in export markets as well.

Yes, I mean broadly speaking though, how would you compare the amount of volatility in log prices to the amount of volatility, let's say, in lumber?

Well I think you see more volatility in lumber than you do in logs. Typically, you'll see logs that will be a little bit lagging in terms of how they respond either up or down to the marketplace conditions. So it's less.

And then getting back to the outlook on your Cellulose business, you said that 3Q was going to be strong, but given what's going on in commodities and pulp markets, how do you see that impacting the potential outlook for 4Q?

Well again, as I mentioned, we have focused relationships with key customers, both on what I would call market pulp as well as fluff, which is our predominant sales volume. We have limited exposure in what I’ll call true commodity-type pulp and so we're not quite impacted as well as others might be by what's going on in China and elsewhere.

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

Just first a couple of questions on Wood Products. Trying to get a sense as to was there any impact from inventory losses perhaps in your Distribution business as prices were falling down rapidly and maybe as a part of that, you’d mentioned that Engineered Wood and Distribution were particularly challenging. Can you give us a sense as to how big an impact that might have been? Because one thing I just compared your profitability in building products versus that of everybody else who’s got a building products business and you didn’t stack up very well in the quarter. And I’m sure you look at that as well so maybe if you could provide a little color as to why that was and what you can do to change that.

Sure. And actually, when we look at lumbers and panels, both in the market as well as with us, we did well in Q2. We were extremely encouraged by our performance of our Panel segment this quarter. With the improved commodity prices, we had a good boost to performance in those markets, and it went well. Our Lumber segment also performed well despite having rapidly falling products as I mentioned from mid-May to the end of June. And we did take some downtime, which impacted our costs so that we were positioning our inventories for what we see as a reduced market outlook in the third quarter. Now as you mentioned, both Engineered and Distributions continue to be challenged. These are segments that are very strongly tied to housing starts and order files from dealers. And it's going to be difficult to see significant performance in those segments until we start to see some sustained recovery in housing starts. I would also note that we do have significant operations that have been curtailed and closed in that segment and not all of the costs associated with those have gone away. However, that does provide significant potential leverage as markets recover. And to your first point, is yes, distribution does get impacted by the timing and the severity of price changes in this kind of a rapid fashion.

I realize you're not going to want to get too granular. But if I look at Louisiana Pacific or Norbord, their panel businesses, they were kind of order of magnitude 25% margins. If you look at the lumber players, there was some range, but they were basically kind of 5% to 15% in terms of margins in the second quarter. When you said you were doing well in those businesses, were you comparable to that or were you -- because if you were, then there must have been very sizable losses in the Engineered Wood and the Distribution businesses.

Well, as you know, each company has a unique portfolio and geographic presence that contributes to their results. In Panels, I think we were fairly comparable. In Lumber, we did well but again, depending on the structure and where the geographic presence are or where the lumber producers, we could be impacted. As you would note, Canadian lumber did well. SBF, a little bit reduced in South and the West where we have our major presence. So we did well given our market presence and where we’re located.

Okay. And then lastly, different line of inquiry, harvest. In the Analyst Meeting earlier this year, you provided an assessment of potential harvest levels. I think it’s like 13.5 units this year and going up to perhaps 16.5 next year if I just look at that chart, what type of housing -- how dependent is that on housing start levels and give us a sense of what type of housing start levels that might have embedded.

Well Mark, as I look back, I think you're referring to we indicated we’d be about 13 million cubic meters of harvest in this year. We’re on track for that. The other one was a potential outlook that could occur, which was based on trend. We don't forecast out exact housing starts going forward. But they certainly have to be higher than where they are today.

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

Patty, can you just confirm that the cost basis for legacy shareholders is, in fact, bifurcated with the legacy shares at the higher basis? And then the new shares at the lower basis. And I guess on a related point, I don't know if you can weigh in on this, but do you have a view on whether wash sale rules will be triggered for shareholders with the IRS?

Well, I think I'll speak to the cost basis of the shares, both pre-and post dividend. In terms of the historical shares, so shares that people owned before the dividend, those shares will retain their basis that they have, there's no change. So if you own shares that you had a $50 basis in, those same shares will have a $50 basis after the special dividend issuance of stock. Now the new shares that we issue for the special dividend will have a full cost basis at the valuation at which we issue them. So if you were to look at Chart 12 then, the new shares, the 305 million new shares that would be issued, would have a cost basis of $16.49. So in our example before, your old shares would have a much higher basis than the new shares that you would get.

And correct me if I'm wrong, but it’s the discretion in the shareholder to which shares they would ultimately sell to apply in their portfolio to book a gain or a capital loss.

Yes, I think there are a number of ways that -- options that shareholders have, individual shareholders, could look at their, depending upon what method they use, if they use an average method when they sell shares, of course, they’d have an average. But you can use a specific identification method, so you could choose to sell the shares that you had in your portfolio before the new dividend shares. And those shares will likely have a much higher basis than the new issued shares. So you would have a capital loss in that respect if you had held them for the holding period.

And again, without being too technical here, do you have a view, Patty, on whether the wash sale rules would be triggered with the IRS on the capital losses?

I really wouldn't want to give individual or corporate tax advice for…

Fair enough. You mentioned that the cash balance is $1.8 billion in the quarter. What do you view as the optimal cash balance going forward?

Well that's a really good question, Pete. Because it really depends, in terms of what your view of the outlook is from a economic climate perspective. Historically, ourselves and probably most others in this industry and others wouldn't carry the amount of cash that they have on their balance sheets today, but the uncertainty in the economic environment certainly has led us to carry a higher cash balance. The other piece that comes into play would be what debt maturities are. And as you know, we did retire just about half of the 2012 debt maturity tower, but we still have just over $500 billion of that in 2012 as well as just under $200 million of RECO debt. So I think as we go forward, as we look at the $1.8 billion, we have some reduction in our gross debt. We also have $560 million of cash of a special dividend that we’ll be issuing in the quarter as well. So we’re balancing all of those pieces in our outlook for cash. In addition, to the renegotiation of our $1 billion line of credit that we have today, that expires at the end of 2011. So I think your cash balance is just a mix of all of those factors, but clearly the amount of cash at $1.8 billion on a go-forward basis would be higher than we normally would have.

Okay, that’s helpful. Tom, can you remind us what the headcount is in the Wood Products business? I know it's come down, but can you remind us what it is today? And if you were to look for housing starts to potentially be in a $1 million or even a sub-$1 million level for an extended period, can you comment on the fixed cost footprint do you have in that business? And whether you think you’re competitive enough?

Sure. Headcount, we're approximately, I believe, about 6,700 in Wood Products, which as you know is down substantially from what it has been. At its peak it was closer to 14,000. In terms of sub-$1 million, as we’ve looked, again, profitability is going to be a combination of price and volume as we go forward. We saw April and May be very profitable months for us even [indiscernible 1:02:43] sub-$1 million housing starts. So as we look forward and we get closer to $1 million, we do have the cost structure that will allow us to do well. But again, you need some level of reasonable pricing along with increased demand in order to make that a fact. So as you know, we've worked very hard over the last year to reduce our cost structure. We're not finished yet. It's a never-ending battle, and we're going to continue to improve our margins by looking for ways to not only improve our sales, but also to reduce our operating cost.

The next question will come from John Tumazos.

Hi, it's actually Joseph Ferrata [ph 1:03:25]. A quick question on the pulp. A couple of local producers announced price cuts starting August 1, and I was wondering if you guys expect to see similar situations where you guys cut back and end up with a slightly higher than last quarter average price as opposed to a significantly higher?

Well, John (sic), again I’ll just go back and mention we don't talk about price action up or down. And I would just say going back is we have a very strong order file, we’re well positioned in the markets in which we serve with our growing set of customers, and as Patty mentioned in the outlook, we’re going to see stronger realizations. And we see strong positioning for ourselves where we are in MBSK and, of course, we’re very strong in the fluff market, which remains strong and very tight inventories and good demand. So we feel good about where we're going to be in third quarter.

And the final question will come from Rick Skidmore with Goldman Sachs.

This question’s for Dan. Dan, as you've now made the decision to convert to a REIT, will there be any significant changes in your strategy across either each of the businesses, either from an operating standpoint or how you look at the portfolio longer-term for Weyerhaeuser?

Thanks, Rick. Our core asset is our Timberlands, and we’re focused on growing Timberlands’ earnings, and the REIT structure supports that strategy. Our other businesses, which are held in the TRS are positioned to benefit from the recovery as we’ve talked about before, and they will generate cash flow. That cash flow will then be available to us to service our debt, to supplement our dividend and to position us for future growth, all to the benefit of our shareholders. So as we look at the portfolio, each piece has a place. And I want to focus on the fact that the core asset is our Timberlands. You know we've got over 6 million acres of some of the most valuable, sustainably-managed timberland in the world, and we're focused on growing the earnings from that segment. We believe strongly that the shift to the REIT structure will significantly enhance the opportunities that we have for Timberlands both in day-to-day operations but also in our ability to grow that asset.

There are no further questions at this time.

Let me just, as we close the call, I’d like to summarize key themes for the second quarter and some of the themes that we’ve talked about as we enter the third quarter. When we entered the second quarter, we had positive momentum in all of our businesses. Our Wood Products, Real Estate and Timberlands businesses capitalized on improved conditions early in the quarter. But then as we’ve spoken this morning, faced challenging conditions after the housing tax credit expired at the end of April. We reacted quickly to the slowdown in housing and effectively managed our operations through this uncertain climate, and I'm encouraged by our profitability for the quarter and the significant improvement over prior periods. As we enter the third quarter, housing activity remains at near record lows. Recovery trajectory continues to be uncertain, and Wood Products prices are back to levels seen at the beginning of the year. Business conditions in our Cellulose Fibers business continued to improve through the end of the second quarter and our earnings reflected the resulting increase in prices and with no planned maintenance in the third quarter, we're now able to return to full production and take advantage of current market conditions. As our business teams focused on improved business operations, we made great progress in moving to a REIT structure by declaring our special dividend to pay out earnings and profits. Our focus now is on completing the conversion with payment of the special dividend on September 1. And so in summary, as I look back on the quarter, we made good progress on three important fronts: Operating earnings, cash flow and REIT conversion. For everybody on the call this morning, we appreciate your attention. And we look forward to continued dialogue and your involvement, and as usual, Kathy McAuley will be available later today to help with any further questions or comments. Thank you, everybody, for joining us this morning.

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