Weyerhaeuser Company (WY) Q1 2011 Earnings Report, Transcript and Summary

Good morning. My name is Nicole, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Kathryn McAuley, Vice President Investor Relations. Ma'am, you may begin your conference.

Thank you, Nicole. Good morning. Thank you for joining us on Weyerhaeuser's First Quarter 2011 Earnings Conference Call. I am Kathy McAuley, Vice President of Investor Relations. This call is being webcast at www.weyerhaeuser.com. The earnings release and materials 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. This morning, Weyerhaeuser reported Q1 2011 net earnings of $99 million or $0.18 per diluted share, a net sales of $1.6 billion. First quarter earnings include an after-tax gain of $96 million on a previously announced sale of 82,000 acres of nonstrategic Timberlands in Southwest Washington State. Excluding this special item, the company reported net earnings of $3 million, break-even on a per share basis. Please turn to the earnings information package available on our website. This package includes a GAAP reconciliation of special items. In our discussions of business segments, we will refer to Charts 4 through 10. Chart 4, Changes in Contribution to Earnings by Segment. This chart illustrates the changing contribution by business segment from fourth quarter 2010 to first quarter 2011. We begin our business segment discussion of the first quarter with Timberlands, Charts 5 and 6. In the first quarter, Timberlands contributed $89 million to pretax earnings before special items, $33 million more than in Q4 2010. Third party sales volumes rose 4% from Q4. This increase was in part due to Chinese demand for logs. Japan remains our largest export market accounting for approximately 70% of export volume. Third party average log price realizations increased 5% in the West and declined 2% in the South. The fee harvest increased 11% from the fourth quarter, most of the increase occurred in the West and was driven by export demand. Higher volumes resulted in lower costs in the West. Costs in the South were lower due to less silviculture spending. Some of the cost improvement was offset by rising diesel prices. Wood Products, Charts 7 and 8. Excluding special items, Wood Products narrowed its loss from $85 million to a loss of $36 million, an improvement of $49 million. Lumber and OSB sales realizations increased 8%. Lumber volumes were flat. OSB volumes increased 9%. Operating rates for lumber and OSB were higher in first quarter. Log costs rose in the West. Solid section volumes were flat and prices declined slightly due to mix. TJI volumes fell 10%, prices modestly increased. Cellulose Fibers, Chart 9. Cellulose Fibers contributed $86 million to pretax earnings in Q1, $52 million less than in Q4. Maintenance costs increased and productivity was lower due to two scheduled annual outages in the quarter. In addition, we also had $7 million of spending in first quarter, preparing for the annual maintenance outages scheduled for the second quarter. Fiber costs were higher in the West and chemical costs increased. Pulp price realizations declined $14 per ton. The majority of our pulp production, fluff and fluff pulp prices were slightly lower. Pulp volumes were flat. Real Estate, Chart 10. WRECO lost $1 million in the first quarter. First quarter is the seasonally weakest of the year. Single-family closings were down 40% from Q4 and 8% from the first quarter a year ago. The average closing price declined $20,000 to $419,000 due to mix. The gross margin was 22%, down from 26% in Q4, also due to mix. The backlog of single-family homes sold but not closed increased to 611 homes. And finally, Corporate & Other. Before special items, Corporate & Other contributed $43 million less to earnings in first quarter. Pension and postretirement expense held in corporate was a noncash charge of $12 million in Q1. In Q4, it was a credit of $19 million. Share-based compensation expense rose $8 million in the first quarter, primarily due to the increase in our stock price. I will now turn the call over to Dan Fulton. Dan?

Thanks, Kathy. And good morning, everyone. Over the last several earnings calls, I've been reporting on how we're doing as we battle this dismal housing market. I'm glad to report that we continue to make progress during the first quarter. Our top line grew year-over-year, as well as our bottom line. And I remind you that this occurred while U.S. housing softened. While margins and returns are still not where we want them to be, we continue to act on the items that we control and take advantage of every opportunity. In my remarks this morning, I will comment on three subjects. First, I want to talk about general economic conditions, with a particular focus on the U.S. housing market since new home construction has such a critical impact on our company's overall performance. Second, I'll discuss the performance of our businesses during the first quarter, adding some color to the information that's already included in our quarterly analyst package and to the summary that Kathy just provided. And finally, I want to discuss the effect of the Japanese earthquake and tsunami on our business. Although I'll address the importance of the Japanese market to us, I want to emphasize that this tragic event had no material impact on our first quarter financial results. We do expect that rebuilding needs in Japan will likely lead to opportunities for increased log and lumber exports over the midterm, but it's too early to tell if there will be any material impact this year. I'll start with general economic conditions and their effect on our first quarter performance. With respect to the U.S. economy, GDP growth has been trending up slowly, but downward revisions of projected growth in 2011 announced earlier this week by the Fed indicate that the recovery may be stalling. Additional comments by Fed Chairman Bernanke further confirmed that there continues to be an abundance of caution. Increasing oil prices are a major concern for us because of the impact on our manufacturing cost, as well as how they affect disposable income and consumer confidence. In Timberlands, for example, increases in diesel prices result in higher harvesting and hauling costs. In our other businesses, higher oil prices result in increased cost for raw materials and energy. At the consumer level, increases in oil prices translate quickly to rising gasoline prices which directly affect the pocketbook of potential homebuyers who may have been ready to reenter the housing market. As contrasted the GDP growth in the U.S., global growth is increasing at a faster pace, especially in emerging economies. This faster-paced growth has had a positive impact on our Cellulose Fibers business, which supplies global customers, and our Timberlands business, which leverages the geographic advantage of our Western forests, as well as our long-term trading relationships in key Asian markets. Turning to the state of the U.S. housing market, the Fed this week described conditions in the housing sector as depressed. In our press release this morning, we used the medical term anemic to describe current conditions and the medical analogy seems appropriate. The U.S. housing market has been in intensive care for the last couple of years. We moved to the recovery room last year, boosted by both federal as well as some state housing tax credits, but then the markets suffered a relapse in the second half of 2010. As we entered 2011, we were planning on single-family starts recovering to an annual level of approximately 525,000, certainly not an aggressive number at that time. But March data shows starts at a seasonally adjusted rate of only 422,000, 21% lower than one year ago. On the positive side, housing affordability is at an all-time high and we did see a slight improvement nationally in new home sales in March, up from the February level which was the lowest since World War II. Perhaps the worst is behind us but our experience from the last several years causes us to be cautious, and we're focusing on being profitable at today's level of starts while maintaining our ability to respond to improve demand signals. To get housing back on track for a slow, steady recovery, our economy still needs to work through the challenges of continued foreclosures, as well as the clear direction from Congress on resolution of the still uncertain future of Fannie Mae and Freddie Mac. Despite the continued drag on our company by the slow recovery in housing, I'm pleased with the progress that we continue to make in improving performance at today's level of starts in our Timberlands, Wood Products and WRECO businesses while taking advantage of continued strength in global demand for our Cellulose Fibers. In Timberlands, the big story this quarter is the Chinese demand for logs. One year ago, China represented 6% of our total export volume, and in the first quarter, the Chinese share of our exports increased to 24%. The location of our Pacific Northwest Timberlands, our extensive logistics systems, our strategically located port facilities and our long-term trading relationships uniquely allow us to take full advantage of the Asian market, helping us to offset the continued softness in U.S. housing. Though Chinese demand is relatively small in the context of our overall volume, this increased demand has led to rising log prices in the West for both export as well as domestic logs, resulting in higher log realizations for the quarter that Kathy highlighted. Turning to our Wood Products business, mill productivity increased as operating rates for lumber, OSB and engineered solid sections all improved as a result of steps taken in 2010 to further rationalize production capacity. The net result of ongoing improvements across the business, including customer selection, pricing improvement and the lower cost structure was an increase in our gross margin and positive cash flow before seasonal build up in working capital. We're still not where we want to be but we are seeing noticeable improvement. In our WRECO business, as expected, earnings were approximately breakeven despite very weak demand. We did, however, see evidence of improvement in some market indicators. Though year-over-year traffic levels are down, our conversion rate of turning shoppers into buyers increased significantly and our cancellation rates dropped to levels we have not seen since 2003. Comparing market conditions across WRECO, the Maryland and Virginia suburbs of Washington D.C. show the greatest improvement, followed by Phoenix and the Puget Sound region. Houston sales remain stable and California and Nevada activity declined year-over-year, in part because last year's first quarter included several new project openings which generally boost sales activity. Shifting to our Cellulose Fibers business. The softwood pulp market remains tight, driven by increased demand for dissolving pulp. For the quarter, earnings were up significantly year-over-year but fell from our record fourth quarter levels, primarily due to increased expense and downtime related to scheduled maintenance at our mills in Flint River and Longview. We are seeing opportunities in Cellulose Fibers for new products that are the outcome of our strategy of continuous innovation to serve the needs of our growing global customers and we expect that the percentage of revenues from these new products will increase over time. Let me close with the discussion of Japan, a trading partner dating back to 1923, when we first entered the market to supply lumber for rebuilding, following the Great Kanto earthquake which devastated the cities of Tokyo and Yokohama. Since 1923, our relationship has grown to the point where sales to customers in Japan represented approximately 10% of our total revenue last year. While we do not have any manufacturing facilities in Japan, whereas our products sold to Japan include pulp, liquid packaging board, newsprint, logs and lumber, and Japan is the primary market for our Westwood Shipping line. While Japan is an important market for us, we've seen only a small impact from the March 11 earthquake. Our sales to customers in the impacted zone are roughly 2% of our total revenues and most of these customers were able to shift production to other parts of the country. Immediately following the earthquake, our attention turned to the safety and welfare of our employees and our ship's crews, and thankfully, everyone is safe. We have focused on our ongoing efforts to meet the needs of our customers, redirecting supply lines to address shortages and adjustments in operating projects. Mid to longer term, once essential infrastructure needs are met, there should be an increase in demand for logs and wood products which would be used to build permanent housing to replace the housing that was lost, and we are well positioned to work with our long-term customers and trading partners to provide materials for rebuilding, just as we did in 1923 and again in 1995 following the Kobe earthquake. And now, Patty will discuss our outlook, and then I'll provide a quick recap before we invite your questions. Patty?

Thanks, Dan, and good morning, everyone. The outlook for the second quarter by business segment is summarized on Chart 11. I'll begin the discussion with Timberlands. Export log demand in Asia is anticipated to remain strong. In the West, sales realizations and volumes are expected to increase somewhat but this will likely be offset by rising prices for diesel fuel and seasonal increases in road and silvicultural costs. In South, we anticipate slightly higher sales volumes and flat sales realizations. Earnings in the South will also be negatively affected by rising fuel. Overall, not including the effect of any nonstrategic land sales, we expect Timberland earnings to increase somewhat in the second quarter compared to the first. Market conditions in Wood Products for the second quarter are very uncertain. We have yet to experience normal signs of the spring building season. However, our forecast does include somewhat higher sales volumes for all products. Sales realizations for most product lines are expected to be flat. Higher productivity as a result of increased production volume should lead to more favorable manufacturing efficiencies, partially offset by increased log costs. We expect the loss in the second quarter to narrow compared to the first quarter and we should be cash positive. Global demand in our Cellulose Fibers segment continues to be robust. We expect sales realizations to improve in the second quarter compared to the first. Sales volumes are anticipated to also increase slightly. Freight costs will likely be higher during the quarter. Additional planned maintenance outages will lead to higher maintenance costs and additional lost productivity for the second quarter as compared to the first. After the second quarter, our planned outages will be complete for the year. Despite these increased costs, we expect that overall, earnings in our Cellulose Fibers segment will increase compared to the first quarter. In our Real Estate segment, we expect our single-family homebuilding business to improve seasonally during the second quarter. Homes closed are anticipated to increase to approximately 500 closings compared to 363 closings in Q1. The average closing price will likely decline slightly due to mix. However, we anticipate margins to continue to be strong at around 20% to 22%. We remain focused on actions within our control despite the continued headwinds of weak consumer confidence, only modest job growth and buyers challenged by mortgage qualification issues. We expect to earn a small profit in the second quarter in our single-family homebuilding business. Now I'll wrap up with some overall financial comments. Our cash balance as of the end of the quarter was just under $1.5 billion. Capital spending during the first quarter was approximately $47 million. For the full year, we expect to spend between $250 million to $270 million. We anticipate receiving approximately $15 million in credits from the Canadian government for projects at our Grande Prairie Alberta pulp mill. Our current bank credit facility of $1 billion expires at the end of this year. No borrowings are outstanding under the agreement and we anticipate replacing this facility by the end of the second quarter. We have $30 million of debt payments due in the second quarter which completes our scheduled debt maturities for the year. Our noncash pension expense and postretirement expense in the first quarter was a charge of about $24 million. This was slightly higher than what we anticipate on a quarterly basis for the remainder of the year. Based on updated estimates of the funded status of our U.S. qualified pension plan, we will not be required to make a contribution for 2011. At year end, we had estimated that the U.S. planned contribution could have been as much as $20 million. We still do expect to fund approximately $80 million into our Canadian plan later this year. Now, I'll turn the call back to Dan, and I look forward to your questions.

Thanks, Patty. In summary, despite challenging conditions in the U.S. housing market which are worse than one year ago, we continue to make progress during the first quarter to improve our financial performance. We're expecting improvement in all businesses in the second quarter based upon actions that we've taken and improvements that we have made in order to increase our competitiveness. We're focused on making the most of existing market conditions and we're prepared to leverage our scale to take full advantage of any market improvement. As we now get ready to turn to questions, I want to make one final comment in anticipation of perhaps questions about weather events this week in the South. We've all heard and seen on TV stories of tornadoes throughout the South that's affected some of our operations in both our Timberlands, Cellulose Fibers and Wood Products business. First of all, I want to say that all of our employees and their families are safe. We are assessing damage as we speak. We suffered some limited power outage at our Columbus Modified Fiber facility but our pulp mill is operating. We've had some limited damage of Timberlands, but we won't have any full assessment until we're able to get up in the air and survey the damage. We've had some property damage in some of our Wood Products facilities and some minor power outages, but at this point, it's likely that there will be no material impact on our activities in the second quarter, and we'll have further reports as our people are able to get back out to the field. I just wanted to provide an additional assessment of how we've come through this past week. So with that, I'd like to turn it back over to Patty and invite your questions.

Nicole, we'd like to open the floor for questions.

[Operator Instructions] Your first question comes from the line of Gail Glazerman with UBS.

Wanted to start with a few questions on the Wood Products operations. Your volumes were up reasonably year-on-year, and I'm just wondering, do you think you took some market share or do you think customers were building inventories because that seems a little out of line with the underlying demand?

I think, Gail, in the first quarter, there is some build in inventory in anticipation of a building season. We talked on the last call about waiting until after the Super Bowl to see if there's a spring selling season. Based upon what we reported this morning and what we see certainly reported nationally, the market is still very soft but we, as you noted, did have some increase in activity. More importantly, for our Wood Products business, we've seen increase in margins which is related to the focus that we've had on focusing on our pricing as well as cost management. But as I noted in my comments and I spent a fair amount of time talking about it, we are concerned about U.S. housing recovery. The first quarter numbers are not healthy, and so we're managing our business based upon the volume that's available today and positioning ourselves to grow with the recovery.

Okay. And just following on, on that, your second quarter guidance were fairly flat realizations in Wood Products. Have you -- was there a lag in pricing that would give you confidence in that? Because current prices would suggest a reasonable decline.

Well, there's a bit of a lag. We're already one month into the quarter, and so the guidance that we've provided is the best information that we've got.

Okay. And just thinking, can you give a little bit more color on what you're seeing on the West Coast in terms of the trends in Chinese demand? Has it continued to grow? Is there any fund that's slowing in either kind of the U.S. Northwest or British Columbia? And also, you've kind of referenced log costs being up in the West, and how you see that impacting domestically oriented sawmills in the West?

So to answer the questions sequentially, talking about general Chinese trends, Gail, we've been watching the building demand over the last 18 months. Lumber demand has primarily impacted Canadian lumber producers in the West. In Timberlands business, the log demand from China has occurred primarily in operations in Washington and Oregon. As we noted, we've had a steady increase in the amount of export that we've been shipping to China. In the lumber business in Canada, it started several years ago with shipments of beetle-damaged wood, and gradually, the volumes have picked up and the quality has picked up. As we've noted before, the Wood Products are going into industrial uses, primarily forms for concrete work, shoring, pallets and packing. We don't see demand backing off at this point, and so we are taking advantage of the opportunity in our Timberlands business to increase flows to the market because we've got longer-term relationships and we've got strategically advantaged logistical facilities. And we are shipping some lumber out of Canada, but given the location of our sawmills, it's not a heavy percentage.

Okay. And just a question in terms of margins for domestic sawmill and for sawmills in the West, given rising log costs, is that a major concern for you?

It is a concern because as you know and as we've talked about, the U.S. housing market has been relatively weak, and so there's not a lot of pricing power for lumber producers. So log prices have moved up because of the demand from Asia and it is putting a bit of a squeeze on lumber producers.

Okay. But no sign of that impacting log demands at this point?

We have not seen it.

So I think the whole question of the impact of China on the domestic market is difficult to dimension because we do have some logs that we sell domestically that could go to export, so others that are exporting as well, as well as some of the domestic producers are shipping lumber to China. So that helps the domestic market as well for domestic producers. So I think it's a little mixed in terms of the China impact isn't really all exported, it does flow over a little bit to the domestic market, which is good given that the U.S. housing market is weak.

And then, I think as I mentioned related to the Japanese earthquake, we would anticipate that there would be a pickup in demand from the West Coast, not only for logs but for lumber. But at this point, it's too early to tell what the timing will be because they do have to work through their issues of infrastructure before they are ready to take on significant rebuilding of permanent structures. The focus right now is on temporary structures because of the incredible amount of damage that was done in the tsunami.

So you're keeping the regular volumes to Japan at this point?

We are. We've seen very little disruption, Gail, in shipments to Japan. Immediately after the earthquake, there was the need for some rerouting and some short-term disruption. In our log export business, we had some logs that were scheduled to be shipped to Japan and on a short-term basis, they were rerouted to China. But we expect that the Japan demand will come back.

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

And again, we very much appreciate the new reporting format. I think this is the second straight quarter, and we look forward to that. I think the biggest question I had, just looking over the results, is trying to forecast the corporate expense line. And it looks to me from what you're saying is that we obviously would shave a little bit from this quarter. It was pretty high for the lower pension expense and I'm guessing that might be what? $5 million. And the other question is on the stock, $8 million you mentioned increase on the stock compensation, is that a number that is totally a function of the stock price or is there some fixed level that we should always factor in? So bottom line is, where do you see that corporate expense number going?

Well, Chip, as you look at that, you're right on the pension. And I would remind you that what's in the corporate segment is just pension and postretirement that doesn't get allocated to the segment. So in the reporting package to try to help you dimension that a little bit better, on Page 4 we give you the total company look by quarter. And then back on Page 9 in the Corporate & Other segment, we give you what portion of that runs through corporate. So that should help you with the pension and postretirement benefits. And you're right in terms of a go-forward number. It's probably $4 million to $5 million left on a per quarter basis than what it was in the first quarter. Now if you think about the variable comp expense tied to the stock, most of that really is a function of the stock price. And it runs in a couple of areas. One, we do have some stock appreciation rights that we use for our equity plans in Canada. And then we also have deferred comp that is in share equivalent. The share equivalents are about, I think, roughly 1 million shares at the end of the quarter, and the stock price moved about $6 in the quarter. So that should help you dimension that movement quarter-to-quarter. And on a go-forward basis, I would say exclusive of those items, probably $10 million to $15 million a quarter in the Corporate & Other segment would be a good rule of thumb. As you know, the Corporate & Other segment is sort of the catch-all segment and it does get impacted by things like foreign exchange, stock price, et cetera. So directionally, keeping those things in mind I think will help you chart what that corporate expense will be on a go-forward basis.

So said differently, if we assume the stock price just didn't change in the given quarter, there would still be the pension expense. And that would be in addition to that $10 million to $15 million, correct?

Yes, that's right.

Okay. And then the second and last question is I believe I heard you say that as you forecast the second quarter for Wood Products, you expected realizations to be flat, I believe, sequentially. And just sort of looking at recent prints from whether it's the futures market or random links, I'm just wondering if that might be something that could be maybe a few weeks old or is that something that would, on the other hand, would anticipate some improvement as we go into May and June?

Well, we really haven't seen improvement as we go into May and June. Usually, we would expect to see some, and we held realizations flat in the forecast. As you appropriately note, in April, those realizations are a little softer. So if we don't get any pickup, then I would say that there's a possible downward pressure on the flat realization forecast.

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

A couple of nitty-gritty questions, I guess, to start. Did I hear you say, Dan or Patty, that in Wood Products, while obviously still a relatively weak end market environment, you expected unit costs to be lower as you were going to be improving production. If I heard that correctly and you don't necessarily see the pickup, does it make for perhaps a weaker third quarter because at some point those costs have to come back to roost if you don't sell the product?

Costs are coming down for a couple of reasons, George. Part of it is the higher utilization rate at our mills that is in part related to permanent closures that we took at the end of last year. So we are operating at a higher rate in lumber and in OSB, slightly higher rate in our solid sections. With respect to lumber, we got very high operating rates in Canada, somewhat lower in the U.S. But those utilization rates should be sustainable given the level of demand that we see today. We're also enjoying some benefits from reduced SG&A. As compared to fourth quarter, we brought our SG&A in the business down by 13%. So it is a focus on tightening up costs, as well as our general focus in our Wood Products businesses to work the margins very heavily and in some cases, we do have some pricing opportunity. But we've got to be working both price and margin.

Okay. That segues to my other questions. One, to the extent that you can comment -- and if you have it in the packet, I had missed it. What would you say your average operating rates are right now across your major product classes within Wood Products? And secondly, for your or for Larry if he's on the phone -- I'm sorry, go ahead, Dan?

Larry's not on the phone, so you got me and Patty.

That's still good. Do you think the initiatives that you've taken in Wood and the actions that you've done to date would be sufficient to bring the business to breakeven on EBIT basis if we held prices in your major categories flat at the 1Q average, or would you need to embark upon additional actions to get to a breakeven on EBIT? So operating rates and further actions that are needed.

Operating rates, let's take that one first. In lumber for the quarter, our operating rate approached 80%. In our OSB business, we were running at around 66% and in our engineered business, it continues to be in the mid-30s. As you know, engineered products go into new home construction, whereas at least with OSB and lumber, we've got some alternative outlets and potential export plus the home improvement warehouse business. With respect to the initiatives in Wood Products, we have a wide range of initiatives underway in every single one of our product lines: lumber, OSB, engineered and in our distribution business. We need to be making progress in all of those to get to the numbers that we're projecting, and we're making progress. So I'm really pleased with the amount of activity that we have ongoing in our Wood Products business to improve our competitiveness. But we have not completed the initiatives and they are ongoing and we need to continue to improve in every single one of those in order to hit the numbers that we projected.

So Dan, if I'm interpreting it correctly, your initiative would get you to breakeven on a cash flow basis but you really can't comment to whether they would get you to breakeven given the current market environment on an operating profit basis, would that be fair?

Well, I think that would be fair, George, to say that in our forecast, we said that we would be cash positive for the second quarter. We said that the loss would narrow on an EBIT basis, and our forecast was realization flat. So we would not be to cash -- or to operating breakeven during the second quarter but we do expect to be cash flow positive.

It's fair enough. I was looking at past flow 2Q, but I'll leave it there for now. The last question, working capital was up quite a bit in the quarter. Again around the same line of reasoning or questioning, is there a way that you can become even more cash efficient in the future, certainly you can't control that a bit more than you can, the markets are dropping and in terms of improving your turns?

Working capital build that you see in Wood Products is seasonal. It is normal this time of the year that you would build first quarter. The utilization of our working capital has also improved over time. We continue to focus on increased inventory turns in our distribution business, as well as the manufacturing portion of our businesses. And I would not say that there's no opportunity there. We continue to work it not just in the Wood Products business but every business that we've got.

Yes, I think as you think about working capital, especially in Wood Products, you're coming off a very low year end, the December and holiday season. So that's a good portion of that build as well and it is pretty typical year-over-year. I would say that if we had more confidence in the housing outlook, we would have built more working capital than what you see there although it is something that we monitor very closely. And we would not expect to be building additional working capital in the second quarter.

Your next question comes from the line of Mark Wilde with Deutsche Bank.

I just want to echo Chip's comments. I find this new layout with the results and the detail very, very hopeful. A couple of questions on Wood Products. I did notice that big drop in Wood Products SG&A, and I wondered, Dan, is that likely to go down any further? Is that first quarter level sort of the new run rate in that business? And can you tell us a little bit about what you did to bring that down?

A lot of that, Mark, came out of selling costs as we looked at our business and evaluated what we really needed in operating. I would say, that there is -- that is the run rate that we've got today but we are looking for ongoing opportunities to bring it down. It was a notable change. And those were actions that we took last year in order to align our cost structure with the market situation that we find ourselves in.

And a number of those costs, in addition to the selling, were actually costs that were cost at the corporate center in terms of allocated cost that historically kinds of costs that would be allocated to the segment for their use for things like IT and other services. And we have been working pretty steadily across the company to bring those costs down in line with Wood Products operating posture. So I think it's the combination of the selling, the G&A, the G&A that is direct into the business as well. And as Dan said, I think in that business, we're really trying to pull all the levers that we can.

Okay. I will just start, Patty, when I looked at it across all the segments, that was the segment where you really saw the big decline both year-over-year and quarter-to-quarter. One other question about lumber, Dan, and I think people have kind of gotten around this a little bit already, but we've seen this big drop in the lumber futures, and I wondered if you have any thoughts about what's behind that. One argument that I've heard is that the Chinese have backed away from the lumber markets up in Canada and elsewhere in the short term, and that's one of the reason we're seeing this. I wondered if you have any thoughts?

We're not a huge seller of lumber into the Chinese market. We've got some production out of Canada.

But you're a huge lumber player -- I was just going to say, you're such a huge lumber so you must have a sense of what's going on.

We are. I think some of this is a reaction to anemic U.S. housing starts numbers. I mean, that's really the driver for lumber especially across the West. And in the South also. We're just not seeing the starts levels that had been anticipated as we entered the year. I made a comment that as we were entering the year, we were expecting starts at about 525,000 single-family. That was certainly not at the high end of the range of forecast. And what we're seeing now is those forecasts starting to drop below 500,000. Yesterday, NAHB [National Association of Home Builders] came out with a revised forecast at slightly under 480,000. And so I think that the Chinese demand for lumber and logs has been important but the main driver is U.S. housing.

Yes, okay. I wanted just to step over to Timberlands for a minute. I wondered, when we look at the details you're now giving us for the Timberland business, is there anything that you could do going forward that would give us a little more visibility inside the portion of that business that's export in terms of export volume and export prices? And it would particularly help us understand kind of how you're doing in the Japanese market because I think you sell a much richer mix of logs into Japan and say what you would sell into other Asian markets.

Historically, that's the case. You used the comment, the term richer mix, and we've seen the quality of logs that are shipped to China increase over the last 12 months. Some of that is related to availability of logs out of the West. And we're working to try to improve the data that we do get to you so you have a better understanding of our business. So we'll take your question as input. And we got an Analyst Meeting coming up where we're going to talk about Timberlands and so we'll try to give you some greater visibility.

Okay. Just one last question, Dan. Just it seems to me there are still a number of peripheral assets around the company. And just to take a single example, you've got a single bleach board machine up there at Longview. Just seems like you have to -- you have one machine in a market that you're not really in otherwise. It just doesn't seem to me that you're the natural owner for some of these businesses. Any kind of thoughts on that?

The bleach board business is located in Longview. It's part of our Longview complex. And it starts to get relatively complex in terms of shared services and integration with other activities. That business is much improved, and in fact we are significant player in that market. There are only a limited number of producers of that product. We've got great long-term relationships, and we are a significant seller of that product in Japan so it's a significant contributor of cash. It's operating better than it has ever been for us. And at this point, it continues to be part of the portfolio.

Okay, very good. I look forward to seeing you in a few weeks.

Your next question comes from the line of Mark Connelly with CLSA. Mark Connelly - Credit Agricole Securities (USA) Inc.: First, your comments about housing mix in the quarter and expectations that the mix will remain weak in Q2. Do you anticipate at this point that your mix is where it ought to be for the rest of the year if we don't see a housing pickup, or is it hard to see beyond the second quarter? And my second question, I was wondering if you could just give us an update on your overall energy cost sensitivities?

So on housing mix, let me understand your question, Mark. You're reacting to our comment that margins shifted because of mix? Mark Connelly - Credit Agricole Securities (USA) Inc.: Sure, sure.

Okay. So that is a comment really around the relative mix of closings and where they came from. So fourth quarter, we would have had a higher percentage of closings coming from Southern California, in particular San Diego. First quarter, there were more closings in other markets. And so on the first quarter statement and as Patty said in her outlook for second quarter about margins, it is a function of where those closings occur. We would expect, as we have in the past, to see a pickup in mix towards California in the back half of the year. But as I reported when we talk about activity on a year-over-year basis, our sales activity is much lower in California than it has been. So somewhat of a concern as we look at what margins might be, and it's too early to tell what that would be in the third and fourth quarter. At this point, we've got a very good sense of what second quarter activity is going to be because those homes are fundamentally in escrow. Mark Connelly - Credit Agricole Securities (USA) Inc.: Right, right. Okay. And on the energy side?

Could you restate your question? Mark Connelly - Credit Agricole Securities (USA) Inc.: Yes. I'm just trying to get a sense of what your energy cost sensitivities are right now. Fuel costs are up, oil prices are up. Just trying to get a sense on both the -- whether it's significant enough for it to matter going forward in the Timberland business and also in your Fiber business?

As you think about it in our Timberlands business, Mark, diesel fuel really is the biggest impact there. And it is a significant impact. If we were to take the prices that we have currently and have those for the rest of the year given where we were at the beginning of the year, it could be as much as a $20 million to $25 million impact for the rest of the year. So that's the primary piece. As it relates to sale of fibers, fuel, of course, impacts freight costs there. And then the other major impact, I would say, as you think about oil prices, flows over somewhat into our Wood Products business in terms of the cost for resin, et cetera. So those would be the major pieces.

Just as a final comment, I made a note in my remarks that energy also does affect consumer confidence. The translation of oil prices into gas prices at the pump does have an impact on consumer confidence which affects the homebuilding business, which ultimately, as you know, flows back to the Wood Products business. When we get to $5 a gallon for gasoline, people start to change their habits and it makes them cautious.

Your next question comes from the line of Joshua Barber with Stifel, Nicolaus. Joshua Barber - Stifel, Nicolaus & Co., Inc.: Dan, you mentioned before some new products on the Cellulose Fibers side, and if I recall, you were doing something with a commodity viscose staple extender. Can you give some more details on that in terms of timing mix? How much that could potentially take out of your typical fluff pulp business and what your expectations are for those new ones?

Yes. Patty talked about this about six weeks ago in a conference, and we are making a product, which has the ability to be an extender for dissolving pulp. It has a brand name called Pearl. And I think the estimate that we've made recently was that we may have as much as 60,000 tons this year. We've had very strong market response for that product. We've had a very limited number of shipments so far but we're building an order book for the balance of the year. It does give us the potential to increase average realizations across the pulp business. It's going to be a relatively small percentage of total production. But on the margin, it will give us some increased pricing power and it should benefit us. And you'll start to see that more in the balance of the year. Very limited activity in the first quarter. Joshua Barber - Stifel, Nicolaus & Co., Inc.: Is there some rough estimate, if you get to 60,000 tons of production, about how much of that would actually take out of the existing Cellulose Fibers production capacity?

Well, it's not a 1-for-1 substitution. So as we shift over to that product, we have a corresponding loss in fluff volume, slightly more than 1:1, but it is more than made up by the increase in price. Joshua Barber - Stifel, Nicolaus & Co., Inc.: Okay, but it wouldn't be like a 2 for 1?

No, no, no. Nothing that... Joshua Barber - Stifel, Nicolaus & Co., Inc.: Okay. And on your Wood Products side, you touched on Japan and how much of that is actually mix of revenues. Is there -- would you be able to give us an estimate of how much Japan actually makes up of your Wood Products division itself? Or is that...

It's a small percentage of Wood Products historically. They've been a major log customer. We ship to Japan primarily from Canada where we ship our J-grade product. And out of our operations in Canada, it is a small percentage that flows there. As demand may pick up for rebuilding, we would have the ability perhaps to pick up lumber exports not just from Canada but also the U.S. But primarily, they're a purchaser of spruce, and so that would be coming out of our Canadian operations. By and far, as we talked about Japan, it's a log market and it is a Cellulose Fibers market for us, both pulp and liquid packaging board.

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

Trying to get a handle on the potential of impact of increased purchases from Japan for your log business related to rebuilding. I realize it's very difficult to forecast especially on the timing. But if we look back to Kobe, can you give us a sense as to what type of impact that you think that that has on your log business? Did it perhaps increase your log sales to Japan by 50% versus where the run rates might have otherwise been for a 3- to 5-year period? Or how would you frame what happened in that prior situation? And if you have any perspective on how the current situation might differ that you'd share, that would be great, too.

I don't have numbers on the impact on our log shipments from that period. The most significant aspect of the Kobe rebuild was that wood frame construction performed very well in that earthquake. And so following that earthquake, there was a more significant adoption of Western-style framing for the construction of single-family homes. And that's now part of their building code so that's not a barrier that we would have to overcome. Longer term, that may be an opportunity for us in China because the Chinese do not build stick frame homes. They build with concrete and brick. And so a terrific long-term opportunity if the Chinese would start to build wood frame houses. So I can't comment on the impact on our log exports. I can just tell you that we've got solid long-term customers that buy our logs, that convert them into structural wood frame products. And so we're positioned with those relationships, not only with the operators of sawmills, but also the trading companies that we've worked with over the years that to the extent that there's a market opportunity and a demand for those products, we'd be able to take advantage of that.

Maybe let me try and come out at a different way and perhaps you can provide some help. If we think about the Japanese housing market, order magnitude is 800,000 starts, maybe 450,000, 500,000 wood starts in the last year or so. If one were to make an assumption that there's going to be another 400,000 houses, but let's just say just pulling numbers out of the air, so it'd be 50% equivalent of one year. And you flow that over five years, then it would perhaps add 10% or so a year to Japanese housing starts, 10% to 20%, depending on how you calculate it. Would that translate to a 10% to 20% increase for you, or would it potentially be very different than the 10% to 20%? So the last part being kind of the question of, if we make a judgment on how much the impact is going to be on Japanese housing starts, how does that then flow back to you?

I can't comment on your modeling and how you would approach it. I assume that we will receive our share of product demand for rebuilding. But remember, they get Wood Products from all over the world, not just North America sending either our finished lumber or logs to Japan. The key for us is to leverage the long-term relationships and the logistical advantages that we have and we will take advantage of this much opportunity as possible. And the timing will play out. As I said, they need to deal with temporary housing. There's about 150,000 homes that were destroyed, their focus right now is on temporary housing which is both steel and wood frame, and then they'll get to focusing on permanent rebuilding. And in some cases, some of the homes that were damaged are in areas where it's going to be a while before there's any rebuilding because they have concerns about radiation, of course.

Okay, great. And then just one last real quick one. I guess I was a little surprised that we didn't see a bigger increase in the Pacific Northwest log pricing relative at least to the fourth quarter? Are those -- is that mix shifts that are offsetting what seem to have been even bigger increases by specific grade?

Well, prices have been moving up and there is some mix. We also have some portion of our logs, as Patty said, that are actually sold domestically to customers that end up flowing them to Asia. So I'm not sure that I'm answering your question, Mark. Restate it one more time.

If you look at your Pacific Northwest log prices, it was up 5% first quarter versus fourth quarter. And if you looked at what many of the movements on individual species of logs had been, it seemed to have been much bigger than that. So I was just trying to understand why there wasn't an even bigger increase 1Q versus 4Q in your average Pacific Northwest log realizations. And I wondered whether it was mix had something to do with that.

So you do have some movement in mix, Mark, because Japan is still our biggest overall market. But in terms of movement quarter-over-quarter, I would say that China, which has a little bit lower price log, was a bigger -- had a bigger movement in the overall mix.

Right, that makes a lot of sense. And do the prices to the Japanese market, do you tend to have longer-term contracts that are much more stable or do they really move with the market as well?

They move with the market.

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

Just wanted to focus on Cellulose Fibers just for a second. Can you just calibrate the outages in the first quarter and possibly the second quarter, either on a tonnage basis or what you'd expect the maintenance cost to be? And then I had a follow-up just on how you're seeing the trends in the fluff market and how you'd think those trends would play out through the balance of 2011?

So Rick, this is Patty, why don't I take the maintenance outage question? As you think about your average outage for our mill sets, on average, they'll run about 10 to 12 days and it will be about $1 million a day, just round numbers. So let's just say that's $12 million a mill. In the first quarter, we had two mills that were down. So that would be a total of $24 million. And then as Kathy said in her comments, we did spend about $7 million in the first quarter on the outages for the second quarter, just getting ready for those outages. So that would be around just a little bit over $30 million for the maintenance cost itself in the first quarter, and we do expense maintenance as it's incurred. So as we move into the second quarter then, I said we would complete our remaining outages for the year. So that means we have four in the second quarter. So again, back to our $12 million a mill, that would be $12 million times four, it would be $48 million. And if you took the $7 million that we already spent on that, we'd be just over $40 million. Now those are for average outages. And we do have one mill in the second quarter where we will be installing a capital project. So its outages, a little over twice as long or about twice as long as our normal outage would be. So let's just say that's another $10 million. So roughly quarter-over-quarter, you're looking at probably just over $30 million for the first quarter and just under $50 million for the second quarter for an increase of a little under $20 million.

Great. And just maybe just comment on how you're seeing the trends in fluff pulp because we've seen some certainly some tightening in paper grade pulp.

There's been some tightening in paper grade fluff index. Prices have been off a bit. There is some substitution that's taking place where there's some fluff that is moving into the dissolving market and conversion of some machines. Our forecast that Patty provided is that we expect average realizations to be up. And that's a function of, in part, what we see as forward pricing but also there's some estimate of mix as we start to flow in some of our Pearl product.

Your final question comes from the line of Steve Chercover with D.A. Davidson. Steven Chercover - D.A. Davidson & Co.: Just on Timberlands, please. First of all, are you currently marketing any nonstrategic land or is there anything pending?

We are always in the market looking at land, in large part, to improve the mix of what we've got. The nonstrategic land that we sold in the first quarter was whitewood land. And we have had a strategy of moving into land that was better suited for Douglas fir. And so on the margin, we are always in the market but we have no significant nonstrategic land parcels on the market today. Steven Chercover - D.A. Davidson & Co.: Great. And obviously, you've been in the timber business for 100 years. But now that you're REIT, do you contemplate stratifying your landholdings at the core, noncore and maybe HBU [highest and best use] categories and discussing it with us?

We're absolutely prepared to discuss that. We've provided numbers in the past. If you look at our inventory, we have a relatively small percentage of HBU because we have, over time, been active in marketing HBU and disposing of it. In terms of core versus noncore. A majority of our Timberlands, we consider to be core. They're in our primary operating areas and so we don't have any significant amount of land that we would consider not to be core. But we're happy to share those numbers and we'll provide a little bit more color in May. We have done that in the past and our core lands are well over 90% if you look at our Timberlands.

I'll turn the call now back to Dan.

Okay, just a final comment. As always, we appreciate your comments and questions. And as a reminder, our Annual Investor Meeting will be held at the Sofitel Hotel in New York, 9 a.m. on Thursday, May 19, and I hope that many of you on the call will be able to join us. If you have further questions following today's call, I encourage you to follow up with Kathy McAuley. And I want to thank you for all joining us this morning.

Thank you, and have a good day.

Thank you for participating in today's Weyerhaeuser First Quarter Earnings Conference Call. You may now disconnect.