Weyerhaeuser Company (WY) Q2 2012 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 Q2 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Kathryn McAuley, Vice President, Investor Relations. Ms. McAuley, you may begin.

Thank you, Nicole. Good morning. Thank you for joining us on Weyerhaeuser's Second Quarter 2012 Earnings Conference Call. This call is being webcast at www.weyerhaeuser.com. The earnings release, analyst package and web slides for this call can be found at our website or by contacting April Meier at (253) 924-2937. Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call. Joining me this morning are Dan Fulton, President and Chief Executive Officer; and Patty Bedient, Executive Vice President and Chief Financial Officer. As summarized on Chart 1, Weyerhaeuser reported second quarter 2012 net earnings of $84 million or $0.16 per diluted share on net sales of $1.8 billion. Earnings for the second quarter include after-tax gain of $37 million from special items. These items are detailed in Chart 2, a GAAP reconciliation of earnings before special items. A gain of $33 million or $0.06 per share for postretirement plan amendments, no further gains are anticipated from these benefit changes which were effective June 30; and a gain of $4 million or $0.01 per share for the sale of properties. Excluding special items, the company reported net earnings of $47 million or $0.09 per diluted share. To provide a better understanding of business operating results, during the second quarter, we began reporting the elimination of intersegment profit on inventory and the LIFO reserve as part of unallocated items. Previously, these amounts were reported in the business segments. For consistency, segment contributions to pretax earnings for first quarter 2012 as well as prior periods have been adjusted to reclassify these amounts as part of unallocated items. These adjustments are detailed on Chart 14. There is no change to Weyerhaeuser's consolidated net earnings for first quarter 2012 or prior years. Next, turning to our business segments. My comments reviewing the second quarter of 2012 refer to changes from the first quarter of 2012 for all segments, beginning with Timberlands, Charts 3 and 4. Timberlands contributed $77 million to pretax earnings, $7 million more than in Q1. Fee harvest volume seasonally increased in the West and South. In the West, log prices declined nearly $5 per cubic meter as the domestic -- as domestic volumes comprised a higher proportion of sales. Domestic log demand was strong. Third-party volumes increased 19% and domestic log prices rose 2%. Japanese log volumes increased. Japanese log prices were slightly lower. The log export mix shifted towards China where volumes were higher and price is lower. Southern sales volumes increased and log prices rose 2%. Logging costs were higher in the West due to more cable logging on steep terrain, and silviculture costs were lower in the South. Wood Products, Charts 5 and 6. Wood Products contributed $36 million to pretax earnings, $49 million more than in Q1. The second quarter included a pretax gain of $6 million on a property sale. Lumber price realizations increased $39 per thousand board feet or 13%. Lumber volumes also increased 13%. OSB price realizations rose $17 per thousand square feet or 9%. OSB volumes were 14% higher in Q2. Engineered wood products declined 6% for TJIs and 2% for solid sections. TJI volumes rose 25% from very low level, and solid section increased 9% also from a low level. Log costs slightly increased from Q1, and other manufacturing costs were flat. Cellulose Fibers, Charts 7 and 8. The pretax contribution from Cellulose Fibers was $36 million, $12 million less than in Q1. Average pulp price realizations were flat in the quarter due to mix. There were 27 days of maintenance downtime in Q2. Manufacturing issues and the timing of shipments reduced pulp sales volumes 5%. Downtime increased costs and reduced productivity. Real Estate, Charts 9 and 10. The pretax contribution to earnings from Real Estate before special items was $15 million, $23 million more than in Q1. Single-family home closings seasonally increased 46% to 508 homes in Q2 from 349 homes in Q1. Home closings increased 11% from the same quarter last year. Gross margins increased to nearly 20% in Q2 from 17% in Q1. The average home closing price was $374,000, nearly flat with Q1. The closing price declined 4% from the same quarter last year due to mix. Unallocated items, Chart 11. The foreign exchange loss was $8 million in Q2 due to a weaker Canadian dollar. This was a $14 million swing from Q1. As discussed earlier, the elimination of intersegment profit in inventory and LIFO, formerly reported at the segment level, is now recorded in unallocated items. Now I will turn the call over to Dan Fulton. Dan?

Thanks, Kathy, and good morning, everyone. Thanks for joining us this morning. On this call, I will provide you with a perspective of our quarterly results. Overall, I'm very pleased with our performance during the quarter. All of our businesses were profitable. Importantly, business improvement initiatives within our Wood Products segment are yielding clear results above and beyond those realized from an improving housing market. Our aggressive actions to improve performance are beginning to show the strength of our businesses and to position us to capture the full benefit of the market recovery as it unfolds. Our work is not yet done, and we will continue to focus on improving our performance to capture the full value of our businesses. As you know, U.S. housing is very important to us as it affects 3 of our 4 businesses: Timberlands, Wood Products and Real Estate, which I'll be referring to as WRECO. Since the beginning of the fourth quarter last year, we've been experiencing a gradual improvement in the housing market that extended through the spring selling season this year and is continuing into the third quarter. Last quarter, we reported a 30% increase in our WRECO sales year-over-year. Our momentum continued to build through the second quarter, and at the end of the quarter, year-to-date WRECO sales are up 38%. During our first quarter call, I noted that we had not yet seen a significant effect on our Wood Products sales due to the time lag between new home sales and starts. Now it's clear that sales by WRECO and other builders earlier in the year, together with improved sales activity in the second quarter, are resulting in increased starts across the country, boosting demand for Wood Products. Improved demand for Wood Products is in turn increasing domestic demand for logs from our Timberlands. Housing construction is on a path to return to long-term trend levels necessary to meet the needs of a growing population and household formation, although we're well aware that the recovery is still somewhat fragile. Now I'll comment on the performance in each of our businesses in the second quarter. In Timberlands, our earnings improved 10% over the prior quarter. Harvest levels were up 5% overall, somewhat more in the West than the South. Third-party sales volumes increased for both domestic and export customers. Third-party domestic sales volume increased 16% as a result of increased demand related to housing activity as well as seasonal pickup in the West. Export volume grew a healthy 6% during the quarter, with a shift in mix among our 3 primary markets: Japan, China and Korea. Japan continues to be by far our largest and most stable Asian market, representing over 75% of our export volume during the quarter. Log sales volume to Japan increased 5% to meet demand driven by increased Japanese housing starts. Log shipments to China had slowed in the latter part of 2011 and early 2012 after significant increases in 2010 and early 2011. We were not expecting much recovery from China until the latter part of this year, but we were able to capture better-than-expected demand during the quarter, leading to a 44% increase quarter-over-quarter. Though a much smaller percentage of our export activity, this increase in volume to China helped to raise total export volume and offset a decline in Korea shipments. In Wood Products, we had a strong quarter as a result of improved market conditions and our improvement initiatives. This was our best quarter since 2006 point 2. EBITDA was $63 million for the quarter, up $80 million compared to last year. Sales volumes for all products increased quarter-over-quarter and year-over-year. Production rates increased across all product lines in response to increased demand, allowing us to capture production efficiencies. The good news for our Wood Products business is that there was a spring this year, as buyers returned to the housing market and builders followed through by increasing housing starts. Our improvement during the quarter was of course helped by increased housing activity, but we're also seeing the payoff of improvement initiatives across our business. These initiatives have resulted in increased revenue from new products and new markets and reductions in cost to production and operations. Year-to-date, earnings in this segment have improved $103 million from last year, more than half of which is attributable to our business improvement efforts. While we still have more work ahead of us to improve our competitiveness, we've made great progress and we're better positioned than ever to profit from improving market conditions that will come with the housing recovery. Shifting to WRECO. We had a solid quarter, with earnings from land sales and single-family operations. Though our overall community count is down slightly from 1 year ago, year-to-date closings are up 4% and sales are up 38%. Our backlog is up 53%, which will lead to a continuing increase in closings in the third and fourth quarters. Further signs of market stabilization are a 39% decline in our unsold inventory from 1 year ago and a firming of house home prices across most of our markets. Prices for new sales in June were 5% higher than 1 year ago. I know that you like to have a bit of color on what's happening in our markets, so here are some highlights of our sales activity during the first half of the year. Southern California, Las Vegas and Arizona were some of the markets hardest hit during the housing recession, and each are beginning to rebound. Our sales have more than doubled in Arizona. In Las Vegas, our sales are up over 60%, and in Southern California, sales are up nearly 20%. In the Seattle area, sales are up over 40%. Houston has been a steady market for us throughout the housing recession, and sales there are up nearly 20%. And in the Maryland and Virginia suburbs of Washington D.C., sales are up over 20% and we're underway with our first project in nearby Richmond, Virginia. Based on our own WRECO experience, our message is that the housing market conditions continue to improve as fundamentals stabilize and confidence begins to build. My final business comments relate to our Cellulose Fibers business. Demand for our Cellulose Fibers products held steady during the quarter. Planned maintenance and some unanticipated operational issues, which are now resolved, led to lower production levels during the quarter. With the exception of these onetime operational issues in this quarter, this business has been operating extraordinarily well. We continue to make progress during our planned shutdowns to make changes that will allow us to transition to an 18-month maintenance cycle. During the quarter, we received regulatory approval at our Longview mill to move to an 18-month cycle. And now I'll turn the call over to Patty to discuss third quarter outlook, as well as our financial highlights.

Thanks, Dan, and good morning, everybody. We anticipate continued improvement in our overall operating results in the third quarter as compared to the second. The comments regarding the outlook for the third quarter are summarized on Chart 12, and I'll begin my remarks with Timberlands. In the West, export realizations are expected to be slightly lower. Export prices and volumes to China are expected to increase, which will result in a heavier mix to China, which lowers the overall export realization. Log exports to Japan remain strong but continued to be affected by the weak euro, which underpins the competition from European laminated lumber. Western domestic log prices are anticipated to weaken in the third quarter compared to the second, as more seasonal volume is marketed by smaller private landowners. Costs for road maintenance are expected to be seasonally higher but will be partially offset by lower fuel costs. In the South, realizations for logs are likely to be somewhat lower with a heavier mix to pulpwood. Fee harvest volume should increase seasonally, although the increased income will be offset by higher silviculture spending. Minerals revenue will be slightly higher. Nonstrategic land sales are expected to increase. Overall, third quarter Timberlands income is expected to be comparable to the second quarter results. In our Wood Products segment, we expect third quarter sales volumes to be flat to slightly down compared to the second quarter. Sales realizations may soften seasonally, especially for lumber, although overall channel inventories remain thinly stocked. Log costs are projected to increase in Canada, be flat in the South and lower in the West. We expect the Wood Products segment to be solidly profitable in the third quarter, although earnings may not be as strong as second quarter results. As Dan mentioned, our business improvement initiatives have resulted in much stronger performance. We continue to focus on driving improvements in our operating results in addition to taking advantage of the market recovery. In Cellulose Fibers, pulp prices are expected to experience downward pressure as the weak euro and the uncertain international economic environment persists. We expect pulp sales volumes to increase, offsetting the effect of weaker prices. Pulp production is forecasted to increase, as there is only one maintenance outage in Q3 versus 2 in the second quarter, and reliability is expected to improve. As a result, maintenance cost is also expected to be lower. Costs for chemicals, energy and fiber are all expected to decrease, although freight is expected to increase slightly. Overall results in our Cellulose Fibers segment should be substantially higher in the third quarter compared to the second. In our Real Estate segment, single-family home closings are expected to improve by over 25% from 508 in the second quarter to approximately 640 closings. The higher closings reflect seasonal increases as well as the stronger home sales from earlier in the year, which are now making their way into home closings. Average prices are expected to decline slightly due to mix, while gross margins are expected to approximate 20%. Selling costs will likely increase due to higher closing volume. Earnings from single-family operations are anticipated to increase in the third quarter as compared to the second. Earnings in the second quarter included $12 million from land and lot sales. It's possible that the third quarter could also include some land sales, but the amount and timing is difficult to forecast. Now I'll wrap up with some overall financial comments. We ended the quarter with cash of $861 million, an increase of $133 million since the end of the first quarter. Capital expenditures in the second quarter totaled $75 million. This brings the total for the first 6 months of this year to $139 million including reforestation. Major capital projects include a pulp converting facility in Poland, replacing of operators at our pulp mill in Grand Prairie, Alberta, Canada and a fiber line upgrade at our Columbus, Mississippi pulp mill. We still expect total capital expenditures for the year to approximate $290 million. During the third quarter, we expect to spend approximately $180 million for debt maturities and approximately $110 million for interest, which includes semiannual payments. As can be seen from Chart 13, our debt maturities for the next 5 years total approximately $600 million, well below our current cash balance. In addition, we have a $1 billion line of credit with no borrowings outstanding. In summary, we have very strong liquidity, improved operating performance and a strengthening housing market, all of which should enhance future cash flows. With that, I'll turn the call back to Dan, and I look forward to your questions.

Thanks, Patty. The housing recovery looks and feels real. We've continued to make improvements across all of our businesses, and I'm encouraged, but not satisfied, by the progress we've made. We're focusing on what we can control, improving our operating performance and our relative competitiveness. We're well positioned to take full advantage of the long-term economic recovery that lies in front of us. And now we welcome your questions and your comments. Kathy?

Nicole, will you please open the floor for questions?

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

Just a couple of quick questions, and one maybe a little more strategic. Was there -- can you quantify any landfill and mineral income that you saw in the second quarter in Timberlands?

With respect to minerals income, minerals income were roughly flat quarter-over-quarter, Gail. What we saw was a decline in income from our gas properties and some of our hard mineral properties, offset by increases in revenues from oil shale activity in the Tuscaloosa basin, where we have property. With respect to dispositions, dispositions were, on a quarter-over-quarter basis, relatively flat.

Okay. And just strategically thinking about it, last year, I know you talked about seeing a material change in your homebuilding business with the talk around the fiscal debt dealings debate. And I'm just wondering, is your sense this year with the fiscal close to be kind of looming that the market would be more resilient as that rhetoric kind of ramps up? Or do you have any fear or worries from the trends that you're seeing that we could repeat what happened last year?

Well, last year, we did see a setback in market confidence surrounding the debate about raising the debt limit, and it had a real impact on consumer confidence and housing sales. This year, there has been a lot of discussion. Just I think last week, Fed Chairman Bernanke was in front of Congress talking about those very same issues. At year end, we have an expiration of the Bush era tax cuts. We have the congressionally imposed sequestration process that will take over at the beginning of the year if nothing is done, and then we have a longer-term challenge around fiscal policies. So we are concerned, and that was fundamentally the message that Bernanke had to Congress. We risk an upset in the economy if we're not able to deal with those issues. The good news for us this year is that the housing market seems to be shaking off. That concern at this point in time, given the numbers that we reported this morning and the year-over-year activity, we're encouraged, but I think we still have confidence issues to deal with among homebuyers and in the general public because it not only affects home sales, it affects retail sales and overall employment.

Okay. And just maybe one last one on China. I'm surprised to hear that you're kind of ramping up your volumes given what we've heard from some others. Someone suggested yesterday that perhaps inventories were starting to build up in China again. Can you just give a little bit of color there?

Our experience has been that inventories were building late last year and early this year, which is when we saw the significant falloff in volume as well as some pullback in price. And as I mentioned in my remarks, we had been assuming that we would see a pickup come back in the latter part of the year. And in fact, we're encouraged to see the opportunity to increase our export activity more towards the end of the second quarter. So we've been developing strong relationships in China. The customers appreciate the quality of the logs that we're shipping and the dependability of our entire logistical chain. And we expect that, that activity will increase over time.

Your next question comes from the line of Anthony Pettinari with Citi.

A couple of questions on Timberlands. The first is Southern sawlog prices have obviously been depressed for a number of years. And with the strength that we've seen in lumber and housing starts picking up, are you seeing any of that strength kind of flow back to the stump? And what is that kind of lag that you would expect between strength in lumber and strength in sawlogs?

Well, it ultimately does flow back. In the South in particular, we are more dependent on domestic demand as compared to our position in the West where we have export markets. We have had some recovery in pricing. As Patty mentioned in her remarks, as we go forward to the third quarter, we see average realization declined. But that is more of a mix issue as we expect to be selling more pulpwood. In general, in the South, you want to look at U.S. housing recovery and that's what's going to translate into timber values.

Okay. And then in the West, you referenced lower expected export log realizations in 3Q. And is that purely a mix issue as well? Or apples-to-apples, are you seeing some deterioration of export prices into July?

Really, Anthony, that's more of a mix issue. So we'll have more volume as a percentage going into China. Our Japan volumes continue to be very strong. Japan has an uptick in their housing starts this year based upon the very low mortgage rates that they have, but also some concern about consumption tax increases a couple of years out. So as well as rebuilding from the tsunami, which we haven't seen a lot of yet but appears to maybe starting to make its way in. So it really is more from a realization perspective the fact that there is more mixed going into China on a relative basis. But all of those volumes are still pretty strong.

Okay. And maybe just one last quick one. In engineered wood that you saw volumes rising sequentially but it really looks like prices kind of fell a little bit sequentially. And I'm wondering if you could just talk a little bit about what you're seeing in solid section in TJIs, and if you're seeing any kind of pickup in that business.

We have seen a pickup in volume as housing starts begin to recover. As we've explained in the past, our engineered wood relies more heavily on new construction as compared to our OSB business and our lumber business, which has a much broader mix of markets. And so the volume pickup is, we would believe, is related to the early stages of housing recovery. With respect to price, there is still -- there are lower operating rates in that industry than in lumber and OSB to competitive marketplace. And we are seeing some signs of some pickup in pricing as we move into the third quarter.

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

I just want to maybe pick up on Anthony's question. In terms of operating rates within your other wood products business, could you comment at all in terms of where you stand? And are there any areas that are still troubling to you, x EWP, which you already covered?

During the second quarter, our operating rates for lumber business were in the high 80% range, up quarter-over-quarter from the first quarter. Our OSB business is operating in roughly the low 80s, George. Engineered wood business, overall, still less than 50% if we include a couple of facilities, which have been indefinitely curtailed. As we look at the operations that we are manufacturing in today, we'd be in the 50% range. So we've got a lot of room to flex up. I'm not concerned about our ability to respond to increased demand because we do have the ability to, especially in lumber, add some shifts. And we've been pleased with the uptick in productivity.

Dan, I'm not sure that we would be able to actually model it, but just to understand, if we continue to see progress in, obviously, the housing markets and therefore the product markets for you, holding price constant, should we see the same level of incremental profitability with that improvement in volume and utilization rates in wood and OSB? Or in theory, might you see actually an incrementally higher rate of profit dollars as demand comes in? And why or why not?

We have a lot of cost inputs, George. And so it is a function of not just log costs but also energy costs, chemicals. But as we increase volume, we do enjoy operating efficiencies. And so we fundamentally have covered fixed costs. We need to cover variable but there should be a corresponding uptick in margin, assuming that input costs are held constant.

Okay. So what I'm hearing from you is basically, holding those constants, your incrementals will stay basically at the same rate as long as volume keeps moving up. I guess the last couple questions I had for you, one, why are you seeing a mix towards pulpwood in the South since we're seeing an improvement in housing since hopefully that would be driving higher sawlog prices -- or demand, I should say? And then to cellulose fibers, would it be possible to parse out what the, if you will, exceptional factors were in the second quarter that hopefully don't recur in the third quarter, what the profit dollars associated with that -- those items were?

Sure, George. I'll take those. I think from the standpoint of a little more mix of pulpwood in the South, we have our spending that goes on as well. So I don't think there's any type of big change driven by pricing in those 2. But more of just the silviculture regime of a little more thinning volume. In terms of pulp, to help you a little bit of getting from the first quarter to the second quarter, or from the second quarter to the third, as I said in my remarks, we have just one outage in the third quarter compared to 2. And we had about 27 days of downtime in the second quarter. So let's just say we have half of that, so about $14 million. And as I've said in the past, maintenance expense runs, for just the maintenance costs itself, about $1 million a day. So we should have $14 million less in just maintenance cost. And in the second quarter, we also finished up a couple of things from the first quarter shut. So maybe maintenance cost itself is around $14 million, $15 million less quarter-over-quarter. Then we also have the increased productivity as a result of producing more pulp, which is similar in amount. And then as I mentioned in my remarks, we'll also have a little lower chemical and fiber costs. So all in all, I would expect that profits in the third quarter should be roughly twice what they were in the second quarter.

Your next question comes from the line of Mark Connelly with CLSA. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Two things. Patty, you didn't sound as optimistic about land sales next quarter as I might have expected. Are you seeing a meaningful pickup in conversations with builders who are short of land as we talked about a year ago? And I'm just curious how that opportunity looks to you now versus a year ago.

Yes, Mark. We do continue to have land sales that we do market. It really was more a function of not optimism about it, but the ability to really tell you what the amount and timing of those will be. So we are still in the market with -- as you know, we have a longer pipeline than most of the other builders. So it wasn't a comment about optimism. It was really more a comment about the forecast of timing and the amount of those. Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division: Okay. And one more question. Just on fluff pulp, are you still selling primarily to the same customers? I'm trying to get a sense of whether the new capacity that's coming is just lowering prices or whether there's also a customer reshuffle going on as well that's going to impact you.

Mark, we've not had any significant change in the customers. In fact, the customers that we work with rely on us. They need our product and we're part of their growth plans, not just in the U.S. but also in the global market. So we have not experienced any significant shift in customers.

Your next question comes from the line of Chip Dillon with Vertical Research.

First question is for Patty. Are there going to be any changes that you anticipate next year? And maybe you can give us some magnitude in your pension funding based on the highway bill provision.

Sure, Chip. As you referenced, Congress did pass an amendment along with the highway bill in June, which basically changed the way that the discount rate was computed for purposes of determining minimum pension contribution funding. So we had disclosed that we would have about a $60 million contribution due no later than the middle of September 2013 for our U.S. qualified plan. And based upon the legislation, we don't believe that, that contribution will be needed.

Got you. And then on a separate note, I'm having a little trouble, maybe I just missed something that's different about you guys, but I'm having trouble seeing the doubling of income in pulp. All the numbers you gave add up, but we left out price. And we've been seeing an unusual situation where softwood has been, if you will, softer than hardwood prices. And so I didn't know how that came into the mix.

Chip, what we've got going from the second quarter to third quarter is, as Patty mentioned, lower maintenance, more up-time because we don't have the same number of scheduled maintenance shutdowns. We also encountered, as we noted, some operational issues during the second quarter that impacted our volume by about 5%. Those were onetime issues. They've been resolved. And so as we look forward into the -- going from second to third quarter, we recover that 5% volume, plus we add volume that we lost during the second quarter related to our annual shutdowns.

We also had a little more in-transit inventory at the end of the second quarter for pulp on the water that didn't close out in the second quarter that will come into the third. So weaker pricing basically just gets offset by the increased volume in terms of that's why you don't see that adding up in the numbers.

Your next question comes from the line of Alex Ovshey with Goldman Sachs.

So first of all, on Wood Products, clearly a very solid quarter there. But just looking at your price realizations, if my numbers are right, I think you sold lumber for $58 more per thousand board feet relative to last quarter, would imply that just from the lumber pricing, you should have seen that type of pickup in the EBIT. And is there anything going on, on the cost line in that Wood Products business that held back the pricing leverage that, I think, you should have seen in the second quarter?

No, there's nothing significant there. We had a slight uptick in log costs during the quarter but not significant. Manufacturing costs quarter-over-quarter were about the same. So the increase that comes through in Wood Products generally is a combination of all of our products.

Okay. Is any of the log costs linked to the lumber price in the Wood Products business?

No. We don't have a tie-in arrangement or indexing. The logs that are purchased by our Wood Products business are purchased at market prices from internal sources or external sources. And so there is no indexing. Some of our competitors have started to move to that. We are not doing it.

Alex, as you think about the leverage, we did see significant leverage in the lumber business as well as the OSB business. So in terms of getting those numbers through in the second quarter, those certainly came through. We did not see the same kind of improvement in engineered wood and our distribution business. So that's probably the piece that you're missing.

Okay, that's helpful, Patty. And then just on the commentary around seasonally lower profitability certainly makes a lot of sense in the context of lumber prices always seasonally softening in the third and through the fourth quarter. But if we were to hold the lumber price constant where it is today, how should we be thinking about the profitability level in Wood Products in the third quarter?

I would say that if prices stay constant that you would see because volumes, we're saying, are flat to maybe slightly down a little bit. We took a little bit of downtime in the southern lumber system Fourth of July holiday. But I would say that results will be similar to the second quarter. And we hope that's the case, Alex.

Yes, same here. And just on WRECO, a number of the home builders have been taking reversal to tax valuation allowance, so that had been established through the very deep recession in housing. Can you just remind us how much of the book value in real estate was written down through the downturn and whether there's an opportunity for you to be able to do that as well?

We do not have the same situation as the public home builders because that fundamentally is their only business. And we file a consolidated return, and so we didn't have the same tax effect that they would have had.

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

First question I had, it looked like there was about $100 million worth of land in lot sales in the second quarter. Is it possible to get some sense of where and why on that?

The land and lot sales during the quarter were primarily related -- this is a WRECO question, I assume.

Yes, it is. Yes, yes, yes.

So that was the sale of Cross Creek Ranch, which we actually talked on the last call, but the closing took place in the second quarter. So that was a master plan community that we had developed in Houston. We sold that property, and so that's what was going through the WRECO books. We booked income on that. As part of that transaction, what we did is we actually -- the benefit of that was not only bringing cash back to our balance sheet so that we can redeploy it elsewhere, but we capitalized on the value that we had created and also established a relationship with the buyer where we have the opportunity to buy lots from that same buyer, not just in Cross Creek in the future but also other properties.

Okay, all right. That's helpful. Second question, Patty, the tax rate in the quarter was a little bit higher than we would have expected, especially if you back out the Timberland earnings. Can you give us a little more color on that?

Yes. As you really think about the tax rate, Mark, probably the easiest way to get there is, at the way that we compute the rate is, as you mentioned, on our REIT Timberland earnings we won't pay any tax. And so we look at the tax rate for our TRS earnings, in this case year-to-date it's a TRS loss. So if you take our year-to-date earnings, which are on Chart 1 of the package, so you have -- and exclude the special items, you've got about pretax earnings of about $200 million and back out the interest expense, which is around $170 million. So you end up then with a TRS loss of $115 million, give or take. And then if you back out all the tax on the special items, and those are also delineated separately for you on Chart 2, you'll get to a tax rate for the quarter on that -- or year-to-date on that computation of a little over 20%. And our year-to-date effective rate -- or effective rate for the TRS for 2012 is just under 23%. So that'll get you pretty close in the ballpark. So I don't know how you did your computation but those would, if you take that, back out the Timberland earnings, back out the special items and the tax effect of the special items, you'll get to just almost that 20%.

Okay, all right. And then the one other question. Dan, I noticed on the announcement around the forest capital sale a couple of weeks ago, that they specifically pulled out about 0.25 million acres of gas and oil rights down in Louisiana. And I know that you've got, I think, over 1 million acres in Louisiana, as well as about 600,000 or 700,000 up at Arkansas and some more over in Texas. Have you guys looked carefully at what you think the potential value of mineral rights across the South is? Because I think all of your land pretty much has mineral rights.

All of our land -- I mean, I can't say 100% we have mineral rights on every single acre of property. But in fact, we have mineral rights on more property than we own across [indiscernible].

Yes, that's what I thought.

So we have roughly 7 million acres of mineral rights as compared to roughly 6 million of Timberland. We do have properties in the South, in the areas that you've discussed. Some of our properties are in the Haynesville Shale area, which we have talked about in the past and where we have active leasing activity and drilling activity. And what we do, just to remind everybody on the call, is generally we'll enter into operating leases with exploration companies. They spend the capital to develop the resource, and then we have a royalty interest that we receive over time. So our income stream is a combination of front-end leases and royalties. We also have land in the Tuscaloosa oil basin, which is subject to a lot higher level of interest right now, because oil is more attractive to the industry than shale gas. But we manage those properties aggressively. We are actively monetizing those properties. We have had a historic practice of not selling those rights but rather retaining them and monetizing them with annual steady income, which we happen to favor. I cannot put a value on all of our mineral rights, and I specifically can't give you a number for what our properties would be worth in that region other than to say that we've got active leases, we've got active exploration going on, and it becomes a fairly steady part of our Timberlands' P&L.

And are you -- how satisfied are you that you're really kind of -- you're maximizing value right now, I guess? Or is it -- how far along are you in the process of you think of really understanding exactly how much value you've got and then extracting it?

Well, we know what we have. One of the things that has emerged over the last 5-plus years is the development of new technology. So frac-ing. That opened up the shale gas opportunity, not just for us but really for the entire United States. And then we're seeing that same technology used in the oil shale basin. So what we do is we enter into highly -- leases with highly qualified operators. They develop the resource. If they are successful, then in fact, we receive those royalties over time. So I'm confident that we know what we've got. I'm really optimistic about the potential future income stream from those properties. And I'm very encouraged about what the development of those resources mean for this country. We are fast becoming energy-independent, and that's a good thing for us generally as a country. And we'll also -- we're already starting to see the impact on some on-shoring of jobs because of low energy prices.

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

One quick technical and then one bigger strategy. On the unallocated, since you changed the accounting, should we still be using a $20 million to $25 million, or does that actually go up a little bit?

Over the course of the year, Mark, it will basically pretty much wash out. It will maybe be a little bit higher this year as we build inventories. A lot of that reduction comes from -- when we sell from one segment to the next, we sell at market price. But for anything that's less than inventory, we have to back out that intercompany profit. So the reason that we brought it into the unallocated segment was really to give you a better view of what the stand-alone business results were by segment. So as you think about our Wood Products business, for example, in the first quarter where we're building inventory, they would be unduly penalized and then they would get that back when they sold that inventory later in the year. So to take that noise out of the system, that's really why we pulled it out of the segments and put it into unallocated, so you could track it very easily from one to the next. But I would expect that as the year progresses, that will likely stay at a pretty low level, and then you'll see another piece come back in the first quarter of 2013, similar to the larger amount that you saw in the first quarter of this year. The other thing, Mark, that really jumps around in that segment, you can see it there as well is the foreign exchange. So the unallocated number really increased over what our guidance typically would have been because of the change in the currency, Canadian dollar. So that was a $14 million negative swing quarter-over-quarter.

And then on the dividend, you've articulated how, over the course of time, you expect to pay out roughly 75%, et cetera. And now things are getting better. Are you likely to view where the dividend should be on a looking kind of a trailing of what you have achieved, or is it more an outlook of where things seem to be going? Because obviously we're at a point where, hopefully, things are getting better. And are you going to likely be proactive on the dividend or more reactive?

Mark, I don't want to get ahead of our board on this one. You articulated our policy very well. So we set the dividend at a target range of 75% of our funds available for distribution over the cycle. We are focused, as we set the dividend, not on looking back but looking forward. And so what we are looking at as we review the dividend level is our future earnings potential, our view of market conditions. We take into consideration the certainty or the level of volatility in forecasts. And those are the areas that the board focuses on as we look forward. So I would say, really quick answer, we're not looking back. We're looking forward. And we are targeting that 75% over the cycle. So we're looking forward to seeing our earnings and cash flow increase, and we're looking forward to the opportunity to increase the dividend.

Your next question comes from the line of Steve Chercover with D.A. Davidson. Steven Chercover - D.A. Davidson & Co., Research Division: Most of my questions have been answered, but I did have one on engineered wood products. You kind of touched on it. But the fact that prices fell when -- especially for I-beams when the input, the flanges and web stock were rising, just is troublesome. So is it just too much production, or is there anything else?

I would simply observe that it's market pricing by a range of competitors. And I can't comment beyond that. As I said, we are starting to see some increase as we move into the third quarter. But I've got nothing else to add. Steven Chercover - D.A. Davidson & Co., Research Division: Got it. And then just -- you only have one sawmill left in British Columbia, and I should know this. But is Princeton on the interior? Are you having significant issues with sawdust that's very fine?

We are not. We're very -- we've had some significant issues -- the industry has in British Columbia. A lot of speculation about the sawdust, and is that or is that not related to beetle wood. We do not have that problem. Our mills, we believe, are operating safely. They've been inspected closely by all appropriate authorities, and so it has not been an issue for us.

And Princeton is in an area, Steve, that is less affected by the mountain pine beetle than most of the other B.C. mills on the [indiscernible]. Steven Chercover - D.A. Davidson & Co., Research Division: Yes. I was kind of interested because of those 2 catastrophic events and wondering whether I guess the province was putting incremental scrutiny, I suppose, on your practices.

They've inspected, and we've gotten a good report card.

Your next question comes from the line of Joshua Barber with Stifel, Nicolaus. Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Two quick questions. On the Timberland side, you mentioned that you'll have some -- I may have missed it before, but some nonstrategic sales in the third quarter. Can you just remind us what the total acreage is that you would still classify there as nonstrategic?

It's actually a very small percentage of our acreage, Josh. We include that number, I believe, in our fact book. It's certainly less than 10% overall. And so when we talk about nonstrategic, we identify what's core, what's not. We do not have significant acreage that we would consider to be nonstrategic. Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And on the homebuilding side, it looks like capitalized interest moved up pretty decently this quarter. Is that more directly correlated with the backlog and the home closings? Or is that more reflective of increased community count?

I can't answer that question.

So Josh, could you ask your question one more time? Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Yes. The capitalized interest on the home -- on WRECO.

On the rollout of capitalized interest? Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division: Just the absolute amount of capitalized interest. Is that -- I mean, it went up fairly significantly this quarter. Is that more reflective of additional backlog and closings in the quarter, or does that have to do more with future community count and...

I think most of that is a result of the Cross Creek sale. So it was a large sale that took place in the second quarter, so we also had to roll out the capitalized interest with it at the same time. So that's more of an aberration of the size of that sale more than anything else.

So Josh, the rollout occurs as we have closings, not as we have sales. And you made the comment about backlog, and just to be clear, it happens as we roll out as we have closings. So over time, as closings go up, you'd see that number move. Well, I would like to thank everyone for your attendance today and for your continued interest in Weyerhaeuser Company. If you have any further questions following today's call, I encourage you to follow-up with Kathy McAuley. And I thank you all for joining us this morning. Have a good summer.

Thank you.

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