Weyerhaeuser Co WY
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/26/2013

Operator: Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser Q1 2013 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

I would now like to turn the call over to host, Kathryn McAuley, Vice President of Investor Relations. Ms. McAuley, you may begin.

Kathryn F. McAuley - VP, IR: Thank you, Brent. Good morning. Thank you for joining us on Weyerhaeuser's first quarter 2013 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.

On the call we will discuss non-GAAP financial measures. Our GAAP reconciliation can be found on Chart 19.

Joining me this morning are Dan Fulton, President and Chief Executive Officer, and Patty Bedient, Executive Vice President and Chief Financial Officer.

Before we review the first quarter earning material, Patty Bedient would like to make a few comments. Patty?

Patricia M. Bedient - EVP and CFO: Thanks, Kathy and good morning everybody. As we began our financial reporting for 2013, I want to call your attention to some additional information that has been included in our earning release presentation material. This information is intended to provide you with some further insight into our reported results. I'll briefly describe some of the changes we've made to our earnings release, slide package and then Kathy will follow with here normal comments on the first quarter performance.

We now present condensed income statement for both Weyerhaeuser Company and each of our business segments to assist you in comparing our quarter-over-quarter results. For Timberlands, we've provided additional detail on revenues from export log sales and the countries to which we sell those logs. This information is to help you understand the scale and diversity of our markets for our Western Timberland.

We've also included a quarterly detail of our non-strategic Timberland disposition. To better explain the earnings of our Wood Products segment, we are reporting the quarter EBITDA for each of our major business line; lumber-oriented strand board, engineered wood products and distribution. In Cellulose Fibers we've provided the total quarter maintenance expense dollars in addition to our scheduled annual maintenance outage days.

For Real Estate, we've included quarterly earnings from land and lot sales as well as information on the number of lots we controlled at quarter-end in each of our major geographies, similar to the information we report annually in our 10-K. We hope these changes will help you in your understanding of Weyerhaeuser and we look forward to your comments and suggestions and thank you for those that have been provided in the past.

So, now I'll turn the call back to Kathy for a discussion of our first quarter results. Kathy?

Kathryn F. McAuley - VP, IR: As summarized on Chart 1, Weyerhaeuser reported first quarter 2013 net earnings of $144 million or $0.26 per diluted share on net sales of $2 billion. Turning to our business segments my comments reviewing the first quarter of 2013 refer to changes from the fourth quarter of 2012.

Beginning with Timberlands, Charts 2, 3, and 4. Timberlands contributed $104 million to earnings $9 million more than in Q4. Western log demand was strong in both export and domestic markets. Log price realizations increased 9% and log sales volumes rose 7%.

The fee harvest in the west was 6% higher. Export log sales increased 15% and this is illustrated on Chart 3.

Southern log prices were slightly higher and volume declined. We weather in the south resulted in an 11% decrease in fee harvest volume.

Earnings from timberland dispositions this is new data available on Chart 4 were $3 million in Q1. Dispositions were $20 million in Q4 2012.

Turning to Wood Products, Chart 5 and 6. Wood Products contributed $178 million to earnings $140 million more than in the fourth quarter. EBITDA improved in all business lines, EBITDA by business line can be found on Chart 5. The strong lumber and OSB demand experienced in the fourth quarter continued through the first quarter.

OSB price realizations increased $69 or 24% to $359 per thousand square feet. Lumber price realizations increased $74 or 20% to $444 per thousand board feet. Lumber sales volumes were flat and OSB volumes were (indiscernible) lower.

Sales volumes in Q4 were very high on a seasonal basis. Price and volumes increased for Engineered Wood Products. Solid section prices were up 2% and sales volumes 19%. I-joists prices rose 3% and production 16%.

Operating rates increased across all product lines. Raw material costs were higher, Cellulose Fibers, Chart 7 and 8. Cellulose Fibers contributed $31 million to earnings, $30 million less than in the fourth quarter. Scheduled maintenance costs increased to $62 million from $45 million and the number of annual outage days doubled to 12.

In addition to annually scheduled maintenance outages, there were projects to lengthen the mill maintenance cycle from 12 to 18 months. Fiber costs increased due to wet weather in the south. Average pulp price realizations declined slightly. Pulp sales volumes increased 2%. Production decreased due to the scheduled maintenance outages.

Real Estate, Charts 9, 10 and 11; in the seasonally weak first quarter Real Estate was slightly better than breakeven. This compares to a loss of $8 million in the same quarter last year. Earnings of $81 million in the fourth quarter of 2012 included an unusually high level of land and lot sales. As illustrated on Chart 11, earnings from land and lot sales were $65 million in Q4 and less than $1 million in Q1. 463 homes were closed in Q1, a third more homes been closed in the first quarter last year. First quarter closings were down from the seasonally strong fourth quarter when 842 homes were closed. The average closing price increased to $394,000, an increase of $13,000 in the quarter.

The gross margin declined slightly to 19.5% from 20% in Q4. The decline was due to mix and raw material costs. At the end of the first quarter, the backlog of homes sold, but not closed increased 46% to 1,131 homes from 744 homes at the end of Q4. The average sales price of homes in the backlog also increased.

Unallocated, Chart 12; the elimination of intersegment profit in inventory and LIFO was an expense of $24 million. This was due to an increase in log and lumber prices and volumes. The unallocated corporate function expense was $5 million lower. Unallocated share based compensation expense increased by $4 million due to a higher stock price during the quarter.

I'll now turn the call over to Dan Fulton.

Daniel S. Fulton - President and CEO: Thanks Kathy, and good morning everyone. Thanks for joining us today. First quarter results exceeded our expectations led by continued improvement in our Wood Product segment and in our Timberland segment. The Woods Products business benefited from strong lumber and OSB prices. In addition, our ongoing focus on earnings improvement initiatives allowed us to take full advantage of improving markets.

Our Timberlands business benefited from an improving U.S. housing market and strong export demand. We're realizing a significant operating leverage that comes with housing market improvement. Our steadily improving operating results, coupled with our outlook for continued housing recovery, led our Board earlier this month to increase our dividend. Combined with an increase just six months ago, this represents a total increase of 33%, since October 2012.

Before I discuss the performance of our business segments, I'll provide a brief comment on select economic conditions that affect our company, first, the U.S. housing market. U.S. housing market continues its recovery towards long-term trend demand levels. I'll cite a few statistics that help to inform our discussion of operating results during the quarter as well as our outlook for next quarter.

Though our primary focus for our company is on new construction, we look at the overall housing market, both existing homes as well as new homes. To better understand and respond to longer term supply and demand balance.

Sales of existing homes have increased year-over-year, leading to a drop in inventory. We now have less than a five month supply of existing homes a level not seen since 2005.

Sales of new homes continued to increase, but we are less than 40% of peak levels of 2006. New home inventory at the end of March was less than 4.5 month supply to these levels of sales. The drop in available home inventory is leading to price increases in most markets and increasing demand for new homes resulting in an increase in housing starts. New starts from RHS reported last week now have moved over 1 million on a seasonally adjusted basis for the first time since the recession, with single family starts at nearly 628,000.

Increasing home prices as I commented before begin to rebuild consumer confidence and strengthen household balance sheets. These factors help bring potential homebuyers back to the market.

For Weyerhaeuser this trend improves demand in three of our four business segments. Beyond the effect from the U.S. housing market activity on our Timberlands, Wood Products, and WRECO business segments, global demand and the foreign exchange rates affect our Cellulose Fibers and our Timberlands segments. For the past quarter we continued to deal with a slow European economy and Asian markets remained relatively strong.

Movement in exchange rates has not been significant enough to have had a material effect on our businesses. Now I'll comment on the performance of each of our businesses in the first quarter.

In Timberlands, our results primarily reflect improved conditions in the west with relatively flat performance in the South. Not including the results of land dispositions, total earnings from operations improved 35% compared with the prior quarter and 66% year-over-year. In the west, demand increased for both domestic and export markets. As Kathy noted, this activity reflected an increases in volumes as well as price. Domestic markets are beginning to see the effect of an improving housing market; especially the beginning of a recovery in California. Our export demand continues to grow with total volume up from the prior quarter and year-over-year. Japan remains our largest export market followed by China and Korea.

In the South, first quarter activity was adversely affected by weather causing harvest levels to decline a bit. Prices moved up slightly due to lessened availability of logs across the region. The contrast between Western and Southern markets is dramatic. In the west, we've had the benefit of the strong export markets throughout the recession. As a result, industry harvest levels did not declined in parallel with the steep drop in U.S. housing. Southern log markets by contrast, were more closely tied to U.S. housing levels, so the industry differed to greater percentage of harvest in the south during the recession. This was especially true of smaller landowners.

Now, as U.S. housing begins to recover, Southern log volumes include more significant amounts of deferred volume as compared with the west resulting in slower price response to increased domestic demand. The positioning of our Western lands allows us to fully realize the opportunity to supply strong export markets as well as to serve recovering domestic demand. In the south, we're well positioned to meet increasing demand as log markets improve. We highlighted in our earnings release that our Wood Product segment experienced its most profitable quarter since 2005. By comparison at that time, total housing starts were over 2 million and our sales volumes were roughly double today's level.

Market conditions in the first quarter improved in line with the recovery in U.S. housing driven especially by increased prices for lumber and OSB. Our scale and the earnings improvement initiatives allowed us to take full advantage of the opportunity. Earnings from this segment increased significant from the prior quarter as well as year-over-year. We've noted in prior discussions that our engineered wood business is the most reliant on new residential construction.

With the recovery of housing, volumes for engineered TJIs and engineered solids increased notably during the quarter. Realizations for all products were up over the prior quarter with the most significant increase in lumber and OSB. Operating rates improved as we ran better, though the benefit of improved pricing and operating rate was dampened slightly by higher raw material cost in the west as well as issues in Canada related to railcar availability and the late takeaway by traders in the south. These factors taken together resulted in inventory buildup at quarter end. Our operating results reflect better market conditions as well as continued progress on improving our operations through initiatives to grow revenue and to reduce cost.

Moving to WRECO, all of our markets continued to improve and were clearly on a path to recovery. Let me highlight some key statistics for the quarter, first community count. As the market continues to recovery, you should expect our community count to increase in response to improved demand. During the first quarter, we opened 16 new communities while closing out 4.

Next traffic, during the quarter our traffic count increased significantly year-over-year, which leads to new sales. Our sales increased 18% year-over-year.

Closings during the first quarter are seasonally low but total closings increased year-over-year reflecting last year's increased sales activity.

Our backlog is the number of sold and unclosed homes in any time. Included in backlog are homes that may already be complete, homes at various stages of construction as well as homes for which construction has not yet begun.

With the continued pickup in market activity our inventory of completed but unsold homes has continued to fall. As a result an increased percentage of our backlog represents homes not yet under construction.

As Kathy noted at the end of the quarter our backlog had increased significantly. These backlog homes will be delivered over the next three quarters. Average home prices in our backlog are a function of both timing of the sales contract as well as geographic and product mix.

Average price in backlog at the end of the first quarter increased and prices for new orders during the quarter were greater than that for the prior quarter. At this point it is steady but modest increases in prices across our regions.

On earlier call I've noted that Washington DC followed by Phoenix were some of the first markets to begin to show signs of recovery. Last year Las Vegas began to wake up and finally our Southern California markets bounced back to life in the fourth quarter with significant increases year-over-year.

Assuming that our competitors are having similar success these new sales are very positive signal of future improvement in our western Wood Products and Timberland businesses.

While improved traffic sales and price increases are all positive signs all home builders face challenges during this recovery.

First, one would typically expect increased demand and reduced supply to lead to price increases. However, increases are hampered today by today's tighter underwriting rules and the ability of appraisers to keep pace with changes in market pricing. In rising market, sales comps for these increased prices aren't available.

Second, land and lot prices are increasing as the existing inventory of finished lots are depleted. New lots need to be entitled, permitted and improved to keep up with demand. Third, construction costs are increasing as costs of materials increase and availability of materials and labor are limited as an entire industry is in the process of going back to work. Leading the way on cost increases are OSB and lumber.

It's difficult for builders who like us begin construction of most of our homes only after locking in a contract price for a home, to totally protect ourselves from these cost increases. The challenges to maintain and grow margin in the face of these increases as price increases are limited by factors I noted above. Over time, market demand and supply should adjust to these changes, but compared with the conditions that we faced over the past 5 plus years, these are challenges that we welcome.

My final business comments relate to our Cellulose Fibers segment. Overall market conditions for fluff and liquid packaging were relatively stable in the quarter with fluff prices still essentially flat and (NBS) prices slowly improving. Euro was relatively stable during the quarter and global fluff wood pulp inventories are at the high-end of the normal range, up slightly from year end.

Our earnings for the quarter were lower as a result of planned maintenance scheduled at our Port Wentworth Mill and additional costs incurred for scheduled major maintenance projects at several mills as we move to an 18 month interval between scheduled maintenance outages.

Additional unfavorable cost during the quarter was a result of higher fiber costs, seasonally higher energy costs for natural gas and fuel usage and lower electricity prices in Canada where we sell energy to the grid.

During the quarter we continued with our strategy to grow with our global customers. We began production and product qualification at our new modified fiber facility in Gdansk, Poland. The grand opening ceremony for the facility will be held next month. We expect to generate our first commercial sales by the end of the second quarter.

Now, I'll turn the call over to Patty to discuss our second quarter outlook as well as provide financial highlights.

Patricia M. Bedient - EVP and CFO: Thanks Dan. The outlook for the second quarter of this year is summarized on Chart 13. I'll begin my comments with Timberlands. In the west, the strong export markets that we experienced in the first quarter are expected to continue. Japanese housing starts this year are running ahead of last year and some projects continue to be delayed by the carpenter shortage, pushing the backlog of housing orders further into 2013 contributing to strong log sales through Q2.

In China, inventory of North American logs are lower than the same period last year. Log prices moved up in March and these strong prices are continuing into this quarter aided by an improving U.S. domestic market. Heavy April shipments from the Pacific Northwest combined with record shipments of New Zealand Radiata Pine in Q1, may tend to dampen further upward price movement in Q2, but we expect these markets to remain strong.

Domestic log prices have increased during April in response to strong lumber market. Western fee harvest volumes are anticipated to be slightly lower. In the south, realizations for pine grade logs are expected to be flat and fee harvest volumes will increase somewhat now that the wet weather is receding.

Costs for both west and south are anticipated to increase seasonally due to higher silviculture related spending. Before considering non-strategic land sales, timberland earnings are expected to be comparable to the first quarter.

Earnings from non-strategic land sales are anticipated to be somewhat higher than Q1 where we had income of $3 million.

In Wood Products (selling) channel inventories combined with seasonally stronger demand are expected to drive low double-digit sales volume increases across all major product lines. Adverse effects from unexpected weather events combined with Canadian rail transportation issue should subside. We expect sales realizations for engineered Wood Products to increase slightly where else while there may be some potential for softening in lumber and OSB prices as more supply enters the market.

Log costs are anticipated to increase especially in the west, partially offset by improved operating rates. We continue our focus on operational improvements including product strategies and customer selections as well as manufacturing efficiencies. We expect another strong earnings performance for the Wood Products segment in the second quarter with overall results comparable to the first quarter.

In Cellulose Fibers sales realizations are expected to increase slightly as the market slowly improved. We anticipate lower maintenance fiber and energy cost. We have fewer major maintenance projects scheduled this quarter as we continue on-track for the transition to an 18-month interval between scheduled maintenance outages which should be completed by 2014.

As Dan said we are on-schedule with the qualification process at our newly constructed Poland converting facility and we anticipate completing qualifications by the end of this quarter.

Overall, second quarter earnings in our Cellulose Fibers segment should be significantly improved compared to the first quarter. In our Real Estate segment, markets continued to gain momentum as low inventories, rising home prices pent-up demand and historically low interest rates are motivating buyers. Prospective buyers are attracted to fresh new designs and new community. As Dan mentioned, our community account is increasing and we are likely to end the quarter with operating 81 communities.

During the second quarter, we expect to close approximately 600 homes compared to 463 homes in the first quarter. The average closing price for this quarter is anticipated to be slightly lower due to mix, although input prices across are rising, average margin should be comparable to the first quarter. Given the higher closing volume, we expect higher selling costs. Overall, we expect a slight profit in our single-family homebuilding business in the second quarter and we do not anticipate any significant land or lot sale.

Now, I'll wrap up with some overall financial comment. During these comments, I'll be discussing items that are included on Chart 14. We ended the quarter with a cash balance of nearly $640 million, a decrease of approximately $260 million compared to year end. Consistent with our normal seasonal pattern and because of the strength of our Wood Product sales, we used cash from operations to build working capital. We had total capital expenditures of about $48 million during the quarter, and we expect total expenditures for the year to be up to $300 million.

Given our improved operating results, coupled with our strong liquidity and valuable mix of Timberlands Holding, Moody's announced earlier this week that they have upgraded our credit rating. We are investment grade rated by both Moody's as well as S&P. We retired nearly $160 million of debt during the quarter. We have remaining maturities this year of just over $250 million, well below our existing cash balance with no significant additional debt repayments until 2017.

In addition, we have an unused line of credit totaling $1 billion. Our net debt to enterprise value was 17% as of the end of the quarter. As Dan previously discussed, earlier this month, our Board increased our quarterly dividend to shareholder from $0.17 to $0.20 per share, underscoring our commitment to sustainable dividend that we intend to continue to grow over time. Now, I will turn the call back to Dan, and I look forward to your question.

Daniel S. Fulton - President and CEO: Thanks Patty. Overall, I'm pleased with our financial performance during the quarter and I'm optimistic about our ability to continuing to improve our operational results as the housing market remains on a path to return to trend levels of demand and global markets stabilize for Cellulose Fiber segment.

In our Timberlands segment, we're well positioned to capitalize on improving domestic markets while taking full advantage of competitive strengths and accessing high value export markets from our Western Timberlands. We have an added benefit that comes from our extensive mineral rights which generate revenue from oil, gas and other resources. In our Wood Product segment, we have the widest range of wood products as anyone in the industry, all of which will be needed to construct new housing units as the U.S. housing continues to recovery.

Our lumber and OSB businesses showed their potential during the quarter. As new construction continues to increase, we expect to see improved results from our engineered wood products and distribution businesses. Our WRECO business is filling its backlog pipeline for new homes to be delivered over the balance of the year. As we continue on our planned path to increase our total community count by nearly 20% this year. I'm encouraged by the interest of new buyers who are visiting our model homes and signing new contracts at increasing prices.

In our Cellulose Fiber segment as Patty noted in her outlook a slight recovery in pulp prices together with reduced maintenance, fiber and energy expense are expected to result in significantly higher earnings in the second quarter. We'll continue with our strategy to grow with our global customers by innovating to create differentiated products that benefit our key existing customers while attracting new ones.

An example of these differentiated products, is our new Cellulose based composite THRIVE, which is now planned to be used as an integral part of a new 2014 Lincoln model which will hit the market later this fall.

In closing we had good solid performance in the quarter and yet we still have opportunity for continued improvement.

We've made great progress in improving the strength of our balance sheet while rewarding shareholders with another increase in our dividend and we are well positioned to capture the opportunities that will come as we continue on a path of economic recovery.

And now we welcome your questions and comments.

Kathryn F. McAuley - VP, IR: Would you please open the floor to questions?

Transcript Call Date 04/26/2013

Operator: Mark Wilde, Deutsche Bank.

Mark Wilde - Deutsche Bank: I want to thank you for your improved disclosure, I know that a lot of us really appreciate that. I wondered first of all on the Wood Products business can you give us a sense of kind of where your estimated operating rates are in those different businesses?

Daniel S. Fulton - President and CEO: Sure. For the first quarter Mark, our lumber and OSB business were operating at about 90% rate, and in our Engineered Wood Products business we saw a significant increase in operating rate, so that we're now operating in the mid 40% range for our I-joists facilities and mid 50% range for our solids.

Mark Wilde - Deutsche Bank: Dan, can you also talk about anything that you might be doing to kind of add more capacity, whether it's just picking up another shift or perhaps restarting capacity or maybe even thinking about a little incremental capital?

Daniel S. Fulton - President and CEO: Yeah. Couple comments Mark. We do have the ability in our lumber mills to add hours and to some extent add shifts, all of our lumber facilities are operating today and our Oriented Strand Board business, all of our mills are operating and we are increasing shifts in some cases, so there's some additional flex capacity in our solid or engineered wood business. We still have two curtailed facilities, and as the market continues to recover, we have the ability to bring them back. As anyone in the industry restarts capacity, there's a long lead time and so we are positioning our facilities so that at the right time we can bring them back to meet demand. One of the surprises I think in the industry has been how long it takes to bring back mills that have been shut down, both because of the availability of labor that's qualified, the ability to fill a log yard and to operate smoothly. So, we have flex capacity to respond and as the market continues to improve, we're well positioned.

Patricia M. Bedient - EVP and CFO: Mark, I'd just like to add that the Engineered Wood operating rate, that Dan gave you, did include those two closed facilities. So, if we were to back those out and just use our existing facilities, they would be closer to the mid-to high 60% ratio. So, those operating rates, as Dan said, are continuing to move up. I think also as you think about our capital spending, which I referenced was, could be up to $300 million for this year, which is similar to what we spent last year. But the mix of where we spend that will be very different from last year given that in last year we were finishing our converting facility in Poland, so we were spending more in Cellulose Fibers last year than we will this year, and we will also be putting more money to work in Wood Products especially in our lumber business to look at low capital, but still capital solutions where we can bring on additional capacity as we need it adding dry kiln here and there so that we can process more of the green lumber that we can produce at some of our facilities. So, you will see a little shift in mix that it's not huge increment, but across our 18 mills that does add up as we put those dollars to work.

Mark Wilde - Deutsche Bank: And if I could, just a follow-up on your Timberland business, you highlighted that dichotomy between kind of the western situation and the Southern situation, what are your expectations about kind of price and volume in the south as we kind of move through the year and when you think this pick-up in housing and Wood Products prices is going to start to flow through to southern log and timber prices?

Daniel S. Fulton - President and CEO: Well, we think it will come, but we can't call the timing. As I mentioned, there was more deferral in the South and so as markets pick up, clearly the Wood Products production is increasing. So the deferral wood in the south is benefitting the margins of wood products producers or as in the west it’s a much stronger log market. So it will just be one that we have to watch over time. Very difficult to call the timing of when that market (tension), because there are so many land owners that have the ability to bring logs to market.

Mark Wilde - Deutsche Bank: But fair to say you think it maybe a little longer than normal lag in south this time around, before this starts to flow back to the stump?

Daniel S. Fulton - President and CEO: Not sure what a normal lag is. I think we've been through an extraordinary period in this housing session. So we don’t have experience with this amount of deferral. But I would expect with the pace of recovery in housing, that there'll be opportunity.

Patricia M. Bedient - EVP and CFO: Mark, I think we've already experienced a little longer than a normal lag.

Mark Wilde - Deutsche Bank: I agree Patty its not been a normal downturn.

Patricia M. Bedient - EVP and CFO: I think those prices will start to move probably sometime more in the latter half of this year than what we've seen at this point. So I don’t think it’s a long ways away. But we'll be ready for it when it comes.

Operator: Chip Dillon, Vertical Research Partners.

Chip Dillon - Vertical Research Partners: By the way not to join bandwagon, but I noticed this was the third quarter in a row where you didn’t have any adjustments to between GAAP and reported earnings and the first time you've had three in a row since 1998. So congratulations.

Patricia M. Bedient - EVP and CFO: Thanks Chip I'm glad that you noticed.

Chip Dillon - Vertical Research Partners: The first question – this has been long time coming. The first question is on the Cellulose business. I know you sort of give us the view that there will be substantial improvement, and as you know that number can jump around considerably excluding any price impact. So, if we made – I don't know what you are assuming whether this current round of price announcements go through or not, but could you just give us a little better guidance in terms of what the movement might be if we exclude any pricing impact from first to second quarter?

Patricia M. Bedient - EVP and CFO: Well, maybe the way to think about it, Chip, would be, if you think about where we would expect that business to be in the second quarter given the assumptions that I had in my outlook, that I would say that it will be much closer to the $60 million that we earned in the fourth quarter than in the $31 million that we moved in this quarter.

Chip Dillon - Vertical Research Partners: Then, second follow-up is on the Wood Products business. I know your guidance is for flat and it's really tough with pricing moving around the way it is. It just seems like in the past that often when there is a sudden movement about the time of the call, and it's is not fair because your people couldn't have looked at randomly last night for example and then reacted to it, but it would seem to me that if we see a continuation of softer lumber prices in the next three or four weeks that maybe that would prove high, but – maybe you could comment on that sensitivity and maybe if I turned it around and said if we do see a bottom by the end of – let's say by mid-to-late May, and a turnaround, could that number actually be up?

Daniel S. Fulton - President and CEO: I guess the best way to answer your question is to think about conditions in the channels, Chip, because this is merely a behavioral issue as much as anything. Channels are very tight and with prices as high as they have been, you know most in the channel have been reluctant to take significant inventory positions. But the orders continue to come in, because new home construction is picking up, and so the real question is to the extent that there is softness, how long, how deep and since inventory levels are relatively low, I think what we may find is something similar to what happened in the first quarter where the orders were coming in and so the distributors and the builders put their orders and reentered the market. So, it's really going to be a behavioral issue I think as much as anything and it's all – really does flow back to demand levels and construction, so I think you have to look at construction levels versus guidance there. I would want to speculate about price movement.

Chip Dillon - Vertical Research Partners: And you are not concerned about inventories being elevated at the very end, at the builder level because we've seen so many strong months?

Daniel S. Fulton - President and CEO: Help me a little bit with your question. Inventory levels at the builder level…

Chip Dillon - Vertical Research Partners: Your end customer, yeah exactly, the guys that are actually using the stuff now?

Daniel S. Fulton - President and CEO: Channel seem to be relatively thin, and finished inventory for builders is very low as I commented, and so as those new orders come in, construction will pick up and it starts with a lumber drop and panels and so, we would expect building activity based upon all of the statistics starts, permits to be continuing to increase through the year.

Operator: Joshua Barber, Stifel Nicolaus.

Joshua Barber - Stifel Nicolaus: I'm wondering if you guys can talk about any of the possible supply pinch points that you may see cropping up or are seeing today. Dan I think you mentioned some of it even I think a lot of us just look at strangely which is the engineered business seems to be operating at pretty low operating rates and generally would follow the single family business, whereas lumber and OSB is at multi-year highs. Can you talk about I guess anything that’s affecting that today and or where you think that could possibly continue if the supply and demand continues where it is for the rest of the year.

Daniel S. Fulton - President and CEO: Well, by product type the engineered products as we've talked before are primarily reliant on new construction and so I think that we have a significant position in both I-beams as well as solids and that product does fill into new construction and so we expect new construction activity to continue to pick up and I think that that’s a positive. We saw that move just in the quarter and the change in operating rate in the business more significant really than what it was for our lumber or our panel business. Multiple outlets for lumber both new construction, repair and remodel all of that looks positive and industrial bit. And then panels primarily going into new construction, but that’s also singles, and its multi. The big question in the industry is probably facilities that have not been operating that are coming back online and I think that there is, people underestimate the challenge of bringing the facility back that’s been shut down for some period of time. So there is, there will be supply that will come on line to meet demand. But I think that supply response is a but delayed and trying to catch up to demand.

Joshua Barber - Stifel Nicolaus: I guess, also as these markets get better and better and especially on the homebuilding side where we're seeing some really excellent valuations, would you guys be inclined, I think at some point to consider spinning off or selling perhaps as we go given the valuations that the number of the other builders are trading at?

Daniel S. Fulton - President and CEO: We're focused on operating our businesses as well as we can and continuing to take advantage of the opportunity presented to us with market recovery. So, our focus is on operations in our homebuilding business. We are well positioned, because we do have a land position to build on. We're in great markets and they are all showing really robust recovery at this point. So, we're going to take advantage of that in our operations.

Operator: George Staphos, Bank of America Merrill Lynch.

George Staphos - Bank of America: I want you pick up on WRECO as well; and certainly you are seeing progress, but for example the closings in the quarter were, I think, a little bit below where you had guided in the prior quarters. I think at one point of time you said you were looking for 500 closings, so I was wondering what might have created the variance there if that was a correct recollection. And also Dan, we're seeing from our scan of the homebuilding regions, California has been very, very strong; Texas had been very, very strong. There are areas where you are – certainly very strong from a regional standpoint, and just curious why we're not yet seeing the lift in your margin within WRECO? And then I had a couple of follow ons.

Daniel S. Fulton - President and CEO: The margin question is I mean to some extend it's a mix issue among markets. We have different margins by market, different margins by product type. We've historically guided that we should expect gross margins in low 20% range. This quarter we were 19.5%, that was a bit of a mix issue between more attach product in the Washington D.C. area and coming off some higher margin projects in the Las Vegas area. Sales, as you know in California have been very strong. As I look at our first quarter activity, the real strength year-over-year was in LA/Ventura which had been a soft market. It was the Inland Empire, it was San Diego and it was Las Vegas. So, those have been the last markets to come back. There is a lag in when those homes are delivered, so the sales that we took contracts on in the first quarter will be delivered over the second, third and fourth quarter, depending upon the complexity of the home. As I noted in my comments, a lot of these are to be built houses and so there is a bit more of a lag. And so, we would expect that we'll have a stronger back half of the year as we always do with WRECO. I did note and I wanted to spend some time talking about cost increases, because they are factors for everyone in the industry. As you noted, I led off with OSB and lumber. So that's not bad thing for Weyerhaeuser Company, but there are increased costs and there is a process as cost increases and we pass that through to the ultimate home buyer where there is a bit of a lag. So, you should expect prices to continue to rise. Our focus is not just on maintaining margins, but growing margins. So you talked about Texas. Texas was not quite as strong first quarter, but last month or so it has really picked up. So, we are really pleased with the markets that we are in we think we have the ability to maintain the margins that we've had in the past, but there are mixed issued quarter-to-quarter and that business is traditionally back ended in terms of deliveries much more heavy in third and fourth quarter.

George Staphos - Bank of America: Dan you've mentioned for a number of quarters the, I'll put it as the affordable housing element in your mix that's been keeping margins perhaps below you would like them to be. when does that if you will cycle through and are you finding that as you are needing to purchase land if there are scenarios like this that you need to continue to commit to certain level of affordable housing as you purchase these new lots and in turn that’s keeping a lid on margin. The other question I had and I'll turn it over, and I think you are alluding to this, because as I look at your backlog pricing it seems to show-up in your selling price on a closed homes usually within a couple of quarters, so these $440,000 levels you've been at the last couple of quarters these more or less should be showing up in the back half would that be your expectations thank you.

Daniel S. Fulton - President and CEO: Let me start with the last question. The higher priced homes that we have generally are some of them are in San Diego and some are in the Washington DC metro area our Winchester and Kimberly. We have longest lead time on those Washington DC homes because they have more customization and so there is cycle time for them that maybe 6 to 9 months as compared to shorter cycle time for us. The other extreme would be a town home that we are building in the Inland Empire. So there is some lag that you observe. With respect to land and lot prices, lot prices had been moving up relatively quickly. We clearly are – we are restocking our pipeline for current projects. Those prices have moved, but we would not expect that that would lead to a significant degradation of margin. You talk about the – asked about the affordable housing units, that's the function primarily in that Washington DC, Metro area. It happens in larger communities of more than 50 units and we try to point that out when we see those closings come through. That was not an issue in the last quarter. Last quarter was just a shift to more of a townhome product, which is lower-priced as compared to higher priced single-families. So, we can try to guide you a bit on those affordables. When they do occur, it normally occurs with a significant number of closings at one-time because we turn those houses over to a regional housing authority and they handle the sales activity.

Operator: Gail Glazerman, UBS.

Gail Glazerman - UBS: There were a couple of reports in the Wall Street Journal and the New York Times earlier this week talking about the tax treatment of REIT and the Journal specifically was talking about Congress taking a look at that pretty hard. I'm just wondering can you give any comments and from what you know about what's going on, is there anything kind of above the usual there and most specifically how it might drilldown to timber REITS versus maybe a more traditional REIT?

Daniel S. Fulton - President and CEO: Well, there has been a series of articles that you've noted that have discussed some recent conversions or some planned conversions, including some non-traditional real estate. So, I think that they are all consistent with current tax law as we look at broad tax reform. I think Congress, if they take a broad look on tax treatment; they talk about all aspects of the code including discussion of corporate tax, personal tax, LLCs, faster entities as well as REITs. The National REIT Organization is well organized. They have broad constituency across the country. I think that the REIT structure has worked very well for a long period of time, because the way it's structured, the REITs generate income, that income is distributed to individual shareholders and they pay taxes. But I can't speculate on what congress might or may not do in any tax reform. But we pay attention to it and the National REIT Organization is well positioned to deal with those questions.

Gail Glazerman - UBS: Just one other quick question. Going sort of back to Chip's question on Wood Products, I just want to make sure I understand or can you just clarify what you think is causing the weakness in the Wood Product prices that we've seen over the last couple of weeks?

Daniel S. Fulton - President and CEO: I can't comment on market reaction to prices. Prices have been very high and I think that at today's levels, that creates some level of caution. But the product is needed and ultimately as I come back in my discussion you have to look at the channel. Channels are relatively thin. If the orders are coming in they'll get filled. And prices will be settled at market and I can’t comment on, quite frankly is the direction, because it’s a function of supply and demand. I feel really good about the demand side.

Patricia M. Bedient - EVP and CFO: As you know volatility and prices for both lumber and OSB are not surprising that usually does happen and prices did move up in the first quarter. So to think that they are going to just continue to move up forever would certainly be a mistake.

Gail Glazerman - UBS: I guess I was just wondering if there was stance, maybe more supply was finally making its way back into the market and even intentional little bit.

Patricia M. Bedient - EVP and CFO: I think that as the demand increases we will need more of that supply. So the fact that more supply is coming on is just kind of the natural order of things. I don’t think there is if you are talking about a real big shift a big fundamental shift from supply demand balance I don’t think there is a huge piece I think what we are seeing here is just more of the normal kind of reaction that we see.

Operator: Alex Ovshey, Goldman Sachs.

Alex Ovshey - Goldman Sachs: Couple of questions for you. I think you are going to start to face some high quality problems in the near future, specifically with the balance sheet. With the EBITDA improving and the cash flow generation picking up. It seems to me the leverage ratio will start to really drop pretty quickly. So can you remind us again how you think about the efficient leverage in the business and what you expect to do stay in front of the balance sheet becoming inefficient?

Patricia M. Bedient - EVP and CFO: Yeah, Alex. You know, what we have said is that for this size of Company that we would think that gross debt at about $4 billion would be something that would make sense for us. At the end of this year we're certainly be there where they are on a net debt basis today. I think that what you point out is that because of the strength of the balance sheet, because of the strength of the improvement and markets and also our own operating performance that we are experiencing, as you call it a high-class problem, I call it a great opportunity to take advantage of things that are out in front of us and so those are the kinds of things that we look at in terms of what is the right leverage, what is the right capital allocation. You've heard us talk about this morning both in terms of investing in our businesses, returning cash to shareholders and all of those things are things that we are reviewing on an ongoing basis. So, I think the future does look very exciting and those kinds of problems I like a lot better than the ones that we're seeing behind us.

Alex Ovshey - Goldman Sachs: Switching to the Wood Products business, can you talk about what you believe the strategic rationale to have a distribution business tied back into the manufacturing businesses?

Daniel S. Fulton - President and CEO: Distribution for us, it's always helpful to provide a little bit of history. Today, our distribution business is a significant channel for our Engineered Wood Products business, plus we do flow some lumber especially our higher grade lumber frame work series and differentiated products as well as some of our higher value OSB. We also in that business distribute products for third-party, so we have some third-party element of distribution because we've got the infrastructure in place to serve our customers in the homebuilding business and they need not just our products but others, and so there are some complementary products. We have a business that historically had more scale. We scaled it back when we changed our operating model and went to a brand called iLevel about five years ago and at that time we eliminated most of our third party distribution and focused on being a channel for our own products, really made that business uneconomic, and so we noted that that wasn't working for us. We shifted it back to standalone business, so you see the results where we account for it as a separate P&L. We've got a scale footprint that allows us to flex with an improving market and we have a lot of operating leverage in that business as we see a housing recovery. So, it serves as a channel for not all of our products, but some of product as well as third-party. It gives us an opportunity to provide some additional marketing services especially for our Engineered Wood Products and we are looking forward to the opportunity to have that business take advantage of its scale and operating leverage as the market recovers.

Operator: Anthony Pettinari, Citi.

Anthony Pettinari - Citi: I had a quick follow-up on WRECO. You know you talked about a stronger back half of the year, but also some mix headwinds and price bottlenecks. I guess when you look at the business broadly I think WRECO earned about $100 million last year with a large land sale impacting that in the fourth quarter. When you think about the earnings potential of a business for full year 2013, would you envision the business would earn a similar amount, would you expect it to earn significantly more or slightly more or could it actually earn less, given the large land sale last year and I understand you don’t give full year guidance but sort of any color on that would be very helpful?

Daniel S. Fulton - President and CEO: You are right we don’t provide full year guidance. So I appreciate you recognizing that. We did have a significant land sale last year of some non-strategic land in San Diego. Which is land with product type that we don’t build, we always have some of that its part of our land development strategy, especially with our Southern California operations. As we look at 2013 full year, what we are expecting is a significant shift in mix in our earnings that will be much more heavily weighted towards our housing business. There may be some land sales but we are not projecting them we are an opportunistic seller of both non-strategic land that might be zoned for products that we don’t build, but we also have in some cases residential lots where we have the option to either build on ourselves or to sell them to others, if we have the right price. I think the major story for WRECO 2012 versus 2013 will be a shift in income away from just land sales, not just land sales, but heavy weight the land sales to much higher weighting on the single family.

Patricia M. Bedient - EVP and CFO: I think also Anthony, as you think about WRECO coming out of 2012 into 2013, I think as Dan gave in his comments, we ended the year with a very low community account in WRECO at 62, we'll be at 81 at the end of the second quarter. So, there's a little bit of a flywheel effect if you will of low inventory at the end of 2012, as we weren't sure about where the California markets were headed. So, that flywheel is going to work. You are seeing it now in the backlog although as was discussed earlier most of those homes don't get delivered until the back half of 2013. So, as you noted, we won't give full-year guidance, but it will be significantly better and better than our normal seasonal pattern because of that flywheel effect of low inventories, at end of 2012 and now going to work in 2013 back half.

Operator: Carly Mattson, Goldman Sachs.

Carly Mattson - Goldman Sachs: I saw the Company's return to a full investment grade, could you talk to whether Weyerhaeuser would consider looking to refinance its higher coupon debt or what types of considerations the Company takes into account when it's thinking about that decision?

Patricia M. Bedient - EVP and CFO: Absolutely, we would love to refinance some of that higher coupon debt. It really is a function of what premium would have to be paid in order to do that in the economic trade-off. So, we look at that on a very regular basis and when that makes sense for us to do, that would be a great thing to do, but right now from an economic standpoint it doesn't make sense.

Operator: Mark Weintraub, Buckingham Research.

Mark Weintraub - Buckingham Research: First just the intersegment elimination, LIFO inventory that was in the corporate, I assume that goes away next quarter and so that corporate goes back down to more like a $20 million number, is that generally speaking right?

Patricia M. Bedient - EVP and CFO: Mark, it is unusually high for two reasons, one typically from a seasonal perspective, the number would be higher at the end of the first quarter, because of our normal inventory build, but given the strength of Wood Products, we certainly had a little more working capital than maybe even a normal seasonal pattern would be, and then as we sell down that working capital over the course of the year, that will turn around and come back, so that the pattern of the unallocated segment will be closer to as you just described it. We try and take all of these anomalies and put them in this unallocated item and give you full visibility in term of the detail of what's in there. So, you can track that volatility, but you've got the pattern right. Just as you can see in the fourth quarter, we actually had pick-up from LIFO and inter-company profit.

Mark Weintraub - Buckingham Research: By the way, I do appreciate the additional disclosure in general. It was very helpful. Second, as you're making more money from the Wood Products and homebuilder hopefully soon, can you help us in how to do the tax rate, it came off a little – little of on my tax rate, is there kind of a rule of thumb way to be able to get to the tax rate?

Patricia M. Bedient - EVP and CFO: Well, it really is, as we've talked about before a function of how you think about the mix of earnings. So, the mix in the Timberlands business that is in the REIT of course is a zero tax rate. And as we look at TRS, those have a normal kind of tax rate I would think about something around 34% to 35% rate for that mix of income. You know we had a higher tax rate maybe then what you would have thought. Given the fact that we had a higher Wood Products income in the TRS than what number of people were thinking about in the model. So it really is a function of the TRS versus the REIT and then also not all the Timberlands earnings are REIT qualified. We do some merchandizing of our logs in the TRS portion of the Timberlands business and so we did have income in the TRS from Timberlands that would be subject to the tax.

Mark Weintraub - Buckingham Research: Then lastly Dan you referenced housing going back towards trend levels of demand over time at this juncture having had couple of years to think about it, where do you think trend levels of demand for housing single family and total what do you think is the right number for trend levels.

Daniel S. Fulton - President and CEO: I continue to follow the long term trend numbers that are generated by the Joint Center for Housing at Harvard. They are not a forecaster they just look at long term demographics starting with population, household formation and there is assumption there is repair or the replacement for destroyed units and then the wild card and their estimates is integration. They would have a range of 1.6 million to 1.9 million Mark with the biggest question being the impact of immigration which can move numbers by 100,000 or more. So, as I think about it, I think generally $1.6 million to $1.8 million is a trend number over a 10 year period. There are periods when you would expect housing starts and deliveries to be greater than that and then obviously we're coming off of very big trough. I think we've been underbuilding for some period of time. The question or the mix between singles and multis is being debated a little bit just as demographics change, but I quite frankly don't expect a very significant shift. I think we'll see a gradual move to higher density housing over time just because of the continued urbanization of population, but as I note, we're a long way from those trend numbers and it really is about household formation and we're going through a period of accelerated formation now just because household formations have been so low. Household formation is about 1.2 a year -- 1.2 million on average.

Mark Weintraub - Buckingham Research: As you think about, if you have those types of long-term trend numbers, that that might call for one type of investment strategy in your underlying business. At the same time you said that we're pretty far away from those numbers, are you going to be a much more of the mindset to actually begin to really see evidence of it of these much higher housing type numbers before starting to commit significantly more capital recognizing that you maybe a little bit late doing it that way or are you going to be inclined to get out in front of it because you are confident it's coming.

Daniel S. Fulton - President and CEO: I think the timing is a question and I think that there's – we're going to be cautious as we've come through this recession. It was just last year that California housing started to pick up, and that's a very significant market not just for us but for the entire country. I think that directionally, we want to be operating the facilities that we have today as best we can, make them as efficient as possible, get the most return that we can from them. We've got opportunities with modest investment to continue to improve operations of our existing facilities and we will focus on what we've got in front of us rather than I think getting out with significant new capacity. New capacity will come back, but I think the entire industry is going to be operating much more efficiently than we were in the prior cycle. I commented earlier that as we noted in our release, this was our best quarter for Wood Products since 2005 and yet we did it on half the volume. So I think not just us but the industry is going to be more efficient and we'll react as the demand emerges.

Mark Weintraub - Buckingham Research: Right. Thank you for your comments.

Daniel S. Fulton - President and CEO: Well, I want to thank everybody for joining us today. We appreciate your attendance and we appreciate your interest in Weyerhaeuser Company. I want to remind everybody on the call that we'll be hosting our Annual Investor Conference in New York. That's just two weeks from today on May 10, at the Sofitel Hotel. You can register for attendance on our website, and if you have any questions about that event or following this call, you have further questions and you need follow-up, contact Kathy McAuley. And we appreciate you joining us this morning. Thanks very much.

Operator: This concludes today's conference call. You may now disconnect.