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Weyerhaeuser Company (NYSE:WY)

Q3 2009 Earnings Call

October 30, 2009 10:00 am ET

Executives

Kathryn McAuley - VP, IR

Dan Fulton - President and CEO

Tom Gideon - EVP, Forest Products

Larry Burrows - President and CEO, Weyerhaeuser Real Estate Company

Patty Bedient - EVP and CFO

Analysts

Gail Glazerman - UBS

Mark Connelly - Sterne Agee

Mark Weintraub - Buckingham Research

Peter Ruschmeier - Barclays Capital

Claudia Houston - JP Morgan

Mark Wilde - Deutsche Bank

Richard Skidmore - Goldman Sachs

Chip Dillon - Credit Suisse

Operator

Ladies and gentlemen, welcome to the Weyerhaeuser Q3 '09 Earnings Conference Call on Friday, 30th of October 2009. (Operator Instructions).

I'll now hand the conference over to Kathryn McAuley. Please go ahead, madam.

Kathryn McAuley

Welcome to Weyerhaeuser's third quarter 2009 earnings conference call. I am Kathy McAuley, Vice President of Investor Relations. Joining me this morning are Dan Fulton, President and Chief Executive Officer, Patty Bedient, Executive Vice President and Chief Financial Officer, Tom Gideon, Executive Vice President, Forest Products; and Larry Burrows, President, Weyerhaeuser Real Estate Company.

This call is being webcast, at www.weyerhaeuser.com. The earnings release and material 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. Forward-looking statements will be made during this conference call.

This morning Weyerhaeuser reported breakeven results for the third quarter on net sales of $1.4 billion. Significant after-tax items were a gain of $98 million or $0.46 per share on the sale of 140,000 acres of non-strategic timberland in Northwestern Oregon, a gain of $74 million or $0.35 per share for alternative fuel mixture credits, a charge of $62 million or $0.29 per share for corporate and wood products, asset impairment and restructuring charges, a charge of $33 million for $0.16 per share for real estate asset impairments and restructuring charges, a charge of $21 million or $0.10 per share for income tax adjustments. Excluding these items, the company reported a net loss of $56 million or $0.26 per share.

A GAAP reconciliation of special items is available on our website in the earnings information package. Please turn to chart four in the earnings information package, as I will next discuss this waterfall chart.

Chart four is a bar chart detailing the changes in contribution to earnings by segment from the second quarter to the third quarter of 2009. This is presented on the basis of contribution to earnings before special items, interest and taxes.

Turning to chart four. Changes in Weyerhaeuser's segment earnings from the second quarter to third quarter were as follows. Beginning with the first bar on the left-hand side of the page, Weyerhaeuser lost $61 million in the second quarter of 2009. Proceeding from left to right across the waterfall chart, we begin with the discussion with timberlands.

Timberlands earnings were $13 million lower in Q3. This decline was driven by significantly lower harvest volumes and fewer non-strategic land sales, excluding the 140,000 acre Oregon land sale. The wood products loss improved by $55 million in the third quarter. This improvement was driven by higher prices for softwood lumber and OSB, manufacturing cost improvements, as well as lower lot costs.

Cellulose fibers earnings were $51 million higher due to less maintenance expense in the third quarter. Also pulp realizations rose and shipment volumes increased. The real estate loss widened by $11 million in Q3 due to lower average home prices. While total home closings increased from Q2, the mix of product in Q3 was generally at a lower price point, which decreased margins. Also, there was less earnings from land or lot sales in Q3.

Corporate and other expense increased by $6 million in the third quarter due to foreign exchange, lower earnings from less wood shipping and marking some equity compensation to market.

The final bar to the right of the page is the third quarter loss of $15 million before special items, interests and taxes. Please note chart one in the information package contains the actual second and third quarter contribution to earnings by segment and the total of special items, interests and expenses and taxes.

I will now turn the call over to Dan Fulton.

Dan Fulton

As I begin my comments this morning, I'd like to first say that we're pleased this morning to report a quarter-over-quarter improvement. As a company with three of our four business segments linked closely to US housing starts however continue to operate in extremely challenging markets. Throughout the year we've begun to see signs of stabilization and even slight improvement in new housing construction activity.

While we continue to be confident about market recovery, the pace of recovery is still uncertain and the market feels tentative and sometimes fragile as we move towards yearend. The reinvigorated economy will benefit all of our business segments, but we're not relying simply on market recovery in order to improve our financial performance.

Once again, Tom Gideon and Larry Burrows join me on this call to discuss the quarterly performance of our forest products and real estate business. Our CFO, Patty Bedient, will provide our outlook for the balance of the year. Patty will also report on financial details and additional actions taken to improve our financial flexibility as we prepare for a recovery, while positioning ourselves for a continued period of uncertainty.

Before I turn the call over to Tom, Larry and Patty, I'd like to discuss a few high level points that I'd like all of you to take away from this call. Across the company during the quarter we continued to make operational changes in order to adapt to market conditions.

In our timberlands business, Tom will report on the sale of non-strategic land as well as increased harvest deferrals, actions to position our land portfolio for long-term value creation. In our wood products business, Tom will share continued actions to adjust our operating posture to better match demands. At the same time, we're making improvements across our wood products system to enhance cost competitiveness in any market condition. Tom will also discuss our cellulose fibers business where we continue to focus on improved performance of our operating facilities.

At the same time we're taking steps for the future as evidenced by our announcement this morning of our intent to build a new converting facility in Gdansk, Poland. When completed, this new facility will process cellulose fibers from one of our Southern US mills for use in hygiene products produced by Procter & Gamble. This provides us an opportunity to grow with one of our key customers in international markets.

Turning to real estate business, Larry will provide an update of our previously announced plans to sell non-strategic lots where we can capture significant tax benefits, thereby repositioning our land for the future while generating near-term cash to further increase our financial flexibility.

In addition to these changes in our operating businesses, we continue making long-term improvements in our cost structure, significantly reducing SG&A, adjusting headcount across the company and making long-term structural changes in overall employment costs. During the quarter, we also continued to take steps to improve our financial position to assure our ability to deal with uncertain market recovery as well as to maintain future financial flexibility.

With all of this progress, we are in a better position today than we were at this time last year. These are not one-time efforts intended to get us through this market. These are deep and lasting changes designed to help us emerge a fundamentally different company, positioned to be much more competitive.

Before turning the call over to our team, I wanted to make one final comment about one other major influence in our current and future performance that we don't talk about very much, and that is public policy. During the past year we've seen the effect of the alternative fuel blending tax credit on our cellulose fibers business. Homebuyer tax credits both at the federal level and in the State of California have in some measure affected our real estate results.

As we look ahead, there is some potential effect related to extension and possible expansion of homebuyer tax credits, of a new cellulosic biofuels producer tax credit and potential payments related to the USDA's new Biomass Crop Assistance Program or BCAP.

Longer term, we believe the Climate and Energy Bill under debate in Congress could significant affect how we manage and operate our extensive timberland holdings. We're convinced of the inherent value that our sustainably managed timberlands hold as part of longer term solutions to climate change and the development of new sources of renewable energy. A mix of economics, science and politics will determine long-term management of these resources.

In addition to our focus on continuing improvement in operations, cost control and financial position, we're also engaged in monitoring these public policy discussions and influencing them where we can make a difference. By executing in all fronts, we will continue to position ourselves to maximize shareholder value for all of our assets.

Now for the details, I'll turn the call over to Tom Gideon, our Executive Vice President for Forest Products. Tom?

Tom Gideon

This morning I'll start by discussing the third quarter market performance of our timberlands business followed by wood products. These are two business segments closely tied to the US housing market. I will close with cellulose fibers. During my discussion of each business, I'll also cover the steps we're taking in respond to market conditions and the benefits we're seeing from those actions.

In timberlands, the primary driver of our third quarter performance was the sale of 140,000 acres of timberlands on the North coast of Oregon. This acreage was heavily damaged by the 2007 windstorms and it was not well suited to Douglas-fir, the primary species we grow in the Pacific Northwest.

Focusing on Douglas-fir improves the efficiency of our operation and helps us deliver better value to both customers and shareholders. As we evaluated this land, we saw an opportunity to adjust our portfolio to better meet our criteria for productivity, growing conditions and species mix. This sale produced $163 million pre-tax gain for the business.

During the quarter, domestic and export realizations in the West strengthened somewhat due to lower availability. Export volumes were relative unchanged compared to the second quarter and year-to-date are only 13% below 2008, which includes significant sales of salvage whitewood. In the South, prices for grade logs dropped from the second quarter, reflecting lower mill demand. However, demand for fiber logs remains strong, resulting in a slight improvement in prices.

In view of continued depressed grade log values, we increased our harvest deferrals. Harvest levels were reduced 12% from the prior quarter, and compared to the third quarter of last year, we have reduced our harvest by 34% or nearly 2 million cubic meters.

Regarding minerals, we elected to monetize royalty payments from some producing properties in the South, which were well developed and where we had a firm understanding of their potential value stream. These sales generated an additional $6 million in revenue during the quarter. We still own the underlying mineral rights and the land associated with these sales.

In wood products, sales were down 42% from the same quarter last year. Due to the steps we've taken, however, the performance of our wood products business improved from the second quarter, resulting in a lower operating loss and improved cash flow performance. Compared with the second quarter, our cash usage improved $20 million and for the quarter we were just over $10 million negative.

Prices were a factor in this improvement, as we saw stronger prices for softwood and hardwood lumber, as well as oriented strand board. Sales volumes for those product lines, however, decreased from second quarter levels. Engineered lumber products experienced an increase in sales volumes compared to second quarter levels.

Also contributing to our improved performance was reduced manufacturing costs, resulting from lower log costs and improved operating efficiencies, as well as actions we took to match our supply to orders. We took 53 weeks of downtime across our lumber system in the quarter in addition to reducing operating hours at a number of our facilities.

Any discussion of our improvement has to include giving credit to our teams' effort to significantly reduce SG&A costs. This hasn't been an easy task for any of us, but the work is producing bottom-line results.

SG&A costs for the third quarter of 2009 were $28 million less than for the same quarter last year. On a year-to-date basis, we've slashed SG&A costs by $85 million. The long-term result is a more competitive and productive segment that is positioned to provide strong returns when the market recovers.

That being said, we know we're not out of the woods yet as we're about to enter our seasonally slowest quarter. Managing through the current market challenges will require continual vigilance to managing costs, improving efficiency and aggressively marketing our products. We are committed to continuing to improve our financial performance.

I'll end my portion of today's call by discussing cellulose fibers where quarterly results from operations improved approximately $50 million from the second quarter. Approximately $43 million of this improvement came from lower maintenance costs and higher productivity due to fewer maintenance outages.

As you'll recall, last quarter we had our annual outages in Grande Prairie, Alberta and Fort Woodworth, Georgia. In addition we had a major recovery in boiler rebuild in Columbus, Mississippi which was completed on July 15. Without these outages we were able to produce 61,000 more tons during the quarter. Our higher operating rate also means we will qualify for approximately $15 million in additional alternative fuel tax credits compared with the second quarter.

Higher average price realizations and volumes also contributed to the stronger performance for the business. Compared with the second quarter, pulp sales volumes increased nearly 14% and price realizations improved slightly. Favorable costs for fiber and chemicals contributed to the remaining improvement and the performance of our cellulose fibers business.

I will now turn the call over to Larry Burrows who will discuss our real estate business.

Larry Burrows

High unemployment and fragile consumer confidence are contributing to the tenuous nature of the housing recovery. Market uncertainty was apparent during the third quarter as WRECO's traffic and sales declined from second quarter levels despite near record levels of affordability. Many markets are caught in a state of transition as positive trends in housing inventories, home sales and pricing are counterbalanced by increasing foreclosures and mortgage delinquencies.

The positive momentum that developed in the second quarter began to erode late in the third quarter. We felt these effects in all our markets, Houston, the Puget Sound, San Diego and Washington, D.C. have held up better, while Las Vegas, the Inland Empire and Phoenix have slowed more.

These trends are reflected in the key indicators table on chart nine. Comparing the third quarter of 2009 to 2008, traffic decreased 50%. Closings declined by 30%, reflecting the adverse sales environment early this year. However, third quarter home sales increased 12% compared to a year ago and our cancellation rate improved by 14 percentage points. Our backlog of homes sold but not closed stands at 997 units.

Our financial results reflect the housing market's continuing struggles as WRECO recorded a loss in the third quarter. Included in our $64 million charge to pre-tax earnings are $55 million in one-time charges. These charges include $13 million for restructuring, $40 million for impairments, primarily in our California, Nevada and Washington, D.C. markets, and $2 million for terminating options to acquire land. Excluding these charges, WRECO lost $9 million on third quarter operations.

As we ended the third quarter, and thus far in the fourth quarter, the underlying fundamentals of the housing market remain uncertain. Though national inventories of new and existing homes declined substantially in the third quarter, the number of seriously delinquent loans is on the rise. Foreclosures, which have continued at a steady pace in virtually all of our markets, are starting to occur at higher price points.

We continued to experience disconnects between contracted sales prices and appraised values, particularly in Las Vegas, Phoenix and the Inland Empire. Also lack of clarity regarding an extension or expansion of the Federal housing tax credit is keeping some customers on the sidelines.

WRECO continues to relentlessly pursue its primary goals of generating and conserving cash. We've made significant adjustments to our staffing and to our land spending and have substantially reduced unsold inventory.

As previously discussed, we are divesting approximately 4,000 non-strategic lot positions in Arizona, California and Nevada. Year-to-date, we have closed over 50% of these lots and we are on track to meet our goal of closing 4,000 lots by yearend. Though our financial performance is not yet where it needs to be, the steps we have taken and continue to take, combined with the eventual stabilization in our markets, will allow WRECO to reemerge as a highly competitive profitable homebuilding operation that will deliver significant shareholder value.

I will now turn the call over to Patty to discuss the outlook for the fourth quarter.

Patty Bedient

While we reported significantly improved results in the third quarter, the traditional seasonal downturn, coupled with the continued uncertain nature of the housing recovery, will put significant pressure on fourth quarter results. I'll start the outlook with timberlands.

In the West, export sales volume is expected to be comparable to the third quarter with a small increase in sales realization. Domestic sales realizations are also expected to increase, although volumes will be down. We anticipate that the harvest in the West will be down almost 20% compared to the third quarter and we expect that inventory levels will also decrease.

In the South, log sales volumes will likely be down with stable sales realizations compared to the third quarter. The harvest is also expected to be lower. We anticipate higher logging costs and seasonally higher silvicultural costs in both the West and South.

Mineral income should also be down in the fourth quarter as we do not expect a similar sale of mineral royalties as occurred in the third quarter. In addition, we don't anticipate any significant sales of non-strategic timberlands in the fourth quarter. Overall earnings in our timberlands segment is expected to decrease in the fourth quarter compared to the third.

In wood products, we expect sales realizations and volumes to decrease seasonally as the fourth quarter is traditionally the slowest quarter of the year. The largest volume decreases are likely to be in engineered wood products, although lumber volumes are expected to be down around 10% compared to the third quarter.

We will continue to match supply with demand and anticipate that significant curtailments will continue, especially as we enter the holiday season. Although we will maintain our focus on reducing costs wherever possible, manufacturing unit costs are expected to rise as a result of lower production volumes. Given the fourth quarter slowdown, we expect the loss in wood products to be greater than that of the third quarter.

In cellulose fibers, continued strong demand in the global pulp markets is expected to increase sales realizations in the fourth quarter. The largest cost variation quarter-to-quarter is expected to be in maintenance downtime. We anticipate our New Bern, North Carolina mill will be down approximately 30 days, and this shutdown should be completed by the middle of November.

In addition to performing annual maintenance, this planned outage will enable completion of a capital project to rebuild the recovery boiler to increase its throughput, allowing for the shutdown of the existing, less efficient gasifier. This project should reduce the mill's dependence on fossil fuels and also increase its reliability. We are also likely to experience increased fiber costs and somewhat lower chemical costs in the fourth quarter.

Overall, the increased costs, including the effect of maintenance downtime, are anticipated to offset the effect of improving sales prices. As a result, we expect that total operating earnings for our cellulose fiber segment in the fourth quarter will be comparable to the third quarter, excluding tax credits. We anticipate a slightly lower amount of (inaudible) credit in the fourth quarter compared to the third.

Moving on to our real estate segment. Unlike our wood products business, the fourth quarter is seasonally our strongest quarter for closings in our single family home building business. We expect that closings will increase significantly in the fourth quarter compared to the third, with total closings in excess of 700. This compares to just over 500 in the third quarter.

As a result, we expect that our single family homebuilding operations will be about breakeven compared to the third quarter loss of $9 million. This does not include the effect of land sales in the fourth quarter.

As we have previously reported, we are focused on optimizing the amount of our potential tax refund from the carry-back of our current year net operating loss. As Larry just discussed, we are currently considering a number of land sales in the fourth quarter.

For economic to do so, our focus is to accelerate transactions that generate tax losses into the fourth quarter and defer those that generate gains to next year. Given the preliminary status of the transactions, we don't have an estimate at this time of any potential earnings impact that might result.

Now I'd like to update you on a few other financial items. Through the end of the third quarter, total capital expenditures year-to-date for Weyerhaeuser Company were approximately $152 million. We expect our full year expenditures to be around $200 million, as we have previously reported.

At the end of the third quarter, we had cash of $1.6 billion. During the third quarter, significant sources of cash included approximately $300 million from the sale of 140,000 acres of non-strategic timberland, as well as around $100 million from alternative fuel tax credits.

We also retired just over $400 million in debt in the third quarter and the third quarter is also the quarter that we make our semiannual interest payments. So cash for interest pavements was higher than is otherwise normal.

Also during the third quarter, at our request, our banks agreed to amend our two existing bank credit lines. We reduced the amount of credit available under one line, which was to expire in March of 2010, from $1.2 billion to $400 million. We have maintained our other credit line at $1 billion and it does not expire until the end of 2011. In addition, our minimum net worth covenant as defined under the agreement was adjusted to $3 billion, down from $3.75 billion.

Looking ahead to the fourth quarter, we issued 500 million of senior unsecured bonds at a 7-3/8 coupon. These are 10-year maturities and proceeds are for general corporate purposes, which include working capital, capital expenditures and refinancing or repayment of existing indebtedness. Our scheduled debt maturities for the fourth quarter are only about $37 million. Although the timing of the economic recovery is uncertain, we have ample liquidity to meet our needs.

With that, I'll turn the call back to Dan and I look forward to your questions.

Dan Fulton

Having provided an overview in each one of our businesses and also the financial overview that Patty has just been through, I'd like to now turn the call over to questions.

Kathryn McAuley

Would you please open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Gail Glazerman from UBS Financial.

Gail Glazerman - UBS

Dan, just digging into some of the government policy a little bit more, I guess there was some news out yesterday that the cap will be restricted to biomass and residuals. I'm just wondering is there any sort of quantification that you could give us in terms of how many tons of residuals you may have that you would be able to qualify as use of biomass increases?

Dan Fulton

I can't give you a number at this point. As you correctly point out, there is a lot of uncertainty surrounding this program. It's being administered by the USDA. There's questions around what would qualify. There's significant questions about whether it would be eligible if you were to transfer from, let's say, our own timberlands into one of our own facilities. At this point, I would rather not speculate. I can tell you that we are watching this very closely and are prepared to take advantage of it should the opportunity arise.

Gail Glazerman - UBS

I'm also just looking for a little bit more color on the pulp markets and perhaps the decision to expand and to converting in Europe. What type of demand conditions are you seeing and can you give any sense about the price increases you've announced, kind of what you think you have forming over the next few months to realize?

Tom Gideon

I think you mentioned Poland, what we'd like to say about that is that we view this as a very exciting opportunity to expand our long-term relationship with Procter & Gamble. We are building a converting facility in Poland that will apply proprietary technologies to the fiber that P&G will use in their hygiene products and it will allow us to convert closer to the end customer and participate in future international growth. So, that is a logical extension of our strategy to continue to grow with our long-term customers.

Gail Glazerman - UBS

Current demand both for fluff and what you are seeing for more commoditized pulp and in terms of fluff kind of where you stand in terms of price increases and realized pricing?

Tom Gideon

As you know, we've made some price announcements earlier this month regarding prices, both for paper grade as well as for fluff. As you know, we remain of the view that fluff market is very attractive for us going forward. It's a market that's growing at 4% a year, roughly 150,000 to 160,000 tons per year. We are well positioned to do well in that market with our mills in preferred locations in terms of wood baskets, as well as being able to supply both domestic as well as a wide array of international markets. They are highly competitive in both cost and efficiency.

Along with that, we have a direct sales relationship with our major customers who see an experienced continued growth and who want us to grow with them. So, putting all of those things together, we continue to think that absorbance is going to be an attractive market space for us and we believe we'll continue to do well and participate in that market.

Gail Glazerman - UBS

Just taking into more current demand, do you think it's being driven by actual consumption? Are you concerned about inventory builds at the customer level?

Tom Gideon

As you look at that you and you have a great observation from an industry perspective as well, obviously, over the last few months we've seen significant increase in demand from China. That seems to have moderated. I think what we really need to do is to take and evaluate the difference between how much is demand driven going forward and how much is due to supply constraints?

Operator

The next question comes from Mark Connelly from Sterne Agee.

Mark Connelly - Sterne Agee

Two things. You said out in your New York meeting some new value propositions in your housing, better price points that would help optimize your profitability. I wonder if you could give us a sense of how well that is working and how much you are still playing around with it? Secondly, we've been hearing paper companies talk about higher fiber cost given the wet weather. How much of the increase you saw in lumber prices would you ascribe to weather conditions, if any?

Larry Burrows

As we talked about, all of our businesses have been looking for ways and have been successful in ways in reducing kind of our hardened construction costs in terms of costs of goods sold. Regardless of whether it's a first time homebuyer or even a move-up customer, what we know is customers today are wanting more for less and that homes are probably a little bit smaller and less expensive. We've had good success really across all of our businesses in being able to achieve that and continue to kind of reposition communities and also introduce and reproduce precision product and have a little bit less expensive product.

Tom Gideon

With respect to weather impacts, we have gained significant rainfall as you know across the south. It's has had an impact and curtailed the logging and silvicultural activities and has produced some downtime at some of our facilities. Weather is very difficult to predict, but based on what we know today and the position that we have, we believe that we can keep our facilities wooded for the remainder of the year. Due to the lower availability, it has increased prices somewhat for fiber and it will have an increased impact in the fourth quarter.

Operator

Our next question comes from Mark Weintraub from Buckingham Research.

Mark Weintraub - Buckingham Research

First question was just were you cash flow positive from operations in the third quarter beyond your CapEx needs and dividend needs?

Patty Bedient

If you look at the analyst package, you'll see that our cash flow from operations was $34 million, our CapEx for the quarter was roughly around $50 million, I believe.

Mark Weintraub - Buckingham Research

That's great. I didn't realize there was that $34 million number out there.

Patty Bedient

We will be filing the Q next week and you'll get the full cash flow, but there are some selected items in the cash flow. The one that's not in the cash flow is interest. We did have some, as I mentioned in my comments, additional interest payments in the third quarter because we'd pay semiannually on some of our interest payments in the third quarter and the first quarter.

Mark Weintraub - Buckingham Research

When you were talking about potential land sales from the real estate business, you talked in the past about monetizing lands, which you had written down last year. It sounded like there were some other or additional possibilities that you were considering. Is that an accurate read?

Larry Burrows

I don't think that necessarily is the case. I think when we talked about it, when we had our strategy shift and we talked about it in the fourth quarter of last year, I think we identified approximately 4,000 lots that we were looking to take to market. That's kind of what we're doing. We always continue to look and evaluate our land portfolio and we'll continue to make adjustments in terms of rebalancing it as we see opportunities to do so.

Mark Weintraub - Buckingham Research

Patty, you had mentioned ample liquidity to meet your needs. Does that statement cover the E&P distribution if you were to choose to go that route in the year ahead?

Patty Bedient

As we have said, we want to maintain flexibility for consideration of conversion if the Board were to make the decision to do that. There is, as you know, questions around exactly how much that E&P distribution might be. So, we are looking at all of those and taking all of those things into consideration.

Operator

Our next question comes from Peter Ruschmeier from Barclays Capital.

Peter Ruschmeier - Barclays Capital

I was hoping as a follow-up to the previous question about flexibility on the cash, as you consider as one possible opportunity, reconversion, I'm curious if you can share with us from a timing standpoint you've shared with us at '09 for a lot of reasons doesn't make sense. As you approach the Board, can you share with us reasons why it would make sense to have discussions earlier in '10 versus waiting as long as you can in '10 to assess what you think the right outcome is?

Dan Fulton

I don't want to get ahead of our Board on this one. This is an issue. As you say, we've made comments in the past about 2009 not being value creating. Listening to Larry this morning, you get a sense of we're taking land to market, we're taking advantage of our tax position this year, and for the reasons that we shared before, 2009 is unlikely. We're maintaining flexibility with respect to 2010. We can continue to monitor any potential changes in operating conditions, as well as tax law. So, I can't prejudge at this point timing of any kind of a decision with respect to 2010.

We need to discuss it with the Board and we're maintaining the flexibility. The actions that we're taking in 2009 put us in a position to maintain that flexibility into 2010, both with respect to our operations as well as our financial position.

Peter Ruschmeier - Barclays Capital

For 2009, I believe you indicated that the harvest in the quarter was down about 35% year-over-year. I'm curious if you can share with us for full year is that about right? How does the harvest for '09 compare to your sustainable cut? Related to this, do you have a preliminary outlook for '10 as to whether it would be up?

Dan Fulton

As you know, we don't give guidance beyond the quarter that we're talking about. In terms of our harvest deferrals in total, our biological ability to harvest would be slightly higher than what we're doing today, but of course we're taking a look at what makes economic sense both now and in the long-term in terms of what's the best return. We will see continued harvest deferrals as Patty had mentioned, and I would just say that we will be at about the numbers that you referenced in your remarks.

Peter Ruschmeier - Barclays Capital

Tom, I was hoping that you could help us to provide some color in the Pacific Northwest, some of the trade publications have shown a pretty steady climb, month after month after month on log prices. I'm curious if you could just help us to understand some of the moving parts, whether it's the impact of the Canadian dollar or diesel fuel and BC and the impact its having or whether it's an export issue or domestic demand, what are some of the drivers that you are seeing in the Pacific Northwest today?

Tom Gideon

The best way I would say that is we have seen some firming of log realizations in the West. It's a combination of lower supply. For us, of course, it's a continuation of good export takeaway. So it's really just a combination of what's available against the demand that's is out there.

Operator

Thank you. Our next question from Claudia Houston from JPMorgan.

Claudia Houston - JP Morgan

I just really had a quick question on the corporate expense, I wondered what sort of base should we be using and then how should we think about the impact of fluctuations in foreign exchange on your share price and is there anything else that sort of cause the volatility lately?

Patty Bedient

If you look at page four of the statistical information that we presented, you'll see some additional color on the corporate and other segments that's included there. As you think about the impact of foreign exchange, we pull that out and isolate it for you because, as you noted, it does tend to fluctuate and this is where that gets booked. In the quarter, the impact of foreign exchange was about $17 million positive. That compares to positive in the second quarter of $21 million. So, a pretty big impact in that segment.

The other thing that runs through there in addition to just ongoing corporate expense is the impact of our pension and other post retirement benefits, which have been running credits as we amortize over in accordance with accounting rules. It's non-cash, but you'll see that isolated separately on that same page. If you think about just ongoing corporate expense, the way to think about the expense is about $25 million to $30 million a quarter, give or take. It's difficult to see that as you look at the package unless you look at the detail because corporate segment is where all of those other items get included.

In addition for this quarter, we also have the large restructuring charge that we have pulled out as a separate item for some asset impairments in the corporate region, as well as the impact of the pension settlement charge, which was also non-cash.

Operator

Our next question comes from Mark Wilde from Deutsche Bank.

Mark Wilde - Deutsche Bank

I wondered if you can give us a little more color in the wood segment on the benefit from lower log prices there.

Dan Fulton

Mark, during the quarter overall log benefit was roughly about $9 million favorable. Of course, if you look in what we did, that was about a third of what we generate in terms of improved manufacturing costs.

Mark Wilde - Deutsche Bank

I just wonder also in this business, it looks to me from the numbers that I've run that your unit losses in the lumber business are larger than average in the industry, yet in my experience you've got very well invested assets. So what do you think the issue is here?

Tom Gideon

I will just tell you, as we look at our business, we do think that we are very competitive, that we run well, we look at all attributes of our cost, including not only at what we do from a gross margin point of view in terms of operations, but also in terms of what is our SG&A that's associated with that.

As Dan has mentioned on a number of occasions, we're diligently working at all of those costs, not just manufacturing, but also the SG&A costs that are attributable to the business, so we continue to go forward. We also have some ongoing costs that are related to the fact that we have some indefinite curtailed facilities and that has an impact each quarter as well.

Mark Wilde - Deutsche Bank

Tom, in the international timberlands you're still running just a small loss there, I wondered do you have any idea when international timberlands will start to be a positive? Also, I think most of those timberlands are in Uruguay, which has become a which has become a much more popular location for the industry over the last few years. I wonder if this increases your options for what you can do down in Uruguay.

Tom Gideon

When you look at international timberlands from an operational point of view, we're actually doing better in terms of being cash and on this positive, but we're also in the process of completing the build out of our second line at Los Piques and that ends up to being some of the cash negative that you see. We do see some improved pricing and we think it will come from European panels going forward in the fourth quarter. Overall, we expect to see some improvement as we go forward through the year.

Mark Wilde - Deutsche Bank

Finally, I noticed that your R&D spending was down quarter-over-quarter and year-over-year and I wondered whether you had done some downsizing there whether there was something else in the numbers.

Tom Gideon

As you know, we already have looked at every facet of our cost structure going forward trying to make sure that we're focused on those items that we get the best return from, and yes, just like other areas of our company, we have taken some staffing reductions in the technology organization. We will continue to look at that and monitor that. At the same time, we believe we've maintained our fundamental core competencies and ability to take advantage of our technology expertise as markets recover.

Operator

Our next question comes from Richard Skidmore from Goldman Sachs.

Richard Skidmore - Goldman Sachs

Just wanted to follow-up on the wood products business. You had talked about trying to get to free cash flow to breakeven in that business by yearend, if I recall correctly. Could you talk about what additional steps you can take in the wood business to narrow the cash burn? You've made pretty good progress there, but any additional steps you can take so that you see?

Tom Gideon

You are right. We have made significant progress, despite sales being down 42% year-over-year, realizations being lower than they were in 2008. We've continued to significantly reduce both cash usage as well as improve our operating earnings. The real focus is going to be continually on better executing our business fundamentals.

As I mentioned during our Analyst Meeting in New York in May, we continue to have our weekly Friday meetings with our entire lead team. We continually assess at each one of those sessions our market conditions and trends. We evaluate whether each mill is cash positive and contributing to fixed costs. We examine all opportunities to improve margins and reduce all costs, whether it is SG&A, manufacturing or working capital, and then we then initiate real-time adjustments considering what needs to be done. So we're basically continuing to execute appropriately against what the market conditions are.

I would say as an example of that process, we mentioned that we made decisions to take out 53 weeks of lumber downtime in Q3. What that translated to is that 18 out of 21 of our sawmills experienced at least one week of downtime, but yet two of them were done for six weeks. So we used this weekly process to, as they say, make real-time adjustments to what market conditions are and continually try to do what we can to reduce our cast usage. Quite frankly, we don't want to be just cash positive as soon as we can, we want to get into their earnings positive realm as well.

Richard Skidmore - Goldman Sachs

As you think about the, back to trend in housing, in your discussions with Larry, has there been any change with regards to how you think about the run rate long term normalized housing level given both the depth of the downturn and the pickup in foreclosures and any other factors that might impact housing such that you need to maybe reassess the footprint again?

Dan Fulton

Our view of long-term trend numbers for housing total starts are really consistent with numbers generated by the Harvard Joint Center of Housing. So we would be looking at 1.7 million to 1.9 million per year. That's a trend number. It's going to take us a while to get back to that point. The recovery has been slow. As Larry shared, even in the past quarter we saw the market becoming more tentative.

So, we believe we've got a footprint in our wood products facilities that serve that recovering demand, the footprint of our homebuilding business is such that we'll be able to ramp-up to meet that demand, but we are managing our operating posture today based upon the level of starts that we have and then we will respond and move up accordingly.

Operator

Our next question comes from Chip Dillon from Credit Suisse.

Chip Dillon - Credit Suisse

Could you just talk to us about how much of the timberland that you are harvesting this year is going towards your own converting facilities and how that might compare to like earlier in the decade?

Tom Gideon

It's kind of changed given the portfolio changes. As you know, we used to have a significant amount of our fiber that was going into our containerboard facilities, and of course those are now going into IP. I would say that for this year we've actually seen a slight movement quarter-over-quarter into more third party volumes, and again all of them are down because we've done harvest deferrals. Again, the relative strength of the export market has actually increased our third party sales compared to Q2.

Chip Dillon - Credit Suisse

I was thinking more just in terms of the wood products plants. Is it fair to say that half your harvest used to go into your wood products plants and maybe because of the weak market it might be a greater proportion because you are deferring this year say versus years past?

Tom Gideon

I'd have to take a look at that. I think we've been fairly constant in terms of the amount of fee versus non-fee on average over the last four to five years. Some periods it can go up more or less. On average, I think we've maintained a fairly representative cross section of fee where it made sense and outside purchase where it was the best value opportunity for us.

Chip Dillon - Credit Suisse

Patty, could you just confirm for us, I know the E&P, if it is made next year, it's based on the beginning of the year level. I'm not asking you to predict the fourth quarter, but if we froze the third quarter, where would that be? Would it still be about a [$2 billion and $6 billion] in terms of the cash and the total? Then if you could review for us what your ability is to sort of carry-back losses? I believe that you would only be able to continue carry-backs once you are a REIT in the TRS. Is that all correct?

Patty Bedient

What we have said is, as we came into 2009, our total E&P was just under $6.5 billion. What we've said about the end of 2009, or the beginning of 2010, is that we would expect it to be under $6 billion. As we said, that will depend on a number of factors in terms of what we do in the fourth quarter and a number of other alternatives. So that's the total amount of E&P.

Now we have also said that a significant amount of that E&P can be distributed in the form of stock. Others, as they have converted, have used 20% cash and 80% stock. And so that's where we get to the over $1 billion number. So it's a computation of the E&P that is made as of the beginning of the year in which you convert. You have until the end of the year to make the actual distribution.

Chip Dillon - Credit Suisse

In terms of your ability to access your tax loss carry-backs?

Patty Bedient

In 2009, as we've said that it's very unlikely we would do a conversion in 2009 and I would underscore "very unlikely''", because the ability that we have to take our net operating loss back against 2008 where we have the very significant containerboard packaging gain from the sale of that business. If we were to convert in 2009, then we would have to take that loss forward. So you are correct in terms of the NOL upon a REIT conversion would have to be carried forward, not carried back.

Chip Dillon - Credit Suisse

What do you see capital spending next year at?

Patty Bedient

We have not given guidance for capital spending for 2010. We will do that on our yearend call. Having said that though, given the uncertain nature of the recovery, we will be very disciplined about capital expenditures going forward.

Operator

There appear to be no questions at this time. Please continue with any further remarks you wish to raise.

Dan Fulton

I'll wrap up the call. As I started the call, I made the comment that we've got three of our four business segments that are closely linked to US housing starts. Though we believe that housing recovery is underway, it's pace is, what I would characterize as highly uncertain. So we're positioning ourselves for the recovery, but we're taking steps today to manage through this timeframe. We're focused, as I mentioned earlier, on continuing to drive down our SG&A costs as a function of headcount. It's also a function of employment costs, including not only current compensation, but we've made a number of adjustments for benefits and post-retirement benefits.

In our businesses, as you look forward to the next quarter, our theme would be in timberlands. We're deferring harvest at a relatively high level in response to demand conditions. The good news is our export volumes are steady. In our wood products business, our operating posture is to match production with profitable demand. In our cellulose fibers business our operating posture is to meet continued strong demand, though in the fourth quarter we have our outage at New Bern to deal with, and then in WRECO our focus for the next quarter is an elevated level of closings, which is consistent with this time of year, and then completion of the land sales in order to take advantage of our tax position.

As I commented, we're closely monitoring a number of public policy issues. There is the homebuyer tax credit, which has a direct impact on WRECO and an indirect impact on our wood products business. The alternative fuel blending tax credit has a direct impact on our cellulose fibers business, as does this potential cellulose biofuel tax credit. We talked about the BCAP allowances earlier. That would have an impact on our timberlands business and likely our wood products business. Finally the climate bill, that's being debated in Congress, has the potential to have a significant impact on our timberlands activities. So that's our focus.

We appreciate your attention this morning, all the questions, and as always, we know that you've got opportunities to follow up with Kathy. I thank you for your attendance and attention. Thanks very much.

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Source: Weyerhaeuser Company Q3 2009 Earnings Call Transcript
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