Weyerhaeuser Company (WY)

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Weyerhaeuser (WY)

Q3 2012 Earnings Call

October 26, 2012 10:00 am ET

Executives

Kathryn F. McAuley - Vice President of Investor Relations

Daniel S. Fulton - Chief Executive Officer, President, Director and Member of Executive Committee

Patricia M. Bedient - Chief Financial Officer and Executive Vice President

Analysts

Anthony Pettinari - Citigroup Inc, Research Division

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Mark Wilde - Deutsche Bank AG, Research Division

Chip A. Dillon - Vertical Research Partners Inc.

George L. Staphos - BofA Merrill Lynch, Research Division

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Gail S. Glazerman - UBS Investment Bank, Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

Steven Chercover - D.A. Davidson & Co., Research Division

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Paul C. Quinn - RBC Capital Markets, LLC, Research Division

Presentation

Operator

Good morning, my name is Marlee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Weyerhaeuser Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to the call over to Ms. Kathy McAuley, Vice President, Investor Relations. Ma'am, you may begin your conference.

Kathryn F. McAuley

Thank you, Marlee. Good morning. Thank you for joining us on Weyerhaeuser's Third Quarter 2012 Earnings Conference Call. This call is being webcast at www.weyerhaeuser.com. The earnings release, analyst package and web slides for this call can be found at our website or by contacting April Meier at (253) 924-2937.

Please review the warning statements in our press release and on the presentation slides concerning the risks associated with forward-looking statements, as forward-looking statements will be made during this conference call.

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

As summarized on Chart 1, Weyerhaeuser reported third quarter 2012 net earnings of $117 million or $0.22 per diluted share. That was our net sale of $1.8 billion. There were no special items in this quarter.

Turning to our business segments. My comments reviewing the third quarter of 2012 refer to changes from the second quarter of 2012. Beginning with Timberlands, Charts 3 and 4. Timberlands contributed $80 million to pretax earnings, $3 million more than in Q2. Revenues from Timberlands exchanges were $24 million in the quarter, an increase of $17 million. In the West, log prices declined approximately $5 per cubic meter. Domestic log prices decreased due to an abundant supply of farmer wood. Export log prices were up slightly due to mix.

Dry conditions and fire danger in the West resulted in a 3% reduction in fee harvest volumes. Road costs in the West were seasonally higher. In the South, log prices increased 2%, third-party log volumes rose 6% and the fee harvest was slightly higher. Silviculture costs in the South were slightly lower as planting was deferred into dry weather conditions.

Wood Products, Charts 5 and 6. Wood Products contributed $59 million to pretax earnings in Q3, $29 million more than in Q2. Price realizations increased across nearly all product lines, as product supply channels remained lean. OSB prices increased $54 per thousand square feet or 25%, and lumber prices rose $9 per thousand board feet or 3%. Sales volumes for engineered wood products increased 8%. Sales volumes for lumber declined slightly as southern lumber mills took downtime in response to slightly weaker market conditions around the 4th of July holiday. Lumber mills operated at over an 80% rate in the quarter. OSB mills took downtime for scheduled maintenance resulting in lower sales volumes. The operating rate for OSB was 85%.

Cellulose Fibers, Charts 7 and 8. Sale of fibers contributed $78 million to pretax earnings, $42 million more than in Q2. During the third quarter, this segment had a strong performance. Pulp production increased 9% and maintenance costs were lower. In Q3, there was only one scheduled maintenance outage of 13 days. In Q2, there were 2 annual maintenance outages resulting in 27 days of mill downtime. Pulp sales volumes increased 2%. Pulp price realizations were flat.

Real Estate, Charts 9 and 10. Real Estate contributed $17 million to pretax earnings and had no significant income from land and lot sales. Second quarter pretax earnings of $15 million included $12 million of land and lot sales. In Q3, single-family home closings increased 21% to 615 homes from 508 homes in Q2. Home closings were up 21% of the same quarter last year. Although the average home closing price was $372,000, this was nearly flat with 2 -- with second quarter. Margins went up in most geographies, with the largest increase in San Diego. Gross margins in Q3 were 24.3%, up from 19.5% in the previous quarter. The backlog at the end of the quarter was 1,055 homes.

Real Estate controls approximately 27,000 lots in our primary markets. In addition, we control 67,000 lots, mostly under options in a large master plan community in Nevada, where development and construction is on hold pending improvement in the local market.

Unallocated Items, Chart 11. The foreign exchange gain of $11 million in Q3 was due to the strengthening of the Canadian dollar. The swing from Q2 was $19 million. Offsetting this was a charge of $10 million for the elimination of intersegment profit in inventory and LIFO. As we discussed last quarter, this item was formerly reported at the segment level and is now recorded in unallocated items. The charge for share-based compensation increased in Q3 as the price of Weyerhaeuser stock appreciated. The increase in share-based compensation largely accounts for the increase in SG&A.

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