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Weyerhaeuser
 Company
Annual Analyst Meeting

  New York, New York
     May 12, 2006
Forward-looking Statement
                 Some information in this pr esentation is der ived pr incipally fr om publicly ...
Steve Rogel
Chairman, President and
 Chief Executive Officer
Strategic Direction
        Patty Bedient
       Senior Vice President,
   Finance and Strategic Planning
Portfolio Principles
                 Cost of capital
                 Focused scale
                 Growth




New York ...
Weyerhaeuser Revenue — 2005
                                  Revenue: $23 Billion
                                       ...
Weyerhaeuser Real Estate (WRECO)
                 Strategic Direction   Implementation
                   Organic growth  ...
Wood Products — Residential
                 Strategic Direction       Implementation
                   Providing framing...
Wood Products — Industrial
                 Strategic Direction     Implementation
                   Explore opportunity ...
Weyerhaeuser Revenue — 2005
                                  Revenue: $23 Billion
                                       ...
White Paper
                 Strategic Direction    Implementation
                   Improve Fine Paper    Closed higher-...
Cellulose Fibers
                  Strategic Direction   Implementation
                   Differentiated        Aligned c...
Containerboard, Packaging & Recycling
                Strategic Direction   Implementation
                 Transform     ...
Timberlands
                 Strategic Direction   Implementation
                  Optimize and grow     Continue success...
Financial Strategy
                  Strategic Direction    Implementation
                   Return capital to      Divid...
Summary
                 Strategic review delivered a course of action
                 Portfolio direction is set
       ...
Strategic Update —
   Timberlands
      Dick Taggart
   Executive Vice President,
    Chief Financial Officer
Timber Update Analysis
                ● Weyerhaeuser’s Timberlands business
                ● Industry ownership structur...
Weyerhaeuser Timberlands
                 Business selling at market prices to internal and
                 external cust...
Weyerhaeuser Timberlands Ownership
Millions of Acres
  9
  8
  7
  6
  5
  4
  3
  2
  1
  0
              1998   2002   2...
Average Log Price
          Average log price has remained relatively stable
        800
$/MBF
        700
               ...
Weyerhaeuser Timberlands Harvest
        Continued intensive management of long-term portfolio
Millions of CCF
10.00


 8....
Weyerhaeuser Timberlands Business —
Earnings
$ Millions
900
800
                                  Portfolio
700           ...
Why Retain Timberlands?
                 We continuously evaluate hold vs. sell
                 Divest when tax-adjusted ...
Different Ownership Structures
                for Timber
                                     Public Owners          Priv...
REIT Creation Issues
                 Issues on transition to create value from
                 REIT conversion
         ...
Tax Issues Relative to Timberland
                REIT Conversion
                 REIT conversion would require distribut...
Tax Issues Relative to Timberland
                REIT Conversion (cont.)
                 Business Purpose Test for corpo...
Paths to a Timber REIT Structure

            Process           Precedence
            Spin              None in timber
  ...
Timber Tax Equity
                 Timber tax proposal
                  • 134 co-sponsors in the House; 29 in Senate
    ...
Conclusions
                 Timberlands business continues to be value-creating
                 for shareholders
       ...
Industry Outlook
           Lynn Michaelis
Vice President, Markets & Economic Research
            and Chief Economist
Agenda for Industry Outlook
                  Macroeconomic setting for forest products
                  Outlook for
    ...
Macroeconomic Setting for Forest Products
                Economic growth remains healthy
                Dollar decline r...
Momentum Carries into 2006
                                         Growth in World Real GDP
                  Percent Cha...
Another Year of 3–4% Growth
                                          Growth in U.S. Real GDP
                  Percent Ch...
Surge in Consumer Spending Fueled by
           Housing Refinance Boom
                                   U.S. Personal Sa...
Dollar Decline Resumes in 2006
                                                  Euro Exchange Rate
                  U.S....
Current Account Deficit Got Even Bigger
                             U.S. Current Account Balance
                        ...
Weaker Dollar and Strong Growth Boost
                U.S. Industrial Production
                                         ...
Inflation Remains Above 3%
                                    U.S. Consumer Price Index (CPI)
                           ...
Result: FRB Moves Short Rates Higher
                                              U.S. Interest Rates
                  P...
Easy Money Fueled Housing Boom
                                         U.S. Single-family Housing Starts
                ...
Very Positive Long-term Trends for
            Single-family Housing Starts
                Demographics
                A...
Agenda for Industry Outlook
                  Macroeconomic setting for forest products
                  Outlook for
    ...
Key Drivers for Lumber
                 Demand primarily driven by residential construction —
                 new and rem...
Another Record Demand Year in 2005
                                 Demand on North American Lumber Mills
                ...
Substitution Was Wood for Wood
                                      Lumber Usage in
                                 U.S....
U.S. Lumber Output Keeps Growing
                                          U.S. Lumber Production
                  Billio...
U.S. Imports in Perspective

                               U.S. Softwood Lumber Imports
                                 ...
Crucial to U.S. Lumber Price Outlook

                                      Canadian Exchange Rate
                   U.S....
Exchange Rate Offset
            Operating Improvements

                          Production Costs for Average B.C. Inter...
Prices Approached Cost Floor in Late 2005
                                   Spruce-Pine-Fir 2x4 Lumber Price
            ...
Tentative Agreement Was Reached
                April 27, 2006

                 Only rough structure of the deal is known...
Tentative Agreement Was Reached
                April 27, 2006

                 Only rough structure of the deal is known...
Tentative Agreement Was Reached
                April 27, 2006

                 Only rough structure of the deal is known...
U.S. Prices Track SPF Prices
                                   Douglas Fir 2x4 Green vs.
                              Sp...
Reflects Lumber Prices and New Capacity
                                     Douglas Fir/Domestic No. 2 Sawmill,
         ...
Key Drivers for Oriented Strand Board (OSB)
                Demand primarily driven by new residential construction
      ...
Demand Pressed Capacity Limit in 2003–05
                                North America OSB Demand vs. Capacity
           ...
Keeping Prices High
                                N.C. Oriented Strand Board 7/16quot; Price
                  $/MSF
   ...
Costs Reflect Energy, Resin and
           Exchange Rates

                                    Variable Cost for an Averag...
Engineered Products Demand
            Continues to Grow
                                         North America I-Joist De...
Agenda for Industry Outlook
                  Macroeconomic setting for forest products
                  Outlook for
    ...
Key Drivers for Cellulose Fiber (Pulp)
                  Global Market: Demand growth near 3%
                   • Economi...
China Demand Growth Averaged 20% per
            Year for 2000–05 Period
                                   China Imports ...
Fluff Market Growing 3–4% per Year
                                 Fluff Market Pulp Consumption
                        ...
Key Drivers For Cellulose Fiber (Pulp)
                  Global Market: Demand growth near 3%
                  Capacity /...
Scan Costs Higher in U.S. Dollar Terms
                                 Manufacturing Costs for
                          ...
Softwood Capacity Declines in 2006
                                     Change in World Capacity
                         ...
Pulp Prices Reflect Demand and
           Exchange Rates
                                          NBSKP vs. Eucalyptus
  ...
Agenda for Industry Outlook
                  Macroeconomic setting for forest products
                  Outlook for
    ...
Key Drivers for Containerboard,
            Packaging and Recycling
                Nondurable industrial production
     ...
Box Shipments Track Industrial Production
                                       Weighted* Industrial Production and
     ...
No Capacity Growth Since 1997
                                     U.S. Containerboard Capacity
                  Average ...
Results in Another Very Tight Year
                                     Containerboard Operating Rate
                  Pe...
The Bottom Line: Box Prices Will Follow
                                     U.S. Corrugated Box Price vs.
               ...
China’s OCC Demand Continues to Grow
                                               China OCC Imports
                  Mi...
Why Did OCC Prices Fall?
                                  Recovered Paper OCC Price (Grade 11)
                          ...
Energy Cost Increase Hit OCC-Based Plants
                                              Comparison of Virgin* vs.
        ...
Summary of Key Messages
                 Overall economic growth remains strong, but inflation and
                 intere...
WRECO and iLevel
          Dan Fulton
           President,
 Weyerhaeuser Real Estate Company
Weyerhaeuser Real Estate Company
                 Single family homebuilding
                  • Retail business — sell di...
Business Definition
                               Homebuilding
                                   Pardee

               ...
Business Definition —
           WRECO Operations




                                   Office
                          ...
Business Definition
                               Homebuilding
                                   Pardee

               ...
Business Definition




New York City
WRECO Land Strategy
 Most of our markets are land constrained
 Increasing regulation extends elapsed time
 for entitlement...
WRECO Land Strategy (cont.)
 Selling land is part of our business
 Disciplined focus on ROI
  • Optimizes balance
    betw...
WRECO Growth Roadmap
   Organic growth is the Base Case for our growth strategy
                      Strategic Direction ...
WRECO Is Positioned to Succeed
                 Long-term favorable outlook for single-family housing
                 WRE...
Homebuilding Industry
                Continues to Evolve
                 Homebuilder consolidation
                 Mark...
Homebuilders Continue to Consolidate
                Production Builder Market Share
                % of total closings
 ...
Key Advantages of Large Homebuilders
                 First look at land and partnership deals
                 Product an...
Weyerhaeuser is a Leading Producer
                of Residential Building Materials
                      2005 Total 3rd-...
Is Positioning for the Future
Integration: 5 businesses into 1
Innovation: Driving profitability of our customers
Interact...
Value Proposition Overview

                Products and services aimed at the residential
                market segment
...
Directed at the “Sweet Spot”
                                         of Homebuilders’ Cost
                              ...
Strategic Validation
            Harvard University, Joint Center for Housing Studies
            Key Findings: Homebuilde...
Expected Benefits
%
100
                                                    Proprietary Product,




                     ...
Is All About
                      Anticipating Change


                “You need to skate to where the
                 ...
Operating Excellence and
              Margin Improvement
                     Rich Hanson
                  Executive Vic...
Timberlands
                Generating higher
                returns through
                • Intensive
                ...
Operating Excellence and
            Margin Improvements
                Leveraging scale and capability to reduce cost
  ...
Wood Products
Prior Strategy             iLevel Strategy
  Production orientation     Demand driven
  Product focus       ...
Containerboard Packaging
Prior Strategy     New Strategy
                     Market segments established as
  Individual ...
Containerboard Packaging Facilities




              Mexico
Containerboard Packaging Facilities
North Central Region / 5 Zones



                                               White...
Containerboard Strategy Benefits
                 Better box plant utilization
                  • 76% today, moving to 90...
Improving Returns
                 Demand-driven strategies
                 Leveraging our scale
                  • Asse...
Financial Priorities
                       Dick Taggart
                   Executive Vice President,
                    ...
Financial Priorities
                  Priorities for free cash flow
                   • Return capital to shareholders
 ...
Weyerhaeuser
 Company
Annual Analyst Meeting

     Steve Rogel
  Chairman, President and
   Chief Executive Officer
Upcoming SlideShare
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Transcript of "New York Analyst Meeting Presentation"

  1. 1. Weyerhaeuser Company Annual Analyst Meeting New York, New York May 12, 2006
  2. 2. Forward-looking Statement Some information in this pr esentation is der ived pr incipally fr om publicly available infor mation, for est pr oducts and building industr y publications and websites, data complied by mar ket r esear ch fir ms, and similar sources. Although we believe that this information is r eliable, we have not independently ver ified any of this information and we cannot assur e you that it is accur ate. This pr esentation also contains for ecasts r egarding futur e economic conditions, economic growth, exchange r ates, demand and commodity pr icing, and statements concer ning the company’s futur e r esults and per for mance that ar e for ward-looking statements within the meaning of the Pr ivate Secur ities Litigation Reform Act of 1995. Some of these for ward-looking statements can be identified by the use of for war d-looking terminology such as “expects,” “may,” “will,” “believes,” “should,” “approximately,” “anticipates,” “estimates,” and “plans,” and the negative or other var iations of those ter ms or compar able ter minology or by discussions of str ategy, plans or intentions. In par ticular , some of these for ward-looking statements deal with expectations r egar ding the company’s mar kets in the second quar ter of 2006; expected ear nings and per for mance of the company’s business segments dur ing the second quar ter of 2006, demand and pr icing for the company’s products in the second quar ter of 2006, stable r aw mater ial and manufactur ing costs in the second quar ter 2006, seasonal incr ease in building activity in the second quar ter of 2006, seasonal incr ease in annual maintenance outages in the second quar ter 2006, incr eased single-family housing closings in second quar ter 2006, lower land sales in the second quar ter of 2006, the completion of a tr ansaction involving the fine paper business, futur e char ges for stock-based compensation, capital expenditur es, incr eased margins, incr eased utilization r ates and r elated matter s. The accur acy of such statements is subject to a number of r isks, uncer tainties and assumptions that may cause actual r esults to differ mater ially fr om those pr ojected, including, but not limited to: the effect of gener al economic conditions, including the level of inter est r ates and housing star ts; mar ket demand for the company’s products, which may be tied to the r elative str ength of var ious U.S. business segments; energy pr ices; r aw mater ials pr ices; chemicals pr ices; per formance of the company’s manufactur ing oper ations including unexpected maintenance r equir ements; the successful execution of inter nal per for mance plans; the level of competition from domestic and for eign producer s; the effect of for estr y, land use, envir onmental and other governmental r egulations, and changes in accounting r egulations; the effect of weather ; the r isk of loss fr om fir es, floods, windstorms, hurricanes and other natur al disaster s; tr anspor tation costs; legal proceedings; the effect of timing of r etir ements and changes in the mar ket pr ice of company stock on char ges for stock-based compensation; and per for mance of pension investments and r elated der ivatives. The company is also a large expor ter and is affected by changes in economic activity in Eur ope and Asia, par ticular ly Japan, and by changes in curr ency exchange r ates, par ticular ly the r elative value of the U.S. dollar to the Eur o and the Canadian and new Zealand dollar s, and r estr ictions on inter national tr ade or tar iffs imposed on impor ts, including the counter vailing and anti-dumping duties imposed on the company’s softwood lumber shipments fr om Canada to the United States. These and other factor s could cause or contr ibute to actual r esults differ ing mater ially fr om such forwar d-looking statements and, accor dingly, no assur ances can be given that any of the events anticipated by the for ward-looking statements will occur , or if any of them occur s, what effect they will have on the company’s r esults of oper ations, cash flows or financial condition . New York City
  3. 3. Steve Rogel Chairman, President and Chief Executive Officer
  4. 4. Strategic Direction Patty Bedient Senior Vice President, Finance and Strategic Planning
  5. 5. Portfolio Principles Cost of capital Focused scale Growth New York City
  6. 6. Weyerhaeuser Revenue — 2005 Revenue: $23 Billion Other 3% WRECO 13% Containerboard, Packaging & Recycling Timberlands 5% 20% Cellulose Fiber 6% Wood Products 41% White Paper 12% New York City
  7. 7. Weyerhaeuser Real Estate (WRECO) Strategic Direction Implementation Organic growth Record growth and returns in existing markets Adjacent markets Portland, Oregon; Sacramento New markets Maracay Homes, Phoenix New York City
  8. 8. Wood Products — Residential Strategic Direction Implementation Providing framing Refocused value solutions to the home proposition building industry Launched iLevel brand New York City
  9. 9. Wood Products — Industrial Strategic Direction Implementation Explore opportunity Sell Composite Panels for scale growth in Refocus Southern hardwoods and Hemisphere appearance products investments to grow in South America New York City
  10. 10. Weyerhaeuser Revenue — 2005 Revenue: $23 Billion Other 3% WRECO 13% Containerboard, Packaging & Recycling Timberlands 5% 20% Cellulose Fiber 6% Wood Products 41% White Paper 12% New York City
  11. 11. White Paper Strategic Direction Implementation Improve Fine Paper Closed higher-cost business capacity Evaluate strategic Active discussions alternatives with 3rd parties New York City
  12. 12. Cellulose Fibers Strategic Direction Implementation Differentiated Aligned capital to strategy products • Conversion of Port Wentworth • R&D investment in new products Closed higher-cost capacity Improve mill system performance New York City
  13. 13. Containerboard, Packaging & Recycling Strategic Direction Implementation Transform Optimize supply system to be business model demand driven and lower cost • Organized around market segments • Increased integration and asset utilization by closing high-cost capacity Improve pricing strategies Align capital with strategy New York City
  14. 14. Timberlands Strategic Direction Implementation Optimize and grow Continue successful business model Continue to pursue tax legislation Evaluated alternative structures New York City
  15. 15. Financial Strategy Strategic Direction Implementation Return capital to Dividend shareholders • Increased by 25% in 2005 Share repurchase • 18 million authorized Disciplined capital Maintain capital spending at program less than 80% depreciation New York City
  16. 16. Summary Strategic review delivered a course of action Portfolio direction is set Focus is on implementation New York City
  17. 17. Strategic Update — Timberlands Dick Taggart Executive Vice President, Chief Financial Officer
  18. 18. Timber Update Analysis ● Weyerhaeuser’s Timberlands business ● Industry ownership structures Issues for transforming into a REIT Conclusions and next steps New York City
  19. 19. Weyerhaeuser Timberlands Business selling at market prices to internal and external customers Softwood sawtimber focus with intensive silviculture Add integration value through efficient conversion Extract mineral, oil, gas and development values Constantly reposition the portfolio to strategic core Reinvest in highest returning regions Forests managed sustainably and by SFI or CSA New York City
  20. 20. Weyerhaeuser Timberlands Ownership Millions of Acres 9 8 7 6 5 4 3 2 1 0 1998 2002 2005
  21. 21. Average Log Price Average log price has remained relatively stable 800 $/MBF 700 Export 600 500 Domestic 400 (Avg. West & South) 300 200 100 1998 1999 2000 2001 2002 2003 2004 2005
  22. 22. Weyerhaeuser Timberlands Harvest Continued intensive management of long-term portfolio Millions of CCF 10.00 8.00 6.00 4.00 2.00 1998 2002 2005
  23. 23. Weyerhaeuser Timberlands Business — Earnings $ Millions 900 800 Portfolio 700 Optimization 600 500 400 Timber 300 Operations 200 100 0 1998 2002 2005
  24. 24. Why Retain Timberlands? We continuously evaluate hold vs. sell Divest when tax-adjusted market values exceed holding values New York City
  25. 25. Different Ownership Structures for Timber Public Owners Private Owners Organizations C-Corp REIT Strategic Financial Direct Pooled Tax Rate 35% Pass through Pass through Mandatory No Yes No Distributions Debt / Leverage Yes Limited Yes Other Businesses Yes Limited Strategic – Yes Financial – Unlikely New York City
  26. 26. REIT Creation Issues Issues on transition to create value from REIT conversion • Potential tax liability • Impact on remaining businesses • Constraints in implementing strategic plans New York City
  27. 27. Tax Issues Relative to Timberland REIT Conversion REIT conversion would require distribution of accumulated earnings and profits (E&P) • Required for any path to a REIT structure • Preliminary estimates of E&P range from $2–$3 billion • Taxable distribution to shareholders ─Typically 80% has been paid in stock with the remainder paid in cash to cover tax liability New York City
  28. 28. Tax Issues Relative to Timberland REIT Conversion (cont.) Business Purpose Test for corporate reorganizations • IRS requires valid business purpose beyond lowering tax liability • Cannot obtain advance IRS ruling • Failure could trigger $3–4 billion corporate tax liability depending on the value of the timber; also taxable to the shareholder New York City
  29. 29. Paths to a Timber REIT Structure Process Precedence Spin None in timber Spin / Merge GP / Plum Creek 1996–2001 Convert / Elect Rayonier / Potlatch New York City
  30. 30. Timber Tax Equity Timber tax proposal • 134 co-sponsors in the House; 29 in Senate • Bipartisan support with no opposition Why it’s best for Weyerhaeuser • Eliminates tax-related value gap at reduced risk • Avoids constraints of growing Timberlands and other business • Retains financial flexibility to execute corporate strategy and return cash to shareholders New York City
  31. 31. Conclusions Timberlands business continues to be value-creating for shareholders Highest value-creation is tax reform in the C-Corp structure At this time, a REIT structure is not the best alternative • Risk of incurring a large tax liability is high • Shareholder tax liability on distribution • Limits ability to execute current strategy — both within Timberlands business and the company Continue to monitor value of alternatives as legislative process evolves and strategic actions unfold New York City
  32. 32. Industry Outlook Lynn Michaelis Vice President, Markets & Economic Research and Chief Economist
  33. 33. Agenda for Industry Outlook Macroeconomic setting for forest products Outlook for • Wood Products • Cellulose Fiber (Pulp) • Containerboard, Packaging and Recycling New York City
  34. 34. Macroeconomic Setting for Forest Products Economic growth remains healthy Dollar decline resumes U.S. industrial production growth continues Inflation and interest rates move higher Housing starts peak New York City
  35. 35. Momentum Carries into 2006 Growth in World Real GDP Percent Change Forecast* 5 4 3 2 1 0 1992 1994 1996 1998 2000 2002 2004 2006 Annual Source: Global Insight, Weyerhaeuser* AMIOT03F New York City
  36. 36. Another Year of 3–4% Growth Growth in U.S. Real GDP Percent Change Forecast* 5 4 3 2 1 0 1996 1998 2000 2002 2004 2006 Annual Source: BEA , Weyerhaeuser* AMDGA01H New York City
  37. 37. Surge in Consumer Spending Fueled by Housing Refinance Boom U.S. Personal Savings Rate Percent 5 4 3 2 1 0 -1 1995 2000 2005 Annual Source: BEA AMDOT32D New York City
  38. 38. Dollar Decline Resumes in 2006 Euro Exchange Rate U.S.$/Euro (inverse) Forecast* 0.7 Euro (X = 5/04) introduce 0.9 1.1 1.3 1.5 1.7 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly QMIEU09F Source: Wall Street Journal, Weyerhaeuser* New York City
  39. 39. Current Account Deficit Got Even Bigger U.S. Current Account Balance as a Share of GDP Percent 1 0 -1 -2 -3 -4 -5 -6 -7 Q4 -8 1988 1992 1996 2000 2004 Annual Source: BLS AMDOT78D New York City
  40. 40. Weaker Dollar and Strong Growth Boost U.S. Industrial Production Growth in Weighted** Index for U.S. Manufacturing Production Percent Change Forecast* 4 2 0 -2 ** 80% non-durable; 20% durable -4 1998 1999 2000 2001 2002 2003 2004 2005 2006 Annual Source: FRB, Weyerhaeuser* AMDIP36E New York City
  41. 41. Inflation Remains Above 3% U.S. Consumer Price Index (CPI) Inflation Rate Percent Change Forecast* 4 3 2 1 0 1998 2000 2002 2004 2006 Annual Source: BLS, Weyerhaeuser* AMDIF01F New York City
  42. 42. Result: FRB Moves Short Rates Higher U.S. Interest Rates Pe rce nt Forecast* 10 Moody BAA Bonds 8 6 3-month Commercial 4 2 0 1997 1998 19 99 2000 2001 2002 2003 2004 2005 2006 Annual Source: FRB, Weyerhaeuser* AMDIR86G New York City
  43. 43. Easy Money Fueled Housing Boom U.S. Single-family Housing Starts Million Units Forecast* 1.8 1.6 Demographic Trend for 2000-10* 1.4 1.2 1.0 0.8 1992 1994 1996 1998 2000 2002 2004 2006 Annual Source: Census, Weyerhaeuser* AMDHO19N New York City
  44. 44. Very Positive Long-term Trends for Single-family Housing Starts Demographics Average home size Housing finance: Efficiency and flexibility New York City
  45. 45. Agenda for Industry Outlook Macroeconomic setting for forest products Outlook for • Wood Products • Cellulose Fiber (Pulp) • Containerboard, Packaging and Recycling New York City
  46. 46. Key Drivers for Lumber Demand primarily driven by residential construction — new and remodeling • Limited substitution Supply is more complex • Timber supply • Canadian delivered costs • Limited offshore competition New York City
  47. 47. Another Record Demand Year in 2005 Demand on North American Lumber Mills vs. Capacity Billion Board Feet 80 75 70 65 Capacity 60 55 Demand 50 1988 1991 1994 1997 2000 2003 Annual Source: RISI AWDNALGD01E New York City
  48. 48. Substitution Was Wood for Wood Lumber Usage in U.S. Single-Family Housing Board Feet/ Square Feet 8 Engineered Wood 6 4 Lumber 2 0 1995 2003 Annual AWDG32C Source: NAHB Housing Survey New York City
  49. 49. U.S. Lumber Output Keeps Growing U.S. Lumber Production Billion Board Feet 50 40.3 40 3.4 36 Other 34.3 3.0 3.1 30 18.6 South 16.7 15.8 20 6.6 Inland 6.6 6.6 10 11.8 West Coast 9.7 8.8 0 2001 2003 2005 Annual Source: WWPA AWDUSLGP10F New York City
  50. 50. U.S. Imports in Perspective U.S. Softwood Lumber Imports (Billion Board Feet) 2005 2002 2005 Share (%) Canada 19.1 21.5 34 Europe 0.6 1.4 2 South America 0.6 0.7 1 Other 0.6 0.9 1 _____ _____ ___ Total 20.8 24.5 38 Source: RISI New York City
  51. 51. Crucial to U.S. Lumber Price Outlook Canadian Exchange Rate U.S.$/C$ (inverse) Forecast* 0.60 (X = 5/04) 0.70 0.80 0.90 1.00 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: Wall Street Journal, Weyerhaeuser* QMICA09F New York City
  52. 52. Exchange Rate Offset Operating Improvements Production Costs for Average B.C. Interior Mill ($/MBF) 2002 2005 Q4 Mfg. Cash Cost (C$) 291 275 Exchange Rate (C$/USD) 1.57 1.18 Mfg. Cash Cost (USD) 185 234 Source: RISI New York City
  53. 53. Prices Approached Cost Floor in Late 2005 Spruce-Pine-Fir 2x4 Lumber Price $/MBF 450 (X = April) 400 350 Reported Random Lengths 300 250 Estimated 200 Mill Net Cost Support in 2005 150 Cost Support in 2002 100 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: RISI Mill Survey, Random Lengths QWDCLP07E New York City
  54. 54. Tentative Agreement Was Reached April 27, 2006 Only rough structure of the deal is known, 2-3 months before full detail and agreement takes effect Most of accrued duty will be returned to producers — 80% to Canadian producers New York City
  55. 55. Tentative Agreement Was Reached April 27, 2006 Only rough structure of the deal is known, 2-3 months before full detail and agreement takes effect Most of accrued duty will be returned to producers — 80% to Canadian producers Structure is a combination of export tax and volume restriction, where province can choose an option • Option A: allows shipment of up to 34% of U.S. market and sliding export tax tied to lumber price • Option B: has lower export tax than Option A but has progressively smaller market share as price declines New York City
  56. 56. Tentative Agreement Was Reached April 27, 2006 Only rough structure of the deal is known, 2-3 months before full detail and agreement takes effect Most of accrued duty will be returned to producers — 80% to Canadian producers Structure is a combination of export tax and volume restriction, where province can choose an option Bottom line: 10-15% export tax at cyclic bottom New York City
  57. 57. U.S. Prices Track SPF Prices Douglas Fir 2x4 Green vs. Spruce-Pine-Fir 2x4 Mill Lumber Price $/MBF 500 Douglas Fi Green Spruce-Pine-Fir 450 400 350 300 250 (X = April) 200 1995 1997 1999 2001 2003 2005 2007 Quarterly Source: Random Lengths QWDWLP06A New York City
  58. 58. Reflects Lumber Prices and New Capacity Douglas Fir/Domestic No. 2 Sawmill, Western Oregon and Washington $/MBF (X = April) 700 600 500 400 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: Log Lines QTLP24A New York City
  59. 59. Key Drivers for Oriented Strand Board (OSB) Demand primarily driven by new residential construction Substitution for plywood New capacity growth continues New York City
  60. 60. Demand Pressed Capacity Limit in 2003–05 North America OSB Demand vs. Capacity Billion Square Feet 30 25 Capacity 20 Demand 15 10 1995 1997 1999 2001 2003 2005 Annual Source: RISI AWDNAPGD38G New York City
  61. 61. Keeping Prices High N.C. Oriented Strand Board 7/16quot; Price $/MSF 500 400 300 April 200 100 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: Crow's QWDPNLP04E New York City
  62. 62. Costs Reflect Energy, Resin and Exchange Rates Variable Cost for an Average OSB Mill* (7/16”, $/MSF) 2002 2005(e) % Change U.S. South 116 144 24 Eastern Canada 88 140 59 * Based on RISI Survey Data New York City
  63. 63. Engineered Products Demand Continues to Grow North America I-Joist Demand Million Lineal Feet 1500 1000 500 0 1996 1998 2000 2002 2004 Annual Source: RISI AWDG27G New York City
  64. 64. Agenda for Industry Outlook Macroeconomic setting for forest products Outlook for • Wood Products • Cellulose Fiber (Pulp) • Containerboard, Packaging and Recycling New York City
  65. 65. Key Drivers for Cellulose Fiber (Pulp) Global Market: Demand growth near 3% • Economic growth • China shift to wood pulp continues • Tissue and fluff end-uses New York City
  66. 66. China Demand Growth Averaged 20% per Year for 2000–05 Period China Imports of Bleached Kraft Pulp Million Metric Tons 6 Softwood Hardwood 5 4 3 2 1 0 2002 2003 2004 2005 Annual Source: Weyerhaeuser APLOTG49A New York City
  67. 67. Fluff Market Growing 3–4% per Year Fluff Market Pulp Consumption by Region Million Tons 4 Rest of World 3 Rest of Asia Japan 2 Europe 1 North America 0 2000 2005 Annual Source: Weyerhaeuser APLOTG02F New York City
  68. 68. Key Drivers For Cellulose Fiber (Pulp) Global Market: Demand growth near 3% Capacity / operating rate • Exchange rate is critical to price outlook • Continued expansion in hardwood capacity New York City
  69. 69. Scan Costs Higher in U.S. Dollar Terms Manufacturing Costs for Bleached Softwood Kraft Pulp $/Tonne 600 Typical Mill U.S. 500 Canada Sweden 400 300 200 100 0 2002 2005-06 Source: Weyerhaeuser APLOTP84A New York City
  70. 70. Softwood Capacity Declines in 2006 Change in World Capacity Bleached Softwood vs. Bleached Hardwood Percent Change 8 Estimated* Softwood Hardwood 6 4 2 0 -2 2003 2004 2005 2006 Annual Source: PPPC, Public Announcements* APLOTG51F New York City
  71. 71. Pulp Prices Reflect Demand and Exchange Rates NBSKP vs. Eucalyptus Delivered Northern Europe $/Metric Ton 800 NBSKP Eucalyptus 700 600 500 400 (X= April) 300 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: RISI QINDP05A New York City
  72. 72. Agenda for Industry Outlook Macroeconomic setting for forest products Outlook for • Wood Products • Cellulose Fiber (Pulp) • Containerboard, Packaging and Recycling New York City
  73. 73. Key Drivers for Containerboard, Packaging and Recycling Nondurable industrial production Capacity / operating rate crucial to prices New factor for OCC prices: Energy costs for OCC plants New York City
  74. 74. Box Shipments Track Industrial Production Weighted* Industrial Production and Annual Growth of U.S. Box Shipments Average Annual Percent Change 4 Industrial Production Box Shipments 3 2 1 0 * 80% non-durable; 20% durable -1 1993-1997 1998-2003 2004-05 Source: Fibre Box Association, FRB ACBBX G82L New York City
  75. 75. No Capacity Growth Since 1997 U.S. Containerboard Capacity Average Annual Percent Change 5 4 3 2 1 0 -1 1993-97 1998-2003 2004-05 Annual Source: AF&PA ACBOTG10H New York City
  76. 76. Results in Another Very Tight Year Containerboard Operating Rate Percent 100 Tight Market 95 90 85 80 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: AFPA QCBOTG09E New York City
  77. 77. The Bottom Line: Box Prices Will Follow U.S. Corrugated Box Price vs. Eastern U.S. Linerboard Price Box Liner $/MSF $/Short Ton 60 520 500 Box (left) 58 April 480 Liner (right) 56 460 440 54 420 52 400 380 50 360 48 340 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: RISI and FBA QCBOTP01A New York City
  78. 78. China’s OCC Demand Continues to Grow China OCC Imports Million Metric Tons (Annual Rate) 10 Total 8 From U.S. 6 4 2 0 1996 1998 2000 2002 2004 Annual Source: EU Consulting, China Foreign Trade Report ARCOCCG14A New York City
  79. 79. Why Did OCC Prices Fall? Recovered Paper OCC Price (Grade 11) (F.O.B. Packing Plant) (Chicago) $/Short Ton 120 100 80 April 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 Quarterly Source: Official Board Markets QRCOCCP16B New York City
  80. 80. Energy Cost Increase Hit OCC-Based Plants Comparison of Virgin* vs. Recycled* Plant Costs Manufacturing Cost Energy $/SWT Other Manufacturing 300 Fiber 250 200 150 100 50 0 2003-04 Virgin 2005.4 Virgin 2003-04 Recycle 2005.4 Recyle * Lower cost mills ARCOCCP14C Source: Weyerhaeuser New York City
  81. 81. Summary of Key Messages Overall economic growth remains strong, but inflation and interest rates move higher Housing and wood products enter cyclic decline Higher delivered cost for Canadian lumber Modest cycle in U.S. timber values Pulp prices benefit from exchange rates and improving operating rate Containerboard and packaging markets do very well Overall message: normal shift near cyclic peak of economy New York City
  82. 82. WRECO and iLevel Dan Fulton President, Weyerhaeuser Real Estate Company
  83. 83. Weyerhaeuser Real Estate Company Single family homebuilding • Retail business — sell direct to final customer • Local / regional focus • Operate in select markets Builder finance • Investment manager of and investor in development financing for mid-sized homebuilders New York City
  84. 84. Business Definition Homebuilding Pardee Quadrant Trendmaker WRECO Winchester Maracay Builder Finance WRI New York City
  85. 85. Business Definition — WRECO Operations Office Locations Maracay Pardee Quadrant Trendmaker Winchester New York City
  86. 86. Business Definition Homebuilding Pardee Quadrant Trendmaker WRECO Winchester Maracay Builder Finance WRI New York City
  87. 87. Business Definition New York City
  88. 88. WRECO Land Strategy Most of our markets are land constrained Increasing regulation extends elapsed time for entitlements Land managed as “just in time” whenever possible Current Lot Pipeline 5.7 years’ sales • 45% of lots are owned Increasing use of land option contracts • Limits risk and upfront capital requirements
  89. 89. WRECO Land Strategy (cont.) Selling land is part of our business Disciplined focus on ROI • Optimizes balance between margin and asset turnover
  90. 90. WRECO Growth Roadmap Organic growth is the Base Case for our growth strategy Strategic Direction Implementation Market Penetration Incremental Investment in Existing Markets Organic Growth New Products Condominiums, Age-Restricted (Base Case) New Brands Camberley Homes Adjacent Markets Portland, OR. (Quadrant) Adjacent Markets Leverage Brand Equity Northern California (Pardee) Leverage Existing Management Acquisition New Markets Phoenix (Maracay Homes, Feb 2006) Start-up
  91. 91. WRECO Is Positioned to Succeed Long-term favorable outlook for single-family housing WRECO is a top performer • Select markets • Proven land strategy • Experienced management team • Focus on financial performance • Leading financial results Linkage to Weyerhaeuser New York City
  92. 92. Homebuilding Industry Continues to Evolve Homebuilder consolidation Market demanding higher quality and more efficient solutions Homebuilder adoption of innovative building methods • Regionally distinct construction methods • Shortage of qualified labor Expectations for future margins New York City
  93. 93. Homebuilders Continue to Consolidate Production Builder Market Share % of total closings 40 35 Top 100 – 37% 30 25 20 Top 10 – 21% 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: Builder Magazine New York City
  94. 94. Key Advantages of Large Homebuilders First look at land and partnership deals Product and geographic diversity Strong balance sheets Scale to leverage processes and supply agreements Expertise to underwrite, control and process land Attract and retain high talent work force Greater relative investment in technology New York City
  95. 95. Weyerhaeuser is a Leading Producer of Residential Building Materials 2005 Total 3rd-Party Sales = $9.4 Billion Other Products 23% Softwood Lumber Plywood / Veneer 39% 8% Oriented Strand Board 12% Engineered Lumber Panels 18% New York City
  96. 96. Is Positioning for the Future Integration: 5 businesses into 1 Innovation: Driving profitability of our customers Interaction: Transforming the way we do business Information: Increasing the transparency of data
  97. 97. Value Proposition Overview Products and services aimed at the residential market segment • Improve efficiency of design process • Optimize the structural frame • Reduce jobsite waste and call-backs • Compress the build cycle time Improve coordination across the supply channel Balance common processes with unique regional needs Capture the full value of Weyerhaeuser integration New York City
  98. 98. Directed at the “Sweet Spot” of Homebuilders’ Cost Construction Labor Materials & 20% Indirect 28% Marketing/Advert. 6% Overhead 6% Financing/other Land and related 2% Profit 22% 16% Source: Professional Builder Magazine, May 2006 (average of 6 th -31st largest builders) New York City
  99. 99. Strategic Validation Harvard University, Joint Center for Housing Studies Key Findings: Homebuilder Distribution Study, 2005 Many builders have not yet implemented practices to promote efficient distribution operations Larger builders are early adopters, but have difficulty implementing innovative practices companywide Builder performance can be improved by adopting innovative product and distribution practices New York City
  100. 100. Expected Benefits % 100 Proprietary Product, >20% Solutions and Whole House 80 Service Differentiated Margins 60 40 Commodity <8% 20 0 Current Sales 2010 Sales
  101. 101. Is All About Anticipating Change “You need to skate to where the puck is going to be.” Wayne Gretzky (and Lee Alford, Senior Vice President, Residential Wood Products) New York City
  102. 102. Operating Excellence and Margin Improvement Rich Hanson Executive Vice President, Chief Operating Officer New York City 102
  103. 103. Timberlands Generating higher returns through • Intensive silviculture • Aggressive portfolio management New York City 103
  104. 104. Operating Excellence and Margin Improvements Leveraging scale and capability to reduce cost • Transportation • Inventory management • Procurement Demand driven • Separating marketing / sales from supply • Optimizing supply system to meet demand at lowest cost New York City 104
  105. 105. Wood Products Prior Strategy iLevel Strategy Production orientation Demand driven Product focus Residential structural frame focus Multiple sales forces Single point of contact Distinctive product Innovative product and orientation with service solutions multiple brands for the builder • Floor, wall, roof • Whole house design • Technology enabled
  106. 106. Containerboard Packaging Prior Strategy New Strategy Market segments established as Individual box profit centers plant driven Integrated supply organization delivers against demand at the lowest cost Leveraging scale
  107. 107. Containerboard Packaging Facilities Mexico
  108. 108. Containerboard Packaging Facilities North Central Region / 5 Zones White Bear Lake Fridley Manitowoc Warren St. Paul Three Austin Rivers Chicago Rockford Waterloo Aurora, Montgomery Cedar Rapids Omaha Lincoln St. Joseph Kansas City Belleville Maryland Hts.
  109. 109. Containerboard Strategy Benefits Better box plant utilization • 76% today, moving to 90% Capital spending focused on cost reduction and asset optimization • 80% of depreciation Improved margins and higher returns • Higher productivity • Lower costs • Centralized approach to pricing • Technology solutions for key markets New York City 109
  110. 110. Improving Returns Demand-driven strategies Leveraging our scale • Asset utilization matched to demand • Improving productivity and reducing costs Effective capital deployment New York City 110
  111. 111. Financial Priorities Dick Taggart Executive Vice President, Chief Financial Officer New York City 111
  112. 112. Financial Priorities Priorities for free cash flow • Return capital to shareholders • Selective growth Maintain operating capital spending discipline New York City 112
  113. 113. Weyerhaeuser Company Annual Analyst Meeting Steve Rogel Chairman, President and Chief Executive Officer
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