Louisiana-Pacific Corp (LPX) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Louisiana-Pacific Corporation fourth-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this call may be recorded.

I would now like to your host for today's conference, Sallie Bailey, Executive Vice President and Chief Financial Officer. Please go ahead, ma'am.

Thank you very much, Christie, and good morning. Thank you for joining our conference call to discuss LP's financial results for the fourth quarter and full year of 2016. I am Sallie Bailey, LP's Chief Financial Officer, and with me today are Curt Stevens, LP's Chief Executive Officer; Brad Southern, LP's Chief Operating Officer; as well as Mike Kinney and Becky Barckley, our primary Investor Relations contact.

I will begin the discussion today with a review of the financial results for the fourth quarter and full year for 2016. This will be followed by some comments on the performance of the individual segments and selected balance sheet items. After I finish my remarks, Curt will discuss the general market environment in which LP has been operating and provide his perspective on our operating results and gives some thoughts on the outlook.

As we have done in the past, we've opened up this call to the public and are doing a webcast. The webcast can be accessed at www.LPCorp.com. Additionally, to help with the discussion, we have provided a presentation with supplemental information that should be reviewed in conjunction with the earnings release. I will be referencing these slides in my comments this morning.

We have filed an 8-K this morning with some supplemental information and plan to file our 10-K next week.

I want to remind all participants about the forward-looking statements comment on slide 2 of the presentation. Please also be aware of the discussion of our use of non-GAAP financial information included on slide 3 of the presentation. The appendix attached to the presentation has some of the necessary reconciliations that have been supplemented by the Form 8-K filing we made this morning. Rather than reading these two statements, I incorporate them with this reference.

For 2016, LP is reporting our highest adjusted EBITDA since 2005, when housing starts were almost 1 million higher than they were in 2016. LP reported revenue of $2.2 billion and adjusted EBITDA of $346 million for 2016. Our siding segment had another record year, with net sales of $752 million, $154 million of adjusted EBITDA, and an adjusted EBITDA margin of 20.5%. With improved OSB pricing from 2015 and siding growth, we reported 2016 adjusted EBITDA margins over 15%.

In addition to the strong earnings and cash flow in 2016, we also cleaned up our balance sheet, refinanced our debt, lowered the interest rate and extended the maturity another four years, and identified significant research tax credits. With that, let me go into the details.

Moving to slide 4 of the presentation for a discussion of the fourth-quarter and full-year 2016 consolidated results. We are reporting net sales of $550 million for the fourth quarter of 2016, a 19% increase from the net sales of $463 million reported in the fourth quarter of 2015. The fourth quarter we recorded net of $42 million, or $0.29 per diluted share, compared to a loss of $8 million, or a $0.05 loss per diluted share, in the fourth quarter of 2015.

The adjusted income from continuing operations for the quarter was $32.8 million, or $0.23 per diluted share, based upon the normalized tax rate of 35% as compared to $1 million, or $0.01 per diluted share, recorded in the fourth quarter of 2015. Adjusted EBITDA from continuing operations was $85 million in the quarter compared to $35 million in the fourth quarter of 2015.

For the year ended December 31, 2016, we recorded net income of $150 million, or $1.03 per diluted share, compared to a net loss of $88 million, or a loss of $0.62 per diluted share, for 2015. The adjusted income for the year was $130 million, $0.89 per diluted share based upon the normalized tax rate of 35%, compared to adjusted loss of $46 million, or a loss of $0.32 per diluted share, in 2015. Adjusted EBITDA from continuing operations was $346 million for 2016 compared to $67 million in 2015.

Moving on to slide 5 and a review of our segment results, beginning with OSB. OSB reported net sales for the fourth quarter of 2016 of $276 million, up 34% from $206 million of net sales in the fourth quarter of 2015. OSB reported operating income of $60 million compared to operating income of $11 million in the fourth quarter of 2015.

Adjusted EBITDA from continuing operations was $74 million compared to $25 million in 2015. We had a 15% increase in sales volume and pricing for OSB was higher by 16%, which resulted in improving operating results by $39 million.

For the full-year, OSB reported net sales of just over $1 billion compared to $808 million, up 27% from the prior year. OSB reported operating income of $186 million for 2016 compared to an operating loss of $46 million in 2015. Adjusted EBITDA for 2016 was $246 million, compared to $12 million in 2015.

Sales volumes increased 3% and sales prices increased 25%. The increase in selling price favorably impacted operating results by $204 million. And in addition to the increase in selling price for the year, a reduction in raw material costs related to petroleum-based raw materials and improved operating efficiencies favorably impacted the segment's results.

Slide 6 reports the results of the siding business. We reported a record fourth quarter and record year. This segment includes our SmartSide and CanExel siding products as well as OSB produced on one line at our Hayward, Wisconsin, operation.

The siding segment reported sales of $169 million, a 20% increase from the fourth quarter of 2015; operating income of $22 million; and adjusted EBITDA of $29 million. Significant improvement from the $14 million of operating income and the $19 million of adjusted EBITDA for the fourth quarter of 2015.

For the quarter, SmartSide average sales prices were up 4% and volumes increased 18%. Volume increase in our SmartSide siding line due to increased availability of our SmartSide siding product following the conversion of our Swan Valley OSB mill. As a reminder, it was estimated that the expenses occurred at the Swan Valley facility during the fourth quarter of 2016 related to that conversion and also market-related downtime were approximately $6 million.

The siding segment produced about 39 million feet of OSB at our Hayward facility during the fourth quarter of 2016, compared to 19 million feet in the fourth quarter of 2015. For the year, the siding segment reported sales of $752 million, an increase of 18% from $636 million reported in 2015. The siding segment reported operating income of $126 million compared to $93 million and adjusted EBITDA of $154 million as compared to $114 million in 2015.

SmartSide sales prices were flat and volumes were up 16%. The improvement in the siding segment's results were due to the higher volumes as well as lower raw material and operating costs.

Please turn to slide 7 of the presentation, which shows the results of our engineered wood products segment. This segment includes I-joists, laminated strand lumber, laminated veneer lumber, OSB produced at our Houlton, Maine, facility, plus other related products. This segment also includes the sale of I-joists and LVL products produced by the Abitibi joint venture or under sales arrangement with Murphy plywood.

The engineered wood products segment recorded sales of $66 million in the fourth quarter of 2016, down from $75 million in the fourth quarter of 2015. The segment's results were a loss of $4 million in the fourth quarter of 2016 as compared to breakeven in the fourth quarter of 2015. For the fourth quarter of 2016, adjusted EBITDA from continuing operations was negative $1 million, as compared to adjusted EBITDA of $3 million in the fourth quarter of 2015.

Volumes of I-joists were down 14%, while volumes of LVL and LSL were down 12% compared to the same quarter last year. Pricing was up 3% in LVL and LSL and up 2% in I-joists.

For the year, sales were $297 million, up from $286 million in 2015. The segment's operating loss in 2016 was $6 million as compared to $7 million in the same period of 2015 and adjusted EBITDA improved to $8 million for 2016 from $6 million in 2015.

Moving on to slide 8 of the presentation. For the quarter our South American segment recorded sales of $34 million, flat with the fourth quarter of 2015. Operating income was $2 million and adjusted EBITDA was $4 million for the fourth quarter of 2016, both lower than the fourth quarter of 2015, primarily due to costs associated with the construction of the third Chilean mill of approximately $3.5 million.

Volumes in Chile were down 3% and volumes in Brazil were down 8% compared to the same quarter last year. The sales volume decrease in Chile was due to weakened housing demand and in Brazil due to continued economic recession in their local market.

Pricing was up 8% in Chile and up 12% in Brazil. In local currency, Chile's pricing was up 3% compared to the same quarter in 2015 and Brazil's pricing decreased by 6%.

For the year, our South American segment recorded sales of $137 million as compared to $135 million in 2015. Operating income was $17 million for 2016 compared to $10 million in 2015. Adjusted EBITDA increased $26 million from $18 million in the same period of 2015.

Total selling, general, and administrative expenses were higher for the fourth quarter and the full year of 2016 as compared to the same periods in 2015. The primary reason for the increase in these expenses is due to increases in management compensation incentives for 2016 and higher costs associated with sales and marketing.

Turning to the balance sheet, we completed the acceleration of notes receivable and the notes payable associated with the timber notes in the fourth quarter. And as a result of this transaction we accelerated the receipt of $41 million of cash. The repayment of the timber notes was quite visible on our balance sheet, with the balance of long-term debt, excluding the current portion, declining from $752 million at the end of 2015 to $374 million at the end of 2016.

Accelerating the gain also caused the acceleration of $121 million of income taxes associated with the gain on the sale of timber from 2003. We anticipate offsetting much of the accelerated income tax with available carryover benefit.

Please refer to slide 9 of the presentation. As of December 31, 2016, we have cash, cash equivalents, investments, and restricted cash of $677 million; working capital of $788 million; net cash of $317 million; and we had $2 million of availability on our credit facility. Capital expenditures for 2016 were $125 million and net cash flow for the year was $225 million.

We are budgeting capital expenditures for 2017 between $175 million and $200 million. This includes funding for the third mill in Chile, as well as funding for current siding capacity optimization, as well as additional siding capacity.

As I mentioned on our last call, we anticipate beginning to pay cash taxes in 2017. The US represents approximately 70% to 75% of our operating income. We don't anticipate paying cash taxes in Canada due to our net operating losses. The benefit amount of our available Canadian net operating losses was $53 million at the end of 2015.

With that, I would like to turn the call over to Curt for his comments.

Thank you, Sallie. Good morning and thanks for joining us on today's call, which I know is a little earlier than normal.

I will start with our safety performance. 2016 was the second-best safety year in LP's history, with a total incident rate of 0.39. Amazingly, this marks the 10th consecutive year that LP has had a TIR below 1.0 and is the sixth year out of the last seven we've been below 0.5.

Today I will be providing comments on our results and accomplishments in the fourth quarter and for the full year of 2016, give you my views on housing and the outlook for 2017, provide our thoughts on capital allocation, and try to answer your questions about what the new administration will mean to LP's business in the future. This certainly could be a challenge.

I know that Sallie just went through our financial results in detail, but I need a chance to talk about these great numbers briefly. Total sales in Q4 were 19% higher than Q4 of last year and produced net income of $48 million. For the year, total sales were $2.2 billion, 18% increase over last year. Net income was $156 million and diluted earnings per share $1.03.

All business segments recorded positive EBITDA in 2016 that totaled $346 million for the Company. And with all that was accomplished with housing starts increasing less than 5%.

In addition to our outstanding safety performance and the financial results, Q4 was a busy quarter for us. We completed the mill swap in Quebec with Norbord and acquired a manufacturing site in Minnesota that gives us additional flexibility to add capacity to support the growth in our siding business.

Sallie mentioned we collapsed the timber notes during the quarter, which cleaned up our balance sheet, greatly reduced notes receivable from asset sales and confusion related to the amounts of notes payable, plus the release of $41 million in cash.

Organizationally we did name Brad Southern as our Chief Operating Officer in early November, followed by a change in leadership that was effective January 1 in our three North American businesses. The growth of our siding business, as we reported a nearly 20% increase in Q4, was also noted.

As I said earlier, housing starts through 2016 were higher by only 4.9% over the prior year, an increase that was less than half of the forecast at the beginning of the year. However, the mix between multifamily and single-family moved in our favor with single-family growing at 9.3%, while multifamily declined by 3%.

Also, as permits are a leading indicator, we were pleased to see an increase of 7.1% for single-family year over year, while multifamily declined 9.3% compared to the last year. The current consensus for 2017 is 1.263 million, an 8% increase over last year.

In Canada, 2016 starts were up slightly, while the forecast for 2017 is again slightly higher for a total of about 200,000 units.

Other economic news related to construction is a bit mixed. The weekly average rate for 30-year fixed mortgages was 4.12% for the week ended January 13. This compares to a rate of 3.47% at this time last quarter.

The inventory of both new and existing homes for sale is at historic low levels. The value of nonresidential construction put in place was $712 billion, the highest since the Great Recession. Consumer confidence remains high and the unemployment rate ended the year at 4.7%. Retail sales of building materials and garden equipment were up almost 6% in 2016.

I just spent the last two days at the policy advisory board meeting of the Harvard Joint Center for Housing Studies in Washington, DC, and had a chance to attend the International Builders' Show last month. There are a few key themes that emerged from these discussions.

Labor availability, as well as the quality of the labor, and the negative impact of aggressive enforcement of immigration has everybody scared. On the regulatory side, it's clear that there are too many, they are too complicated, and it adds too much expense in housing.

Multifamily starts will continue to decline. Rents have been flat for 12 to 18 months, while their costs are rising. Watch out for inflation and the infrastructure spending and increasing debt. Housing availability is a major issue in many of our urban markets, as is the low inventory of houses for sale.

[Zolmish and Annisley], the participants at the meeting the last two days, expect 5% to 7% growth, all of that being in single-family and housing starts, and 4% to 7% growth in repair and remodel.

As many other CEOs have done in the last few weeks, I do want to provide a few comments on the possible implications that could result from the recent change in administration. Trying not to be political here; I'm trying to focus on the economy and our business interests.

On immigration, any actions that limit the availability of workers will not be good for housing. This is also true on the demand side if we further limit access to immigrants. The withdrawal from the TPP, the plan to renegotiate NAFTA, and the constant threats around punitive duties for products from Mexico, Canada, and China will raise the cost of living for our employees.

The selective duties threatened against US companies who choose to produce elsewhere is also very scary. I do think the new administration will take a more balanced approach to regulations and enforcement and appears to be focused on changes in tax policy to make the US more competitive. I applaud all these efforts with the caveat that the border-adjusted tax suggested in the Ryan blueprint could have a negative impact on our Canadian operations.

We have seen a 0.75 point rise in interest rates since the election. There is also talk of Fannie Mae and Freddie Mac being once again privatized. On the positive side, changes and modifications to Dodd-Frank or the Consumer Financial Protection Bureau could allow financial institutions to increase the access to credit.

Sallie and I, in our recent discussions with investors, we've been asked a lot of questions around capital allocation. I'd like to just take a few minutes to discuss.

We do believe that our credit profile should support higher ratings from Moody's and Standard & Poor's. Sallie and her team will be meeting with them for an update later this quarter. In both their comments, they highlight the volatility of OSB pricing as a reason to discount the rating.

With our growing siding business, we may be able to blunt this in the future. We do not believe we are being penalized by the market for the lower rating, as evidenced by our 4 7/8% bond issuance last September with very limited covenants. With over $675 million in cash and investments along with the available credit under our banking arrangements, we are in a very strong position to fund internal growth, pursue acquisitions, or return cash to shareholders via dividends or share repurchase.

We did review this topic in depth with our Board at our meeting last week. Based on this discussion, we are aligned on our short-term priorities. As Sallie mentioned, our capital investment plan for this year is between $175 million and $200 million and includes maintenance capital of around $75 million with the remainder being growth or cost-out projects including continued construction of the third mill in Chile, beginning work on the next siding mill, and expanding our siding capabilities at our existing mills.

We continue to look at adjacent acquisitions that would add to our capabilities and we are a buyer of existing OSB mills that can be converted to siding should any be available. The $100 million share repurchase authorization is still in place, although we haven't yet purchased any shares. We did discuss and review the implications of implementing at this level or increasing, but have no short-term plans to do so.

We have also looked at reinstating either a fixed or variable dividend, but both present some challenges. The data shows that the building construction sector has the lowest average dividend yield at 1.1% and that a dividend has very little impact on the stock price.

So our priorities are clear: accelerate the growth of siding, acquire OSB if available, look for acquisitions that enhance our current competitive position or are complementary to our businesses, and implement high-return capital projects. And do this in the context of transitioning from a traditional forest products company to a building products company with the intended increase in multiple.

As to the priorities for this quarter, we have seen a slight decline in OSB prices, but we started the year stronger than we anticipated. Also, late last week we saw pricing firm and random links midweek showed high single-digit increases in most regions. As in the past, weather will be a major factor on the demand side in Q1 as the Pacific Northwest and Northern California were virtually shut down by winter storms for two weeks in January.

We've seen the demand for our siding projects and will be implementing selective price increases over the next several quarters. Construction continues on our third mill in Chile. In preparation for this additional capacity, our team in South America is preparing to open sales offices in Peru, Argentina, and Colombia later this year. We are completing our engineering and operational analysis for the next siding mill and should be in a position to identify the site or sites on the next call.

Following our annual internal sales meeting and a well-attended International Builders' Show last month, our sales and marketing folks are out there aggressively pursuing new business to keep us on the growth trajectory.

With that, let me turn it back over to Sallie for some questions and answers.

Great. Thank you, Curt. Christie, we would like to take questions now, if we could go to the queue.

(Operator Instructions) Mark Connelly, CLSA.

Thank you, two things. Can you give us a sense of the rough split of your siding products right now between new construction and R&R? And if housing does keep up with single-family the way you are expecting, is that going to be a significant shift towards R&R in 2017 or away?

From a percentage of sales, we are roughly 40% new construction and that would include both single and multifamily. Then the R&R side is actually a smaller piece of that. The R&R side -- can't really tell with the home centers, but R&R is probably in that 20%. And the rest would be going to nontraditional structures like the shed business that we have and outdoor building. So we do see a big potential in R&R.

On the new home construction side, as we grew 6% last year -- sorry, less than 5% on housing starts, we think we probably did double that as a volume increase in new construction. So we are seeing some penetration as well as getting the lift from housing starts.

Okay, that's fantastic. Just one more question. Can you talk about your current expectations of fiber and resin costs in this next quarter, in the first quarter?

Yes, the fiber costs are going to be relatively flat. We are seeing a little bit of an increase in resin costs. Principally MDI and benzene costs have gone up, but I don't -- it shouldn't be meaningful in the first quarter.

Super, thank you.

Chip Dillon, Vertical Research.

Good morning. First question has to do with the -- you mentioned -- just so I hear this right, you would likely identify I guess what would be the fourth siding plant on the next call, so I would assume this would include as a possible candidate the Cook site you bought or something else. Is that the way to think about that?

I think it's still -- think about the Cook site, think about Val-d'Or, and think about any of our other Aspen-based OSB mills.

Okay, got you. I thought -- Oh, I see, okay. I thought the -- just so I understand, so will this be the third plant or the fourth plant you're talking about?

Well, we actually have five strand-based siding plants now. We have the Swan Valley, our Hayward, and then the three smaller mills in Tomahawk, Newberry, and Two Harbors.

Got you, okay. So really -- I see what you're saying. So basically it will be Val-d'Or or Cook as the next one.

And then, let's say you identify that; if you stay on your growth plan, I would assume you would want to have that up and running sometime late next year. Is that fair, for the 2019 season, or am I delaying that too long?

No, that's fair and that's -- the work we are going through -- we may have to do work on both of those because a Val-d'Or conversion is much quicker, which would meet the timeline you're talking about. Cook would be a brownfield site and it would take longer than that, and we don't want to have a lack of capacity. So you likely will hear that we will do both in a sequenced manner.

Got you, got you. So maybe we would see one up and running sometime in 2018 and the other maybe in like 2020 or 2021, based on the way you see the market growing?

Could be even sooner than that. Val-d'Or is a small mill, so we think that gives us maybe a year and a half of production.

Got you. Okay, that's helpful. Then looking at the engineered wood products business, I just didn't know if you had any kind of update in terms of how we should think about that for the long term.

Unlike what we are seeing in OSB and siding, is it still fair to say that's sort of a toggle-type situation? Toggle meaning that we got to hit a certain level of housing starts or lumber prices before we really see that contributing.

It's been a dilemma during the downturn because it's been so heavily tied to single-family new construction, particularly where it's not on slab so you have a raised floor, which raised floor is mainly up in the north. What we've done with our engineered wood business -- and we announced this when we announced the changes in our general manager structure -- is we have actually given the assignment to Mike Sims, who has been our Senior Vice President of Marketing and Sales. He now is also the General Manager of EWP.

We are doing a lot of things to restructure the cost basis there and to look at opportunities to drive costs out further. It has been an underperforming business, largely because housing hasn't come back and we have a lot of excess capacity, but we are definitely focused on that to increase the returns.

The other thing I will remind you is we also have capacity that we sell that we don't own all of. We have a joint venture in I-joists and then in LVL we actually buy from Murphy plywood and we remarket that. So we don't get the full manufacturing margins on those.

Chip, while I think it's fair to say it was a disappointing fourth quarter, if we look at the full-year results, we do see some improvement there both in terms of sales as well as the adjusted EBITDA and a 50 basis point improvement in the adjusted EBITDA margin. And so it's pretty consistent with what we've been saying if housing starts get to 1.2 million.

Real quickly, the start-up costs you mentioned in Swan, that was in the fourth quarter of 2015, not 2016, right?

Yes, that was the fourth quarter of 2015, that's correct. But it was --

I got you. I'll turn it over, thank you.

George Staphos, Bank of America Merrill Lynch.

Thanks, everyone. Good morning. Congratulations on the year. Thanks for the details.

First question really, maybe just segueing off of Chip's question on EWP, is there a way to quantify what the impact of inflation and inputs were for EWP in the quarter, either sequentially or year on year? I got to imagine that was a little bit of also an offset in terms of why you didn't see a perhaps even better performance.

You know, George, our performance in EWP quarter over quarter really was more about demand. And if you think about the fourth quarter of last year, we had strong utilization and we were changing distributors and we were selling more products. We were changing Canadian distributors.

We think again in the third quarter 2016 we also saw some changes in our dealer distribution strategy. We think potentially those dealers were pre-stocking sort of or getting their stocking levels to the right amount so they had just less demand in the fourth quarter. So our conversations actually around our EWP business have been very demand-focused.

And, secondarily, we did see some improvements in our volumes in the US, but where we really performed less than we anticipated was in our Canadian sales.

George, I think if you look at overall EWP, the business was down 10% in the fourth quarter for the industry, so we were pretty consistent with the volumes being down with the industry.

Okay. I didn't want to overdo it, obviously given the rest of the business is much larger, but I would've expected maybe higher OSB prices might have leeched into the margins there or other inputs. But it doesn't sound like that was the overriding factor from what you're saying.

No, it was really volume. They had an impact, and I can't quantify it for you, but it was really the volume. (multiple speakers) want to say is our laminated strand lumber we had a record production year for laminated strand lumber, so we are seeing the adoption of that product.

And that helps our cost as well.

Sure. Appreciate that, Sallie. I guess next question, since we're on the topic of cost, obviously you've had some nice improvement in demand and price realizations in OSB year on year and I want to get to that in a minute.

But from a manufacturing standpoint, you touched on improving operating efficiencies in the OSB mills. Can you quantify or talk maybe with a little bit more direction or color in terms of what you are doing to lower manufacturing costs, breakeven levels within OSB, during obviously what is a much better environment than we had, say, five, six, seven years ago?

Well, the first thing is coming from the demand side, because as we utilize our mills more we're going to drive the cost down because we can get more throughput. We took fewer down days in 2016 than we did 2015.

And we do focus on the operating efficiencies, so we are looking at unplanned, unscheduled downtime. We are looking at run rates; we're looking at line speeds. So we are doing all those things that, frankly, our competitors are also doing.

So the benefit this last year was on some selective capital projects that did reduce our cost. We put very little capital during the downturn into our business to drive costs down because it wasn't meaningful because extra production didn't help you. So we're focused on getting our mills up to their operating levels and getting the utilization up; that's really what is done in OSB.

Okay. In the quarter, Curt, could you talk about what mix or other factors were impacting realizations in OSB relative to just the published indices?

Then my last question and I will turn it over. You talked a little bit about border deductibility. Recognizing a lot of water has to flow under the bridge on that, if something like that occurred could you comment at all in terms of how you would manage against that? Is there anything you could do within supply chain to manage that?

Any thoughts would be helpful. Thank you, guys.

Okay, your first question was on --

Mix. (multiple speakers)

OSB realizations and mix, yes.

We were up about 2% year over year in the value-added percentage. I think we went from 44% to 46% of value-added; so that had a small impact, but I wouldn't say it was significant.

We are continuing to push, obviously, our value-added products, particularly those like FlameBlock, which enjoy much higher margins and are not tied to random lengths. So we will continue to push that.

On the border-adjusted tax, the way I understand it is, if we produce it in Canada and bring it into the US and either put it through our own distribution or sell it to our customers, they won't be able to deduct that under their cost of sales. Obviously that will have a negative impact.

So I think what we have to think about is 35% of our capacity is in Canada from an OSB perspective, 65% in the US. Obviously, you're going to get a higher price for a US-produced product than you are a Canadian-produced product. Where's the breakeven? Those are the numbers that you would go through.

I will say that the border-adjusted tax is in the Ryan plan and not in the Trump plan, so we will see what happens there. I don't think that the Republicans are united in their approach to this.

Just to quantify that, we had in 2016 about $440 million product Canadian sales coming into the US out of $2.1 billion or --

$2.2 billion.

$2.2 billion.

Okay, thank you, guys. I'll turn it over.

Gail Glazerman, Roe Equity Research.

Good morning. Just going back to George's question on OSB realizations, earlier in 2016 you talked about some of your value-added products actually selling at a discount to commodity. Has that started to reverse itself? Are you feeling that you are getting the premium you deserve on those products now? I think it was particularly in flooring that was an issue.

No, the commodity flooring is still a laggard and it's selling a little bit below commodity pricing. So it still has an influence and that's why we're trying to push our 350 and 450 flooring, which are higher value-added products.

Okay. And OSB volumes sequentially held up much better than I might have expected for year-end. Were you surprised by that? Do you think there was any customer inventory building? What do you think drove that?

I think what drove that is we really didn't see winter arrive until the middle of December, so we got an extra month of housing.

Okay. Sallie, I think you referenced that you saw -- there was a headwind from early Chilean construction work. Is there any outlook on how we should think about that project affecting operations in 2017?

You know, Gail, right now we don't really think that the expense portion -- something that would impact the income statement would be material to the 2017 results.

Let me just give you a little color on that. We are redeploying equipment we had in the US. When you dismantle the equipment, you don't get to capitalize that and so basically the $3 million-plus that Sallie talked about was the dismantling cost. That equipment has now arrived in Chile so we don't have any that's going to happen this year.

Right. We think most of the ongoing costs we will be able to capitalize. To the extent we can't, we will call those out if they are material.

Okay, and just one last one. What was your operating rate, both in the fourth quarter and I guess for all of 2016, and maybe down days as well if you can share that?

Sure, we had -- for all of 2016 we had 174 down days. We had 57 in the quarter and we -- our capacity utilization was 87% in the quarter and it was 88% for the full year in OSB.

Okay. And does that include the capacity at Val-d'Or or no?

No, it does not.

Ketan Mamtora, BMO Capital Markets.

Thank you. First question, can you provide some color on your comment earlier in your prepared remarks on interest in adjacent and complementary products?

Sure, yes. Ketan, we are already talking about looking at adjacencies and FlameBlock is a great example of what we are talking about. We sort of introduced FlameBlock; we talked about the $15 million of capital last year that we used to put some capabilities in.

That is a product that uses our sheathing and then we put a slurry, a coating on top of it and it goes primarily into multifamily construction. So that would be an adjacency to our typical OSB sheathing. Some 10-plus years ago TechShield would've been considered an adjacency.

So those are the ways that we are thinking about adjacencies and we are actively, through our growth and innovation group as well as just the sales teams in the market, talking to customers around the types of ways we can use our products differently to expand organically our sales.

What we talked about in the past is we talked about some of the trends that we see in building. Clearly labor is an issue, so anything we can do with our products and acquiring technologies or companies that help us do that, to reduce labor content, is an important piece of that. Energy is going to be an important piece of that as we look at how we can more energy-efficient elements to our products.

Acoustics, with the zero lot line approach that we are now taking in single-family, plus the multifamily. Fire retardant use is going to continue to be an issue, not only for multifamily but on the urban interface. And then weather-resistance is another one. So as you think about technologies that we might want to acquire, we would look at adjacencies in those areas.

I see. So when you mentioned transitioning from forest product company to a building products company, are these the kinds of products that you are looking at? Or should I also read that you are open to acquiring some more building products-oriented businesses or products? Or is it within kind of OSB, where you can do more things to kind of make it more value-added?

We are looking at both. As I said, we are an acquirer of OSB that can be converted to siding, because we're going to continue to grow that product line. And then as we look -- if there were other building materials that would be common from a distribution standpoint, from a sales standpoint, that would be attractive to us as well.

Our view is that our siding business is not a forest products business; that's a building materials business. And so I think you should be thinking that we want to find more products that are similar to siding than commodity OSB.

So is it fair to say that it has to be more strand-based?

No.

No.

Okay, that's helpful. And then on siding, when you mentioned optimizing existing capacity, can you provide some color on that? Do you have room to kind of add another line at existing mills or is there anything else that you all can do?

It's mainly in the finishing end. We've produced trim, soffit. We do variable length trim. We do lap and we do panel siding. So when we try to optimize our system we got to make sure that we have lap and trim capability.

As an example, we have a big capital project in Hayward to add a lap capability into that mill so that we could fully utilize it. Those are the kind of investments that we're making, mainly in the finishing end; it's not the front end.

I see. Okay, that's very helpful. I'll turn it over. Good luck in 2017.

Steve Chercover, D.A. Davidson.

Thanks. Good morning, everyone. A lot of my questions have been answered, but can you remind us what that $9.4 million gain on sale was in the quarter?

That was related to the swap that we did with Norbord. It's funny accounting, Steve. We ended up -- that was a $9.4 million game and I think they had a $16 million gain. It's all based on appraisals and book values.

You would have to talk to Becky. Becky is probably the only one in this room that understands it.

I agree, completely. She'd be happy to talk somebody through the accounting if they're interested.

It's all non-cash.

I agree.

I figured it might have been associated with Chambord and Val-d'Or. Have you actually got the forest licenses for Val-d'Or?

No, we are in discussions with the Quebec government, but we have not been awarded the licenses.

Okay, got it. Then that whole notion of the border tax is pretty scary, but have you ramped up even a staff to figure out how you are going to get your head around that?

You know, I think at this point there's so much uncertainty I would be wasting time and money to get people to think about it.

We certainly -- we are monitoring it, like everyone else is, and talking to our advisors as well as our trade associations. So we are certainly on top -- trying to figure out which direction it's going to go, but it seems directionless.

I think, as you know, I am the chairman of the Forest Products Association of Canada, and we've got them working on it. As well as NAFTA; as well as keeping their eye on the SLA.

I mean, at the end of the day, it's not really an SLA issue but I certainly hope that sanity prevails, because housing and construction jobs are also a national priority, so --. (multiple speakers), it's beyond my pay grade.

Thanks, Steve.

Mark Weintraub, Buckingham Research.

Thank you. A couple of follow-ups. First, on the siding business, it looks like volumes for the year were up 16% to 17%. You noted that in new construction you were up about 10%, so that sounds like there was some stronger growth in the other two buckets. Maybe a little bit more detail there would be helpful.

We look at it in five buckets. One is the new home construction, both multifamily and single-family. Then we look at the repair/remodel.

We look at retail and retail was relatively flat; maybe their comps were up 3% to 5%. We are kind of in that range. And you don't know where that goes, whether it goes to new construction or it's going to repair/remodel.

And then the industrial applications and then the outdoor buildings, which would be the shed business. Shed business is very strong for us this year, so they grew at a greater rate.

And the number you gave on the growth; I think that included our hardboard siding sales, which we really don't plan on adding capacity. So we're going to be kind of limited in their growth. The growth there is going to come in sales price; it's not going to come in volume. We are adding capacity as we are adding in our strand capacity.

Okay. And so, as you sit today with the type of single-family forecast that you provided, what might realistic targets in siding be for growth in 2017?

What we've talked about is that we want to see our strand siding grow at 12% to 14% a year.

Okay. Then just to follow up also on the OSB; the volume, which looks like it was up 15% or so, which was well ahead of the industry for the fourth quarter. Notably, Weyerhaeuser was down for the quarter because they had a facility down, so I'm just curious whether or not you had picked up some of that business. And if that was the case, is that sustainable?

Well, when we go into December we generally plan for two weeks of downtime towards the end of the year, because people aren't building. And we did cut some downtime as a result of that outage. I'm sure our competitors are doing the same thing to us this quarter because we have Jasper down; probably won't come up until late this week, early next week. We did a press rebuild, so we were off the market all of January.

Okay. Does that become the contract business for you potentially or is that more spot business and so it's changing hands all the time?

Well, our contracting strategy differs by mill, but generally, we are 60% to 65% contracted and 35% to 40% in the open market. When we know Jasper is going down we didn't commit the wood in the first quarter and we told our customers that.

Then, lastly, on the engineered wood. When you look at the profitability across that group, are there one or two facilities that are real outliers that maybe are --? I know at one point I believe Houlton was struggling quite a bit. Do you have a barbell there or is it basically nothing is really doing great at this point?

And then as a follow-up; looks like lumber prices are moving meaningfully higher and certainly with the SLA there is speculation that this can continue. How helpful can that be to the Holton facility?

So the Houlton facility, we do LSL there and we also do OSB there. We have ramped up the production of OSB and, as I said, we had record volumes of LSL.

LSL has done a couple things. One, in the first couple years most of that was going to industrial markets. It's now going into housing, which is a very positive sign for us. And so the increase in the growth and going to the market that we want to sell it to I think has been very good.

One of the advantages we have with LSL is we can use that for the fire retardant I-joists. We can replace a fire-retardant I-joist with LSL, so in the Pennsylvania Ohio area, where the building codes require that, we have seen pretty good penetration there.

I think Houlton is back to the point where it's not hurting us, but we need to get more volume in there so it can help us. In general, we are very competitive on our I-joists and our I-joists joint venture has been a pretty profitable operation for us. But there's just a lot of capacity in I-joists. As you know, it's mainly raw materials costs of the flange and the web, so volume helps us in those facilities.

Great. Thanks for the details.

Paul Quinn, RBC Capital Markets.

Good morning, Curt, Brad, Sallie. A couple questions. One, very impressed with the 16% increase in SmartSide growth in 2016. Where are those inventories at right now and where are you guys taking market share?

So inventories are -- it's an interesting question in siding. In the remodeling sector, that really is a prefinished product and we rely on third-party prefinishers to do that. They take a lot of inventory at the front part of the year because they don't have the capacity to satisfy the need in painting if they don't take inventory early. But those inventories are not any different than they were last year, so they have not ramped that up.

Now we have announced selective price increases by segment and we do allow our customers to buy a certain percentage ahead on that. So we probably did see a little bit of pull-forward based on price increases, but I don't think it's significantly different than it has been in prior years. So I think we're kind of right where we were last year from an inventory standpoint; I don't think it's any different.

Okay, thanks. Then just number one question I get from investors is industry capacity restarts and the only ones that I know that have been announced in 2017 are the small Forex mill in Quebec and Martco's new mill coming online in Texas. Maybe you could just comment on anything else that you see out there, as well as OSB inventory levels that you are currently seeing with your customers.

I had -- our new employee at Val-d'Or drove by the Forex mill. It is steel; there is no outside to the building and there's no equipment. It's not coming up anytime soon. It's just not, Paul; so I don't worry about that one much.

We fully believe that Martco will be up either late third quarter or early fourth quarter. They are on track from everything we've seen. They are hiring.

Now we have heard rumors on GP running their mills more aggressively in South Carolina. We have checked the want ads and they are not hiring, so I don't know how you do -- you can ramp up without people.

And the OSB inventories in the channel are --.

Yes, according to random length, inventories are very low in the channel, so I think we're in good shape. Martco will come up; there's no doubt about that.

And then, as you know, Norbord has got two mills with the Chambord mill and the Huguley mill that they will make decisions on based on their own internal factors.

Great. I'm hearing the same thing on the Forex mill. I expect it now in Q3, if they are lucky.

Just lastly, on the acquisition front, you mentioned that you would look at OSB assets. Is that constrained to North America or would you look in other jurisdictions?

Well, there's nothing in South America and I actually think that the situation in Europe is pretty well-balanced. And I'm not -- we were in Europe with our mill in Ireland. I was the Chairman of that Board and it was not a very fun experience, so I'm not sure I want to go back into the European market.

I think that mill is still for sale.

Well, the Irish government owns it now. They bought the old laminate mill, too.

So I think it would be focused in North America. And as I said in my comments, we would like it to be an Aspen-based wood basket so we would have the option to convert that to siding.

Great, that's all I had. Best of luck, thanks.

Roger Spitz, Bank of America.

Yes, my questions have been asked. Thank you.

Sean Steuart, TD Securities.

Thanks, just one question on CapEx. You talk about potentially sequencing Val-d'Or and Cook for the siding conversion. Can you give us an idea of what the total cost for each conversion would be and how much of that is in your discretionary CapEx guidance of I guess $100 million to $125 million in 2017?

So the CapEx guidance Sallie gave was $175 million to $200 million and we've got $40 million to $50 million for the targeted, but not identified for siding capacity expansion, which could be some at Val-d'Or, some at Cook, or all at Val-d'Or. So that's kind of the magnitude.

For the total cost, I wish I could give you an answer. I can't get one from my engineering people until they finish, so I don't have a good answer on that. I will say that the Cook site is a site so that you can think about that as building an OSB mill and adding siding capability to it.

Got it. Okay, that's all I had. The rest has been answered. Thanks, guys.

John Tumazos, Independent Research.

Thank you. I wanted to make sure I understood your comments about dividends and acquisitions and reinvestments. You are not saying that a dividend discount model or net present value model is the wrong way for us to look at a company; you are saying that you want to be in value-added, de-commoditized businesses, if I heard it right.

Is it fair to look at Kronospan in Europe as a model of what you want to be when the emphasis becomes value-added?

I can't speak to the latter, but I think I can speak to the former, John, which is that we think we have a lot of really great opportunities with our current portfolio of products and investments, particularly back in the siding, to focus on in terms of capital allocation.

Are you totally opposed to dividends, period?

No, that's not what Curt -- Curt didn't say he was opposed to dividends. We are looking at all sorts of options. To understand capital allocation, I think what we are saying is in the short term we are really going to focus on reinvesting back into the business. That should be the take-away.

Thank you.

Thank you and that concludes our Q&A session for today. I would like to turn the call back over to Ms. Sallie Bailey for any further remarks.

Great. Thank you very much, Christie, and thanks, everybody, for participating in our call today. If you do have any questions, in particular about the gain, please don't hesitate to contact Mike or Becky. They are always available to answer any of your follow-up questions.

Thanks, everybody, and have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone, have a great day.